Over the last six years, the region has made a number of improvements in terms of macroeconomic and financial policy. This has enabled countries to take advantage of the external boom and is now helping the region to face the crisis in a completely different way from in the past. The region has thus been able to continue growing even as the external situation seriously deteriorates. Nevertheless, many of the improvements are beginning to fade and in some cases revert.
Even though the factors described below are clearly different from those observed in past situations, if the crisis deepens and/or its effects become more prolonged, the macroeconomic foundations for the region’s recent growth are eventually likely to be weakened. These factors include:
1. The balance-of-payments current account surplus
It is unprecedented in the region’s economic history to see growth coincide with a surplus on the external accounts. Initially, this was due to the combined effect of greater export volumes and higher prices for the exports of most of the region’s countries. However, as the volume factor become less important, the increase in export values began to be exclusively dependent on international prices (while economic growth was also accompanied by a rise in imports). Therefore, the recent fall in commodity prices and the expectation that this downward price trend will intensify as a result of slower world growth cast doubt over one of the main strengths of the region in recent years: its independence from external financing. Indeed, in 2008, the above-mentioned factors had already generated a slight current account deficit (0.6%), which is expected to widen in 2009 to a projected deficit of around 2.5% of regional GDP.
2. The generation of a surplus in the public accounts
Public accounts improved significantly, largely thanks to higher revenues (on the strength of better export prices and increased economic activity) and (up to 2007) to less expansionary spending patterns than in the past. The improvement in public accounts resulted in a substantial reduction in public debt.
More recently, public spending has been on the rise, and this has curbed the expansion of the primary surplus. The surplus has become exclusively dependent on income levels, and the reduction of public debt has also slowed. As with the current account balance, public revenues are expected to come under greater pressure at times when it may become necessary to increase spending to tackle the slowdown in private demand.
Given the predictions for income from exports of non-renewable resources (analysed separately), a small total deficit is forecast for the public accounts in 2008 (0.3% of GDP), although the primary surplus is expected to be maintained. In 2009, there should still be a primary surplus, albeit a smaller one, and the total deficit will expand to 1.5% of GDP.
The region’s twin surpluses (on the current account and the fiscal accounts) in the period 2006-2007 are giving way to twin deficits, which will start off small in 2008 and then widen in 2009. The average for the region also reflects individual country trends, as shown in the figure: only three countries will retain their position in the virtuous quadrant with twin surpluses in 2008, while a growing number of countries will find themselves in the quadrant with deficits on the public and external accounts.
3. The external debt and international reserves
Exceptional liquidity conditions on the financial markets in recent years have meant that the reduction in external debt made possible by the twin surpluses went hand in hand with a tendency to renegotiate debt with better conditions in terms of rates, maturities and even currency in some cases. At the same time, some countries experienced strong capital inflows seeking to take advantage of the significant interest-rate spreads as currencies appreciated.
These capital inflows, combined with current account surpluses in many countries and foreign direct investment, led to significant growth in international reserves. As of mid-2008, that growth averaged about 15% of the region’s GDP and was equivalent to almost five times the countries’ short-term debt.
The role of financial capital inflows is increasingly significant in terms of the factors that contribute to the growth of international reserves. This is especially true when compared with the share of the increase in foreign exchange reserves that is accounted for by current account surpluses, which showed a markedly downward trend. This makes the stock of reserves somewhat fragile, particularly in some of the countries of the region, in light of the volatile nature of such resources.
4. The private sector
The maintenance of macroeconomic equilibrium requires that the sum of external saving and public saving is equal to the difference between private-sector investment and saving. External saving is equivalent to the balance-of-payments current account balance, but with the sign reversed. From 2003 to 2007 that balance was negative for Latin America and the Caribbean, and this was the counterpart to the aforementioned current account surplus. In 2008, however, the external saving figure is expected to be slightly positive.
When public-sector saving is calculated by means of the overall fiscal balance, the amount by which investment exceeds private saving can be determined; this, in turn, is an approximation of the private surplus (when it is positive) or, inversely, of private-sector overspending (when it is negative). This factor can produce a significant level of external vulnerability, as may be the case in a number of the countries whose private external debts have risen considerably, even if the macroeconomic fundamentals which are followed most closely are solid (as in the case of the twin surpluses seen in the region from 2003 to 2007).
Figure I.15 shows the trends of the current account balance, the surplus on public accounts and the private-sector surplus for the region. The behaviour of these balances in recent years provides a new picture of fundamental economic aggregates in the region. Taking the regional average, the private sector was in surplus from 2003 to 2007, while the public sector cut back its deficit and then achieved a surplus from 2006 onward. Until 2006 the private surplus was very high and easily compensated for the shrinking public-sector deficit, so the region as a whole was in surplus and did not need external saving; the current account balance was positive (i.e., external saving was negative). In 2006 and 2007, negative external saving was mainly a reflection of the public surplus, since the private sector saw its surplus shrink in 2006 and posted a deficit in 2007. From 2008 on, external saving was positive thanks to the combination of a fiscal deficit and excess private spending. In a context of tight international financial markets, this combination of factors is a source of vulnerability.
There are considerable differences across countries in this respect. As shown in figure I.16, the private-sector deficit is larger in Chile and some Central American economies and is somewhat smaller in Peru, Uruguay, Mexico and Colombia. It should be noted, however, that in many cases fiscal data correspond to the central government aggregate, and the figures obtained for the private sector as a residual therefore includes public enterprises.