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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Emerging Market Corporate Debt in Foreign Currencies

By Selim Elekdag and Gaston Gelos

Debt held by firms in emerging market economies in a currency other than their own poses extra complications these days. When the U.S. Fed does eventually raise interest rates, the accompanying further strengthening of the U.S. dollar will mean an emerging market’s own currency will depreciate against the higher value of the U.S. dollar, and would make it increasingly difficult for firms to service their foreign currency-denominated debts if they have not been properly hedged.

In the latest Global Financial Stability Report, we find that firms in emerging markets that have increased their debt-to-assets ratios have generally also increased their overall sensitivity to changes in the exchange rate—commonly called exchange-rate exposure.

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With China Slowing, Faster Reforms Critical to Generate Jobs

By W. Raphael Lam, Xiaoguang Liu, and Alfred Schipke         

(Version in 中国)            

China is moving toward a “new normal” of safer and more sustainable growth.  To this end, ensuring its labor market stays resilient will be critical.  Reforms to contain vulnerabilities caused by buildup of credits may temporarily slow growth, and raise the unemployment rate, but supported through a strong safety net, these reforms will raise productivity, and facilitate more sustainable growth.

Despite the slowdown of the past few years, however, China’s labor market has remained resilient.  Efforts to maintain labor market stability are paying off, helped by an expanding services sector.

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From Windfall to Windmill: Harnessing Asia’s Dynamism for Latin America

By Andre Meier and Fabiano Rodrigues Bastos

(Versions in Español and Português)

Latin America’s recent economic fortunes highlight the region’s closer economic ties with Asia. China, in particular, has grown into a crucial source of demand for Latin American commodities over the past two decades, providing significant gains to the region. The flip side is that the ongoing structural slowdown of Chinese investment is weighing considerably on the prices of those commodities, and the countries that export them.

But Asia can be much more than just a source of episodic windfall gains (and losses) for Latin America. Like a windmill, Asia could help to power a stronger Latin American economy—by providing an example of successful regional trade integration and through greater direct links across the Pacific that benefit both sides. However, securing these benefits will require clear and realistic objectives, a long-term strategy, and attention to the political and social implications of greater economic integration. 

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Tolstoy & Billionaires: Overheard at the IMF’s Spring Meetings

By iMFdirect editors

All happy countries are alike; each unhappy country is unhappy in its own way.

This twist on Tolstoy’s Anna Karenina echoed through the seminars during the IMF’s Spring Meetings as most countries, while recovering, are struggling with the prospect of lower potential growth and the “new mediocre” becoming a “new reality.”

Our editors fanned out to cover what officials and civil society had to say about how to help countries pave their own path to happiness.

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The Promise of Islamic Finance: Further Inclusion with Stability

By Mohamed Norat, Marco Pinon and Zeine Zeidane

(Versions in عربي)

Since the global financial crisis, policymakers have sought to press the “reset” button to strengthen financial intermediation that is performed by conventional banks and non-bank financial institutions. The aim has been to address the fault lines that helped trigger one of the most devastating financial crises in a century, and to enable a more inclusive, stable financial system that promotes stability as well as economic development and growth.

Islamic finance offers several features that are consistent with these objectives. Islamic finance refers to financial services that conform with Islamic jurisprudence, or Shari’ah, which bans interest, speculation, gambling and short-sales; requires fair treatment; and institutes sanctity of contracts. And these principles hold the promise of supporting financial stability, since a key tenet of Islamic finance is that lenders should share in both the risks and rewards of the projects and loans they finance. 

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Still Some Hurdles On The Fiscal Path

Martine GuerguilBy Martine Guerguil

(Versions in 中文, Français日本語, Русский, and Español)

Five years into the crisis, the fiscal landscape remains challenging. On the positive side, deficit-cutting efforts and the first signs of recovery reduced the fiscal stress felt in many advanced economies; but debt ratios often remain at historical peaks. At the same time, slowing growth and rising borrowing costs, combined with unabated demands for improved public services, puts pressure on government budgets in emerging market economies.

So we created  an index of ‘fiscal difficulty’ that shows the biggest challenge ahead for advanced economies is to maintain budget surpluses until debt ratios return to lower levels.  We expect this will take several years.

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