South America Economic Structure

By: EconomyWatch Content   Date: 17 March 2010

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Most major Latin American economies have displayed resilience in the face of the global downturn of 2008-2009. The fiscal policy of the region has been the key driver of the region’s overall economic performance. Before the crisis hit Latin America, most South American countries had moderate fiscal deficits and in some cases, surplus. In addition, lower public debt to GDP ratio was also instrumental in allowing governments to use their respective fiscal policies as a tool to contain the aftershocks of the downturn. Chile has been the benchmark of efficient fiscal management in the region by implementing a structural budget as a target for fiscal policy. The global outlook for the region too is becoming increasingly positive with the region’s economy projected to grow 3.8% in 2010. 

South America Economic Structure: Brazil, Venezuela, and Mexico

The Brazilian economy is the largest in the region and the fiscal policies administered by the Lula administration have been quite effective. However, there are some risks associated with the country’s fiscal policy. The first is the fragile policy that threatens to undo the good work of the industry. The second risk is Brazil’s inability to implement structural reforms necessary for taking the growth to the next level. In addition, there are issues such as addressing successive appreciations of its currency and managing the capital inflows.

Venezuela has also witnessed widespread nationalization of its financial institutions and reluctance on the part of investors. The fiscal policies are further weakened by the country’s black market exchange rates. However, with rising commodity prices and assuming oil prices reach $80, Venezuela’s fiscal policies can be implemented successfully. A greater than anticipated fluctuation in essential commodity prices could well lead to fiscal issues in countries such as Venezuela, Bolivia, Argentina and Ecuador.

Mexico, on the other hand, experienced two successive investment downgrades from Fitch and Standard and Poor’s. Latin American emerging markets have not achieved the investment grade status and run the risks of being downgraded. Hence, the region needs to be more cautious rather than relax on the fiscal gains achieved over the last few years. If the fiscal policies slip beyond the accepted levels in 2010, the effects may reverberate in the coming years. And with elections dominating the political landscape of the region in 2010 and beyond, any slippage in the fiscal policy could spell disaster in the Latin American economy.


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