Peru, Chile, Paraguay and Bolivia area among the South American countries best prepared in the event of another global crisis while Venezuela stands at the opposite end with ‘weakened’ defences, according to the latest report released by the IMF.
Peru with its fast growing economy emerged as the most resistant of the region with a budget surplus and sovereign debt equivalent to approximately 20% of GDP. Paraguay, Chile and Bolivia were just below Peru, and followed by Colombia where the government has targeted a balanced budget for 2014.
The IMF document states that the results followed stress tests in scenarios going from an ‘exceptional financial problem with no economic impact’ to a repeat of the default and bankruptcy of Lehman Brothers in 2008. Tests showed that despite the region overall is far more resistant than in the past “individually countries will have to battle to overcome those hurdles”.
A step lower Brazil, Mexico, Uruguay and Ecuador could be capable of addressing a prolonged global deceleration, but their debt ratio could jump over 65% of GDP, a standard too high for emerging markets. However much depends on how monetary policy is managed including the option of fiscal stimuli to counter the impact.
Brazil which currently has a debt/GDP ratio of 35% was unable to reach its surplus budget target in 2012, which surfaced investors’ doubts about the country’s commitment with fiscal discipline. The IMF document showed that Venezuela and Argentina would suffer strong budget reductions even when faced with moderate impacts.
Venezuela’s sovereign debt would soar to 145% of GDP in a scenario of a very serious crisis, probably at the same level as Greece back in 2010, when the first combined rescue of the EU member country.
“These results suggest that the region would benefit from a strengthening of the shock absorbers, while favourable conditions persist, thus reaching a position from where to actively implement fiscal policy if external conditions deteriorate faster and deeper than expected”, concludes the IMF release.