Bad Debt in Emerging Markets: Still Early Days

by John Caparusso, Yingyuan Chen, Evan Papageorgiou and Shamir Tanna

(Versions in 中文, PortuguêsРусский, and Español)

Emerging markets have had a great run. The fifteen largest emerging market economies grew by 48% from 2009 to 2014, a period when the Group of Twenty economies collectively expanded by 6%.

How did emerging markets sustain this growth? In part, they drew upon bank lending to drive corporate credit expansion, strong earnings, and low defaults. This credit boom, combined with falling commodity prices and foreign currency borrowing, now leaves emerging market firms vulnerable and financial sectors under stress, as we discuss in the latest Global Financial Stability Report.

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Trading Out of Trouble in Latin America

By Natalija Novta and Fabiano Rodrigues Bastos

(Versions in Español and Português)

Growth in Latin America and the Caribbean is suffering a double whammy—economic activity has slowed down sharply and the medium-term outlook continues to deteriorate. It is therefore not surprising that policymakers across the region are eagerly searching for ways to revitalize growth.

One answer may be more trade—both within the region and with the rest of the world. Our new study analyzes the export performance in developing and emerging market regions over the past two decades to assess the potential for future export growth in Latin America. We find evidence that most countries in the region “undertrade” compared to what standard models would predict. This has been an entrenched problem for almost a quarter of a century, partly as a result of the region’s geography and a legacy of protectionist policies.

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(Yet) Another Year of Subpar Growth: Latin America and the Caribbean in 2015

Alejandro WernerBy Alejandro Werner

(version in Español and Português)

The turn of the year usually brings a fresh dose of optimism. Yet, worries dominate across much of Latin America and the Caribbean today, as 2015 marks yet another year of reduced growth expectations. Regional growth is projected at just 1¼ percent, about the same low rate as in 2014 and almost 1 percentage point below our previous forecast. Challenging external conditions are an important drag for many countries. Still, it’s not too late for some good New Year’s resolutions to address domestic weaknesses and improve growth prospects.

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Acting Collectively: A Better Way to Restructure Government Debt

By Sean Hagan 

(version in Español)

To restructure or not to restructure? That is a question few governments would like to face. Yet, if a country does find itself with an unsustainable debt burden, one way or another, it will have to be restructured. And if that time comes, it is better for the debtor, creditors, and the entire financial system that the restructuring be carried out in a prompt, predictable, and orderly manner.

The global financial crisis ushered in a new wave of sovereign debt crises that has reinvigorated discussions over the current framework for sovereign debt restructuring. The experience with Greece’s debt restructuring in 2012 and the ongoing litigation involving Argentina, in particular, provide a salutary reminder that vulnerabilities remain.

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A Downturn Without Layoffs? Reconciling Growth And Labor Markets In Latin America

Bertrand Gruss 2By Bertrand Gruss 

(version in Español and Português)

It looks as if labor markets in Latin America have not been following the economic news—literally! Economic activity has slowed markedly in the last three years, with some South American countries slipping into outright recession more recently. Yet, labor markets still appear remarkably strong, with unemployment rates, in particular, hovering at record-low levels in most countries (Figure 1). So, what is going on? Has the region discovered how to defy the law of gravity?

ENG.WHD REO Fall.Chart 1

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Banking on the Government

By Jesus Gonzalez-Garcia and Francesco Grigoli

(Version in Español)

Government ownership of banks is still common around the world, despite the large number of privatizations that took place over the past four decades as governments reduced their role in the economy. On average, state-owned banks hold 21 percent of the assets of the banking system worldwide. In Latin American and Caribbean countries, the public banks’ share is about 15 percent, with some of them showing very large shares, for instance, Argentina, Brazil, Uruguay, and Costa Rica are all over 40 percent (see Figure 1).

State-owned banks play an important role in the financial system. They fulfill functions that are not performed by private banks, provide financing for projects that benefit the rest of the economy, and provide countercyclical lending (lending more when the economy is weak). But public banks usually respond to the needs of governments owing to the state’s obvious involvement in their administration. As a result, government’s participation in the banking system may weaken fiscal discipline by allowing the public sector to access financing that they would not obtain from other sources.

In our recent study, we use a panel dataset for 123 countries to test whether a larger presence of state-owned banks in the banking system is associated with more credit to the public sector, larger fiscal deficits, higher public debt ratios, and the crowding out of credit to the private sector. 

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The Outlook for Latin America and the Caribbean in 2014

Alejandro WernerBy Alejandro Werner

(Version in EspañolPortuguês)

Looking to the year ahead, how do we see the global economic landscape, and what will this mean for our region? This question is especially on people’s minds today, given the risks of deflation in advanced economies and of sustained turbulence in emerging markets.

Despite these risks, we expect that the region will grow a little faster than last year—increasing from 2.6 percent in 2013 to 3 percent in 2014. Stronger global demand is one part of the story, but not the whole story; volatility is likely to be a significant feature of the landscape ahead. And regional growth rates will still be in low gear compared to historical trends, and downside risks to growth remain. So, let’s start with the global scene.

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