By Alonso Soto
BRASILIA, Jan 30 (Reuters) - Latin America is in a better position now to handle a resurgence in global market turbulence, but policymakers need to stay alert and use sound policies to tackle any spillovers, the International Monetary Fund said on Thursday.
The region needs to rebuild fiscal buffers and use monetary policy and flexible exchange rates to absorb any shocks, said Alejandro Werner, the IMF’s director for the Western Hemisphere Department, in a press briefing streamed online.
“The region is much better prepared,” Werner said. “We believe their economies are less tied together than they were 20 years ago. But it is always important to remain alert.”
Fears about the health of major emerging economies have set off an exodus of investors from those markets, prompting many central banks to raise interest rates in an attempt to contain the effects of the selloff.
In mid-2013, after the United States announced an eventual removal of monetary stimulus, a similar capital flight exposed the vulnerabilities of many emerging nations that, until then, had been the main engine of global growth.
A sharp devaluation of the Argentine peso has raised fears of a currency crisis in the South American nation that could spread to regional peers such as Uruguay and Brazil.
Werner said that smaller economies like Uruguay and Paraguay, although more vulnerable, are better prepared than in the past to avoid contagion from Argentina.
“These economies are more susceptible to contamination, but these economies have also diversified their foreign trade,” he said.
“We believe that they are solid (economies)... in a better position to face any eventual regional contagion,” he said, adding that the IMF is monitoring developments in Argentina as closely as possible.
Werner also said the impact of currency depreciation on inflation is smaller in the region than it was 20 years ago.
An expanding U.S. economy will mostly help the nearby economies of Mexico and Central America this year, Werner said. Brazil and the rest of South America, on the other hand, would see less immediate benefits from the recovery of developed nations.
In the case of Brazil, Werner said, the government needs to improve its fiscal policy to grow more in the medium term. He also stressed that low investment levels continue to be one of the main weaknesses of Latin America’s top economy.