BY CLAUDIO LOSER
WASHINGTON , DC — Life was to be good for Latin America this year and next. That is what many policy makers in the region wanted — and wanted us — to believe. Delinking was in, and dependency was out. Commodity prices would continue going up and there was no worry about financing. Reserves were high and generally creditworthiness was solid. Problems were hitting only the United States and a few other developed countries that had caused the world economic commotion.
What a difference a few months make. By now, the sense of invulnerability is gone. Commodity prices and domestic stock market values have declined by more than half from their peak. Currencies in many Latin American countries have depreciated as capital left the region. Also, those that did not allow the exchange rate to move are under pressure. While most governments were reasonably (but not sufficiently) careful with their investments and policies, many enterprises held "toxic" assets, with serious consequences for their financial health.
The crisis is deepening and the impact on the balance of payments and on domestic incomes is serious. The region's financial markets are known to be in trouble, but quantifications of the emerging losses are at best scarce. The attached table provides a stylized calculation of these losses so far in 2008. The numbers are based upon data on the size of financial markets in the world for end-2007 included in the Global Financial Stability Report (IMF, October 2008). It takes into account the depreciation of currencies, the decline in stock market prices, the loss of value of private and public debt, and the effect of the depreciation on deposits. The estimate does not include the loss in value of assets held by Latin American individuals and corporations abroad. Even so, the estimated losses in asset values are very large-in the order of $2 trillion since end-2007. This is the equivalent to 60 percent of annual GDP for the region.
Such losses will have a very adverse impact on domestic expenditure, which could easily decline by 5 percent. The terms of trade effect will aggravate the situation, as it will reduce incomes and worsen the balance of payments by $75 billion or so (2-2.5 percent of GDP). Thus, it should be no surprise if economic growth in 2009 is only 2 percent or even less, in practice entailing a recession.
In these conditions, policy makers will need to find a balance between economic stimulus and financial stability. There will be no room for denial or for populist policies; otherwise the crisis will become even deeper for those that pursue careless policies.
Claudio Loser is a Senior Fellow at the Inter-American Dialogue and former Head of the Western Hemisphere Department at the International Monetary Fund. Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter.