The Latin American and Caribbean countries have adopted a variety of measures in response to the deepening international financial crisis. They are well aware that, although most of them have macroeconomic foundations that are significantly stronger than in the past, the region will not escape the impact of instability in world financial markets and the expected recession in the developed economies.
The range of measures implemented is quite wide, not only because the effects differ from country to country and the instruments needed for countering them therefore also vary, but also because of differences in the countries’ capacities, in terms of the availability of resources, to implement such initiatives.
That availability generally depends, on the one hand, on the fiscal room for manoeuvre available for financing the measures, when their implementation entails the use of public funds; and on the other hand, when they involve foreign-currency transactions, on the availability of external assets (basically, foreign reserves) or of access to foreign-currency credit. In the current circumstances, the latter is limited to dealings with international financial bodies.
Beyond these considerations, taking into account the impact that these measures may have on the rest of the economy, a full analysis of the countries’ capacities should encompass, in addition to the aforementioned factors, other elements such as the degree of monetization and the depth of the financial market or the balance-of-payments current account balance. It should be remembered that a demand promotion strategy based on increased public spending, aside from its fiscal impact, may widen the external deficit beyond a country’s capacity to finance it. In this case, the availability of foreign-currency resources will be an issue even if there is plenty of fiscal room for manoeuvre.
Table I.2 summarizes the areas of action selected by the governments of the region. In the short term, central banks in several countries have endeavoured to provide liquidity to their financial systems in both domestic and foreign currency in order to enable local credit markets to function normally or to provide funding where those markets cannot do so. Generally, there has been a marked difference between the scope of the policies announced in certain South American countries in comparison with some of the Central American and Caribbean States. This certainly relates to differing capacities to implement countercyclical policies, as referred to above.