| COSTA DO SAUIPE, Brazil, March 30
COSTA DO SAUIPE, Brazil, March 30 The fiscal
deterioration of many Latin American countries in recent years
has left the region more vulnerable to shocks stemming from the
reduction in U.S. stimulus, according an Inter-American
Development Bank report released on Sunday.
It said the rise in foreign currency debt sales by banks and
non-financial companies has also left many countries more
exposed to shocks this time around than during the 2008 global
financial crisis, it referred to as the "Great Recession".
"The region appears somewhat more vulnerable to certain
shocks now compared to prior to the 'Great Recession,'" the IADB
said in its annual Latin American and Caribbean Macroeconomic
Still, the regional bank says Latin America is for the most
part able to withstand capital fluctuations resulting from the
draw back of asset purchases by the U.S. Federal Reserve and
slowdown of the Chinese economy.
During the 2008 financial meltdown, the region poured tens
of billions of dollars into their economies to bolster activity,
shore up employment and help local banks.
Since then, many of those countries left the fiscal tap open
despite the recovery, raising debt levels and diminishing their
fiscal arsenal to battle another round of market turbulence.
"Fiscal balances have continued to deteriorate, and tighter
fiscal management and restoring policy buffers remain key policy
priorities," the IADB warned in its report.
"Developing automatic fiscal stabilizers and institutions
that favor carefully designed discretionary policies ... would
help the region to become truly countercyclical."
Rebuilding fiscal buffers is specially key now that the
region's economy is expected to grow between 3 and 3.5 percent
in the next two years, at near potential but well below the 5
percent seen before the 2008 crisis, the IADB said.
For the typical country in the region, overall fiscal
balances remain 3 percentage points of GDP below pre-crisis
levels, with only three out of 21 countries improving their
fiscal position in 2013 from 2012, the report said.
A clear example of fiscal slippage is Brazil where the
country's primary budget surplus, or excess revenue prior to
debt interest payments, has plummeted from 3.11 percent of GDP
in 2011 to 1.9 percent last year.
That rapid fiscal deterioration and lackluster economic
growth prompted Standard & Poor's to cut Brazil's debt rating
closer to junk territory on Monday.
A recent rise in the issuance of dollar-denominated debt by
Latin American banks and companies has also increased
vulnerabilities if the region's currencies depreciate too
rapidly, the report warns.
A weaker local currency reduces the value of companies
assets while their dollar debts remain the same.
(Reporting by Alonso Soto; Editing by Sophie Hares)