World Bank: Caribbean currencies absorbing world financial shocks

October 11, 2013 10:37 AM
WASHINGTON, DC--The World Bank says that for the first time currencies in Latin America and the Caribbean (LAC) are absorbing some of the shocks derived from a "less friendly" global environment.
According to the latest report by the World Bank's Chief Economist in the office for Latin America and the Caribbean, depreciated currencies not only lower the cost of exports but also raise the cost of imports, making the export and local industries more competitive and boosting job creation.
 
"LAC, together with other emerging markets, is entering a new phase of lower growth dynamics, as the tailwinds that blew so favourably in its direction in the recent past continue to recede," the report says.
 
It says growth rates in middle-income countries in Eastern Europe, East Asia, and LAC, as well as China have declined by about 3 percentage points from their 2010 peaks to the present.
 
In the case of LAC, the report says the growth rate has fallen from about 6 per cent in 2010 to around 3 per cent in 2012 and to an estimated 2.5 per cent in 2013, "with a predictable heterogeneity within the region."
 
The World Bank said forecasts go from rates at or below 1 per cent for Jamaica and Venezuela, to Asian-style growth rates of 5.5 and 8 per cent for the two best performers in the region in the past decade, Peru and Panama, respectively.
 
"Reassuringly, a good number of mid-sized LAC countries, such as Argentina, Chile, Colombia, Costa Rica, Ecuador, Guatemala, and Uruguay, are beating the regional average, with growth rates in the 3-4 per cent range," the report states.
 
However, it also notes that the region's giants, Brazil and Mexico, are growing below the average, with Mexico's growth falling below 2 per cent, despite the ongoing wave of reforms fuelling investor optimism.
 
But low growth, coupled with a less supportive global environment, will not, as sceptics warn, translate into 1990s-style financial distress.
 
"When you look at the ability of the region's economies to buffer the effects of this less friendly international environment, you realise that the days when currency depreciation spelled disaster are today virtually gone," said Augusto de la Torre, World Bank Chief Economist for Latin America and the Caribbean.
 
De La Torre said in the 1990s, exchange rate adjustments, as those seen in recent months, would translate into high inflation and financial pain due to large private and public foreign currency debts.
This situation changed dramatically in the 2000s, according to the report, thanks to two important structural changes: De-dollarization and more credible monetary regimes.
 
It says that while economies with flexible regimes that can benefit from the exchange rate buffer now account for 70 to 80 per cent of LAC's population and GDP, a significant number of countries in Central America and the Caribbean are too small and open to be able to develop an independent monetary policy.
 
Looking forward, the report urges LAC to focus on generating productivity gains "to ensure solid growth now that global tailwinds recede.
 
"To do so, it will require addressing structural deficits such as those in infrastructure or education. The good news is that the depreciation of LAC currencies that will likely accompany the ongoing changes in the external environment should provide the short-run cushion to plan for the long run," the report adds.

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