Financial Update (Second Quarter 2008)

Fed Gov. Kroszner: Latin Policymakers Must Be Vigilant

Governor Kroszner Strains in financial markets in the United States and other leading economies are so far not severely damaging Latin America. Still, Latin America is linked to the global economy in important ways, and therefore Latin American policymakers should be mindful of the turbulence elsewhere and continue the improvements they've made, Federal Reserve Board Governor Randall S. Kroszner said in a speech in early April in Miami.

Speaking at the annual meeting of the Board of Governors of the Inter-American Development Bank, Kroszner noted that economic growth has edged down in many Latin countries from high rates in 2006 and 2007. But the International Monetary Fund continues to forecast solid expansion for most of the region this year and next.

Major linkages: trade, capital, and shocks
Kroszner outlined three major economic linkages between the United States and Latin America: trade, capital flows, and global shocks.

In terms of trade, with the exception of Mexico, most Latin American countries are not overly dependent on the United States to buy their exports, Kroszner said. Capital flows, therefore, are a more important connection than trade. Capital flows in the form of bank lending, investment in stock markets, and foreign direct investment into the region have all increased substantially in recent years.

"An important factor fostering these flows has been improvements in macroeconomic and microeconomic policies," he said.

Text of Kroszner's speech off-site image
Americas Center
Inter-American Development Bank off-site image

Global shocks link the United States and its southern neighbors but don't always affect them in the same ways. Recently, for example, rising global commodity prices have generally hurt U.S. growth but helped Latin America because the United States is a net commodity importer while Latin America is a net commodity exporter, Kroszner pointed out.

Business cycles will continue
Ongoing growth is not guaranteed, however. Even though Latin American economies have largely avoided the financial market turbulence felt in major global economies in the last year, Kroszner cautioned: "The current attractive conditions for commodity exporters should not deceive us into thinking that Latin America has permanently escaped international business cycles."

Kroszner observed that the positive economic outcomes in Latin America result in part from greater discipline in monetary and fiscal policy. He said most Latin American central banks have shown resolve in fighting inflation, and governments have generally not spent all their increased revenue that came from rapid growth. In addition, Latin nations have strengthened bank regulation and local equity, and bond markets are growing in many countries.

Latin American officials should stay vigilant, in Kroszner's view. "The recent financial strains and the potential for spillovers to Latin America only heighten the need for policymakers in the region to avoid complacency," he said.

April 25, 2008