Euro crisis could expose weaknesses in Latin American financial system
An escalation of the European sovereign debt crisis may expose weaknesses in Latin American financial systems and fiscal policies, according to the World Bank.
Should conditions in Europe deteriorate sharply, vulnerabilities in Latin American countries that have so far remained latent could be revealed, the Washington based lender said.
‘Countries in the region may need to identify new drivers of growth and to address structural problems that negatively affect competitiveness,’ it explained.
Regional economic growth will slow to 3.6% this year from 4.2% in 2011 as consumer spending and exports weaken, the bank said in its latest Global Economic Prospects report. The region’s fiscal deficit may expand to 2.7% of gross domestic product from 2.6% in 2011 and 0.9% in 2008, the year before the global recession.
Wider deficits will make it harder for Latin American governments to boost spending to stimulate growth if demand declines for raw materials that account for more than half of exports.
Central banks also may have to keep interest rates high after inflation threatened or exceeded targets in countries such as Brazil and Chile last year, the bank said.
The two countries are the only major rate setting nations in Latin America to reduce borrowing costs in their latest meetings. At 11% and 5% respectively, Brazil and Chile have the highest key rates.
Reduced capital controls and an increase in foreign ownership of Latin American financial institutions make the region’s economy vulnerable if European banks decide to liquidate assets, the World Bank said. Euro area banks account for a quarter of banking assets in major Latin American countries, according to International Monetary Fund figures.
The report also says that European banks could be forced to sell off assets in Latin America with potentially significant impacts on equity valuations which in turn could affect capital adequacy of regional banks. That could spark a credit crunch even among otherwise healthy local banks.
Peru will lead growth among major countries in the region this year with 5.1%, compared with an estimated 6.3% in 2011, according to the report. Expansion in Brazil, the region’s largest economy, will accelerate to 3.4% from 2.9%, while Mexico’s growth will slow to 3.2% from 4%, it adds.
Growth in the global economy will slow to 2.5% this year from 2.7% in 2011, according to the lender.
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