Unprecedented Global Protectionist Threats and Increasing Financial Volatility: Latin America at a Crossroads

1. Unprecedented Global Protectionist Threats and Increasing
Financial Volatility: Latin America at a Crossroads?
39th Statement
Washington, April 10th, 2018
Comité Latino Americano de Asuntos Financieros
Latin American Shadow Financial Regulatory Committee
Comitê Latino Americano de Assuntos Financeiros

2. • The world is witnessing a series of protectionist threats that pose the risk of
escalation into a trade war, most notably between the US and China
• The recent threats related to the imposition of US tariffs on steel and
aluminum imports, based on national security concerns. Later on, a
number of countries, such as Canada, Mexico, Brazil, Argentina, and South
Korea were excluded from these measures, diluting the potential effects on
steel and aluminum markets
• China’s retaliation announcements and subsequent rounds of responses on
an increasingly long list of goods and a higher value of bilateral imports
between the US and China have raised concern on the impact of a potential
wider trade war between these two countries on the global economy
The Protectionist Threat

3. • Although the materialization of protectionists threats may entail
misallocation of resources, trade diversion, and effects on
economic growth, the Committee believes that these effects are
so far likely to be limited
Announcements mainly relate to tariffs on final goods and
primary products and some intermediate goods
The Trade Channel
The Committee believes that the set of goods potentially affected so far
is unlikely to significantly alter the structure of international value chains

4. • The main effect until now has been through higher uncertainty
that has induced an equity market correction and increased
volatility in international capital markets
• Heightened uncertainty is already affecting investment in
Mexico. The effect on Mexico is further affected by uncertainty
around the renegotiation of NAFTA
The Uncertainty Channel
The Mexican case shows that persistent threats, even with no actions,
can cause significant effects on capital flows, exchange rates, inflation,
interest rates and economic activity

5. • Even if the initial real effects may be limited, the likelihood and severity of
financial disruptions have been magnified
• This occurs in a context in which emerging markets are vulnerable to a faster
than projected pace of increase in US interest rates
The Financial Channel
I. Reduced multilateralism in a world that is highly integrated financially and prone
to recurring episodes of financial volatility may weaken decisive action by
institutions such as the IMF
A move from multilateralism to bilateralism raises the risks that
resolution of controversies may no longer remain contained within
specific institutions (e.g., the WTO). The prospect of two key players
in the world economy increasing their antagonism may affect the
normal functioning and effectiveness of other multilateral institutions

6. The Financial Channel
II. The fact that the US is a central provider of global money is a
source of financial risk that is often underestimated. Weakening
of confidence in the US dollar may severely disrupt the
international payment system and trade flows

7. Current account balance / GDP in 2017
(in percentages)
Source: IMF-WEO
How Vulnerable is Latin America?
For some countries in the region, the financial channel is the main channel of transmission
of the risk of heightened protectionist threats
• Countries in Latin America that exhibit large borrowing requirements are
particularly exposed to capital market disruptions

8. General government fiscal balance / GDP
(in percentages)
Source: IMF-WEO
How Vulnerable is Latin America?
• Fiscal positions in the region have deteriorated in the last decade. Some countries, such
as Argentina and Brazil, exhibit large fiscal deficits and, in the latter case, displays a large
public debt to GDP ratio. Public debt to GDP has also become relatively large in Colombia
and Mexico
2017
General Government Debt / GDP
(in percentages)

9. • In some countries, notably Chile, total external debt to GDP has
increased significantly, often reflecting an increase in private
sector indebtedness
How Vulnerable is Latin America?
Total external debt / GDP
(in percentages)
Source: World Bank -IMF, Quarterly External Debt Statistics

10. The Financial Channel: Beyond the Direct Impact
If escalating protectionism eventually affects China and US economic
growth, most Latin American countries could suffer through a further
reduction of commodity prices, as capital flows to the region have
traditionally been highly correlated with commodity prices
Source: IMF

11. • Uncertainty is two-fold. On the one hand, the rules of engagement of
the IMF vis-à-vis economies that require assistance are likely to be
very different than those observed in the 1990s and early 2000s, and
is likely to rely more on debt restructuring and private sector
involvement than on liquidity assistance.
• On the other hand, there is more uncertainty about the role of the US
as the main shareholder of the IMF and, in the past, the central
player in the design of policies to deal with systemic financial crises
in emerging markets. In this context, the role of other important
shareholders, such as the EU, does not appear likely to fill in the gap
The Weakened Capacity of Response of the
International Community
There is uncertainty regarding the response of the official community (in
particular, the IMF) in the case of an event of renewed capital market volatility
in emerging markets

12. • The Committee believes that the prolonged period of low
international interest rates and the inherent complacency of
policy makers have exposed many LAC countries to eventual
reversals of capital inflows
• A perfect storm may be in the making, as international interest
rates are starting to increase, trade conflicts are on the rise,
and the traditional safety net offered by multilaterals may
be weaker than in the past
• The current situation calls for decisive action on two fronts.
Firstly, countries in the region needs to consolidate their fiscal
positions and reduce their current account deficits and external
debt. Secondly, the IMF needs to strengthen its instruments
and policies to address potential financial crises in emerging
markets.
Concluding Remarks and Recommendations

13. This statement was jointly produced by:
• Laura Alfaro, Warren Albert Professor, Harvard Business School, Former Minister of
National Planning and Economic Policy, Costa Rica
• Guillermo Calvo, Professor, University of Columbia; former Chief Economist, Inter-
American Development Bank
• Roque Fernandez, Economics Professor, UCEMA University; former Minister of
Finance, Argentina
• Pablo Guidotti, Professor of the Government School, University of Torcuato di Tella;
former Vice minister of Economy, Argentina
• Guillermo Perry, Non-Resident Fellow, Center for Global Development. Former
Chief Economist of the Latin America and Caribbean Region, World Bank. Former
Minister of Finance, Colombia.
• Liliana Rojas-Suarez, president, CLAAF; Senior Fellow and Director of the Latin
American Initiative, Center for Global Development; former Chief Economist for Latin
America, Deutsche Bank
• Ernesto Talvi, Director, Brookings Global-CERES Economic & Social Policy in Latin
America Initiative, Brookings; Academic Director CERES; former Chief Economist,
Central Bank of Uruguay