• Financial liberalisation

Financial liberalisation

This paper expolores the sensitivity of Latin American GDP growth to external developments using data from 1994 to 2006 on key external and Latin American variables. The paper finds that Latin American growth is robust to moderate declines in commodity prices and U.S. or world growth, but sensitive to more extreme shocks, particularly a combined external slowdown and tightening of world financial conditions.

Main findings of the study include:

• financing shocks, external growth shocks and commodity price shocks explain more than half of the variance of the growth rate in Latin America over the medium term
• financing shocks are the most important, explaining over half of the contribution of external shocks
• the overall impact of a world or U.S. growth shock on Latin America is roughly one-for-one over time
• Latin American growth would be fairly resilient to plausible risks to the external environment
• even with moderate shocks, Latin America’s external environment would still remain relatively favourable
• a significant slowing of Latin American growth would require a stronger set of shocks, such as a combined world growth slowdown and much higher financing premia, which currently appear unlikely.

The paper concludes that more credible monetary policy frameworks and institutions, and improved public debt structures with much less reliance on foreign currency and short term debt,  have reduced Latin America’s vulnerabilities to external economic shocks.

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