Don’t Fear the IMF Forecast

Lucky Lima. It’s just had the International Monetary Fund (IMF) and World Bank gravy train roll into town. Twelve thousand policymakers, business leaders and general hangers-on descended on Lima for days of talks, conferences and canapés. The Friday was declared a holiday in an attempt to free up road space for the chauffeur-driven delegates.

An awful lot of planning has gone into the event, as it’s the first time in almost half a century that the annual meetings have been held in Latin America. Yet in many ways the timing couldn’t have been worse. When this shindig was planned back in 2012, the region was booming. Now the IMF has just issued a forecast predicting a Latin American recession for 2015. So much for not insulting your hosts.

Changing relations

The last time the IMF and World Bank were in Latin America poor old Che Guevara was meeting a sticky end in the Bolivian jungle. Widespread political change has shaped economic growth in Latin America. The old battles between left and right have become more nuanced as both have shifted towards the centre. That means investors don’t have to worry about radical swings in policy at every election.

It was the first IMF/World Bank Annual Meetings in Latin America for almost half a century

For a lot of Latin Americans, the IMF and World Bank are linked with that old struggle. The US-based institutions imposed strict austerity measures on Latin American countries, after a string of sovereign debt defaults in the 1980s. Given that the US government supported a host of right-wing Latin American dictatorships at the same time, you can see why some Latin Americans see these organisations as part of a wider US plot to control its ‘backyard’.  Even those who didn’t buy into the conspiracy theories were angered by the harsh bailout terms. GDP across the region fell by around 8% between 1980 and 1990, with the 1980s remembered as Latin America’s ‘lost decade’.

But the relationship between Latin America and the IMF is now much warmer. As IMF head Christine Lagarde said in Lima, both Latin America and the IMF have changed over the past few years.

The ‘new’ Latin America

The most important change is that Latin America is much more robust now. The headline figure about a Latin American recession in 2015 is misleading because of the huge weighting of Brazil. If you take out Brazil, Latin America’s largest economy, then the region should grow at 2.6% this year.

The members of the Pacific Alliance used prudent macroeconomic policies during the good times, which is now allowing them to keep growth going through some fiscal and monetary stimulus in the bad times. This type of orthodox economic policy would have seemed ideological a few decades ago, but now it is woven into the policy framework of these countries and not debated by the mainstream parties.

“The most important change is that Latin America is much more robust now…”

Crucially, the fact that these economies are better managed means that they don’t have to go cap in hand to the IMF. Which probably explains why it is easier for them to be pally now. The important point is that these countries in Latin America have ended the cycle of boom to crisis. That doesn’t mean that they will never have a recession, but they have managed to negotiate the current slowdown without a horrendous bust. That matters because it was the regularity of those horrendous busts that meant Latin America never seemed to keep any of the gains from its previous economic growth spurts.

Our Chinese friends

Of course, not every Latin American economy has added the IMF to their Christmas card list. Argentina and Venezuela, for example, are involved in various spats with these organisations. These are also the countries that would seem to be most in need of IMF help. Venezuela’s sclerotic economy was already struggling before the oil price crash, now it’s in free fall. But here too, things have changed because now the IMF isn’t the only lender of last resort. China offers an alternative source of emergency funding, especially if there are commodities involved. Ecuador, Venezuela and Argentina have all received multi-billion-dollar loans that have helped them fund shortfalls in their budgets. And whatever the Chinese conditions are (the deals aren’t as transparent as IMF ones), they clearly appeal to some of these countries.

It would be naïve to think that China is an altruistic knight in shining armour. It will be interesting to see what happens when it is time for it to collect its repayments. But, nonetheless, it is great for Latin America to have more funding options. Another good example of this is the China-backed Asian Infrastructure Investment Bank, which Brazil has signed up to. Of course, there are lots of challenges that come with dealing with an emerging superpower, but for savvy Latin American countries, the entry of China into America’s backyard is a positive.

The rising importance of the rest of Asia is also evident with the Trans-Pacific Partnership. In short, it is a huge new trade bloc that represents 40% of world GDP. It’s no coincidence that the three Latin American countries involved – Chile, Peru and Mexico – are all Pacific Alliance members, while Colombia is also interested in joining.

Latin America is richer, more stable and more democratic than ever before. Its newfound position of strength is helping it open up new markets and deal with multinational institutions with confidence. And that will be vital if it is to negotiate the current slowdown.