Latin American countries should accelerate the liberalization of their economies, as decreasing demand for energy resources in China and rising interest rates in the United States are threatening their economic prospects, the Inter-American Development Bank (IDB) said on Monday.
Economies in the region, according to the IDB are set to grow at 3% in 2014 and 3.3% in 2015, a growth rate insufficient to generate enough jobs and finance social welfare programs. The IDB forecast paints a bleak picture for the region’s economies that enjoyed an average 4.9% growth for several years prior to the 2008 financial crisis.
The report, distributed yesterday at the IDB’s annual meeting in Costa do Sauipe, Brazil, warns that countries running a high fiscal deficit might face the risk of a so-called sudden stop scenario in capital flows.
“We need to take a closer look at reserve levels in this environment of heightened risks and higher fiscal deficits. And we need to monitor private sector currency mismatches and liquidity risks. We cannot be complacent,” said IDB economist Andrew Powell, who coordinated the study.
Improved economic prospects in the U.S. and Europe will, however, help boost growth in a few countries in Central America, while the biggest beneficiaries will be Mexico and the Caribbean, whose economies are more closely tied to the United States.
Tightening monitory policies in the US is expected to prompt investors to sell their financial assets elsewhere in the world and bet on US sovereign bonds. But what is more concerning is the slowing of growth in China. South American economies are especially vulnerable to a Chinese slowdown, the report explained.
Though the region’s economies are on a more sound footing than they were during the shocks of the mid-1990s, most countries are in a weaker position than they were in 2007, prior to the onset of the great recession.
In recent years, public debt and dollarization levels have risen, and countries have increased fiscal expenditures in programs that are more difficult to dial back in counter-cyclical ways, the IDB says.
The IDB has warned that countries, especially those with fixed exchange rates, will need to rely less on monetary options and enhance fiscal counter-cyclical tools. “Fiscal balances have deteriorated and rebuilding fiscal buffers should be a priority especially given current uncertainties,” said Santiago Levy, IDB Vice President for Knowledge and Sectors.