Financial cooperation with China can buffer LatAm against external economic shocks

MEXICO CITY/BEIJING - Latin America is in a position to weather the potential economic impacts of a tighter monetary policy the United States has adopted. In particular, the region's financial cooperation with China has served to further cushion any economic blows, a Chinese economist has said.

In an exclusive interview with Xinhua, Chai Yu, director of economic affairs at the Chinese Academy of Social Sciences' Institute of Latin American Studies, said that the current situation offers both China and Latin America a good opportunity to boost cooperation by promoting the circulation of the Chinese currency renminbi, or the yuan, in the region, which would offset the outflow of the US dollar.

Breaking cycle of economic crises

On Dec 16, for the first time since 2006, the US Federal Reserve announced it would raise its benchmark interest rate by a quarter of a percentage, launching a new cycle of a tight monetary policy expected to stem the supply of dollars in circulation, but which could potentially spark capital flight out of the region.

As a result, the central banks of Mexico, Chile and Colombia raised their respective interest rates by 0.25 percent, in a bid to prevent major capital flight and greater volatility in the regional financial market.

Historically, Latin America has been highly vulnerable to the Fed's interest rate hikes, which were largely seen as the straw that broke the camel's back, triggering economic crises many times throughout the region.

These recurring crises -- including the Latin American debt crisis in the 1980s, Mexico's 1994 peso crisis, the 1998 Brazilian crisis and the 2001 Argentina crisis -- all erupted when the Fed raised rates, sparking a dollar scarcity in local markets that eventually led to defaults on those countries' massive foreign debts and steep devaluations of their national currencies.

This time, however, "the situation has changed," said Chai, not least because regional countries have implemented sound fiscal policies, including adopting inflation and fiscal deficit targets, and more flexible exchange rates.

Today many Latin American countries have succeeded in keeping their public debt at lower levels while accumulating sufficient international reserves.

According to the data released by the Economic Commission for Latin America and the Caribbean (ECLAC), the region's public debt amounted on average to 34.3 percent of its GDP in 2015, well under the 60 percent limit established by the European Union.

At the same time, gross international reserves took up 15.3 percent of the region's GDP in 2015, rising from 14.8 percent in 2014. As of October, the figure stood at $824.795 billion, almost five times larger than the total registered in 2000.

"The macroeconomic foundations of the whole region remain relatively stable, displaying a greater capacity to weather the headwinds generated by the Fed's interest rate hike," said Chai.