Increased flexibility in exchange rates and investment coming in to the region could provide the buffer Latin America needs to weather economic shocks and help keep it on the path to sustainable growth in the future.
That’s the message from World Bank Chief Economist for the region, Augusto de la Torre, who said the recent pessimism about the economy slowdown the region is facing is "exaggerated."
Unveiling the World Bank’s semi-annual economic forecast for the region today, De la Torre predicted that the region as a whole will continue to grow in 2013, albeit at a comparably reduced rate of around 2.5%.
However, a strategic devaluation of local currencies, where the monetary capability exists, could not only cushion the region but also stimulate internal demand as domestic products fill gaps left by the relative increase in the price of imports. Also, a competitive currency will give momentum to local exports.
While, he recognised that previous attempts to affect exchange rates have backfired for the region, De la Torre repeatedly assured viewers in a simultaneous livechat organized along with El País América that the region’s current economic context had eliminated the three fundamental reasons to be worried about devaluation.
- Regional debt: Rather than being indebted to the international community, today Latin America has accumulated international reserves and are now a creditor for the global community.
- Dollarization: Whereas in the 90s, loans and debts were calculated in dollars, a region-wide process of dedollarization means the financial structure exist so that loans today are in the local currency - essentially eliminating the problem of paying off a debt in local currency following depreciation.
- Inflation: 80% of the Latin American economies now base their monetary policies on inflation targets. As a result, any devaluation wouldn’t translate in an increase in prices, to ensure foreign capital remained in the country.
"The exchange rate could play a new role for the region’s economies," De la Torre explains. "In the 90s, currency devaluation was seen as a sign of financial weakness or announcing a possible crisis. Today a good proportion of Latin American countries have eliminated these problems."
There were words of warning, however, for the region’s smaller economies - especially in the Caribbean and Central America - who don’t have so much room for manoeuvre or flexibility in their exchange rates.
Along with devaluation, De La Torre mentioned that more foreign investment coming to the region and stricter regulatory measures are reasons to be optimistic.