What will LatAm need in order to weather the global financial crisis?

The region has been abnormally resilient to decline for the most part of this decade’s economic crisis, but 2015 leaves behind a contraction in the size of its economy.

It has been a turbulent year for Latin America, economically as well as politically the region has felt the need to adapt to several local and global changes, many of which it had valiantly remained impervious to in recent years. However, the numbers show, that 2015 has been the year in which ultimately Latin America appears to be catching up to the global economic slow-down. Reversing a 0,4% reduction in its regional GDP is the greatest economic challenge Latin America will have to face in the coming years, how countries will face it however, is still largely to be seen.

Despite uncertainty and disparities between countries, the need for certain monetary and fiscal reform is a starting point for many Latin American governments in the face of economic decline. Some of these reforms can be minimal or even non-existent, as is expected to be the case of Peru or Colombia, which can boast low debt on top of their already controlled inflation rates, allowing for more reasonable reform to be carried out over time.

Brazil on the other hand, the economic powerhouse of the region, is facing considerable trade deficit, high debt and inflation nearing 10% so the process of reform will not only need to be more drastic, but also more immediate. In its quest for economic recovery, then, Brazil is at a crossroads, where they can opt to either raise interest rates in an effort to suppress inflation, or lowering them to increase competitiveness and alleviate debt. With rumors of a reshuffle in the country’s finance ministry, which would imply the resignation of current minister Joachim Levy, the clues on Brazil’s course of action are still few and far between.

Hand in hand with reform comes governance, and governance has become a problem in many Latin American countries. All governments throughout the region are facing significant downturns in popularity and acceptance, translating into a lack of legitimacy that makes the application of functional economic reform much more difficult. Venezuela, for example, is still wrestling with a region-high 63% inflation rate, but political and electoral pressures have delayed action on the matter, and low approval ratings for Nicolás Maduro have signified a complete lack of governance, further complicating the matter of fiscal and monetary reform.

Additional to the problem of governance comes the question of multilateral development funds, and how to work with them. Countries undergoing more critical conditions will have to demonstrate great financial responsibility, as well as strong democratic institutions in order to get access to low-interest credit, which will prove difficult in Brazil and Venezuela, where credibility is low and scandals run amuck. But even countries with verifiable liquidity and proper fiscal management, as is the case of Chile, Peru and Colombia, will struggle to find access to IDB and IMF loans at reasonable interest rates, due to the austerity measures these banks will put in place to permit the allocation of funds where they are needed the most. Despite difficulty, however, working on low-risk access to development credit will be vital to solving the considerable trade deficit that strikes some Latin American countries, as it allows for more relaxed fiscal measures without sacrificing growth.

Highlighting these three areas as regional priorities might prove to be a worthy place to start for Latin American countries as they face a crisis that without proper management will only deepen in the coming years. 2015 left more questions than answers when regarding the economic future of the region, and the prospect of changing governments and further regional economic integration leaves even more to the imagination, however, the stage is set for Latin America to prove its resilience one more.

Sources:
http://www.brookings.edu/events/2015/10/21-latin-america-global-economy
http://www.brookings.edu/blogs/future-development/posts/2015/11/17-latin-america-global-economy-talvi-ruiz

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