Global economic slowdown continues to weaken LatAm economies

GMT 05:27 2015 Saturday ,08 August

Arab Today, arab today Global economic slowdown continues to weaken LatAm economies

Global economic slowdown continues
Mexico City - XINHUA

Global economic slowdown and weak economic recovery in the United States continue to threaten Latin American countries, raising the risks of capital flight and currency devaluation.

According to the Economic Survey of Latin America and the Caribbean 2015 published recently by the Economic Commission for Latin America and the Caribbean (ECLAC), the region's currencies have tended to weaken against the U.S. dollar over the last year.

The ECLAC attributed this depression to the withdrawal or slowing down of stimulus programs, the fall in prices of basic goods, the lower availability of capital in international markets, and the overall regional economic slowdown.

"We cannot see the light at the end of the tunnel," Alicia Giron, a researcher at the Institute of Economic Investigations of the National Autonomous University of Mexico, told Xinhua.

"The International Monetary Fund (IMF) is constantly lowering its growth rate predictions. This is a complex crisis that is making all regional currencies more volatile," Giron said.

In its annual study, the ECLAC said that "lower interest rates, as a result of relaxing monetary policies, contributed to the fact that, in 2014, the currencies of 15 countries depreciated against the U.S. dollar."

Furthermore, the announced rise in interest rates in the U.S. is making many countries nervous as they fear it may lead to a capital flight which may cause an abrupt devaluation of their currencies.

"Many strong pressures are coming into play, currently exemplified by the fall in oil prices and the strengthening of the dollar," said Sergio Garduno, a senior consultant at Consultores Internacionales, a Mexican economic consultancy and prospective analysis firm.

"However, the change in U.S. interest rates will have a much more direct impact," Garduno said.

In July, Chairwoman of the U.S. Federal Reserve Janet Yellen said that she hoped to implement an interest rate hike in 2015 but did not provide specifics.

As Mexico is among the countries that might be most affected by a potential capital flight, the government has responded with a fiscal policy set to protect liquidity and avoid chaos in the foreign exchange market.

The country can also count on ample foreign reserves and a flexible line of credit that could help dampen the impact of a capital flight.

In early 2015, the Mexican peso saw an annual devaluation of 20 percent against the U.S. dollar, largely due to an expected interest rate hike in the United States.

This was just part of a larger impact that external economic factors have had on Latin American countries, which have struggled to see their gross domestic growth rise above 3 percent annually in recent years, according to Garduno and Giron.

This year, the situation will be even worse.

According to the ECLAC's latest projection, Latin America and the Caribbean countries' economy will only grow by an average of 0.5 percent in 2015, with South America's economy to contract by 0.4 percent, Central America and Mexico to grow by 2.8 percent and the Caribbean to grow by 1.7 percent.

For Giron, this stagnation will cause a very real slowdown in job creation. "If the economy is not growing, neither is the formal labor market," she warned.

The informal labor market will become an "escape valve...but will provide low-quality jobs, which are poorly paid and have no access to social security."

As a result, "this crisis will definitely lead to poverty increasing in Latin American countries," concluded Garduno.

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