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Interview: Joyce Chang Discusses Latin America's Economic Growth Prospects

October 23, 2008

“Multilaterals have significant resources that can be tapped as few emerging market countries were borrowing heavily over the past three years.”


In an exclusive interview conducted by AS/COA Director of Policy Jason Marczak, Joyce Chang, the global head of emerging markets and credit research at JPMorgan Chase & Co., analyzes the effects of the financial turmoil on Latin America and overall emerging markets. JP Morgan now forecasts that the region will grow 1.8 percent over a year ago—a 2.6 percentage point decline from its April forecasts. Stay tuned for additional AS/COA interviews with key economists and policymakers as the global financial uncertainty continues to unfold.

AS/COA: What are your new prospects for Latin American growth this year and in 2009?

Chang: Weaker export demand, lower commodity prices and the fallout from the global credit crunch will all conspire against Latin America's growth next year.  Beyond a weaker current account, the region's capital account will probably register lower foreign direct investment (FDI) inflows next year, while domestic credit conditions are also bound to tighten. While this year's weaker 3.8 percent projection will take the 2004 to 2008 average annual growth to 5 percent, Latin America's solid growth performance of recent years will soon be history. We now expect Latin America to grow only 1.8 percent over a year ago (oya) in 2009, far below the 4.4 percent growth pace penciled into our forecasts as recently as last April.

AS/COA: Given Latin America's overall solid growth over the last few years, is the region better prepared to weather the current financial turmoil versus previous economic slowdowns?

Chang: Emerging market (EM) authorities have greater policy flexibility to provide support via fiscal and monetary policy and are also resorting to rescue packages for banks and corporates similar to those in the United States. This time, EM vulnerabilities are focused on risks from corporate rollovers rather than the sovereign. Risks to EM corporates have increased on several fronts: near term from financial derivatives exposures, but more significantly, on-going risks from the tightening in financing conditions in both external bond and loan markets at the same time that domestic bond markets are closing and banks are curtailing access to capital. Through 2009, EM syndicated loan and corporate bond maturities exceed US$306 billion—surpassing the market capitalization of the JP Morgan Emerging Markets Bond Index Global (EMBIG).

AS/COA: What is your opinion of the policy responses taken by individual governments?

Chang: EM countries have accumulated substantial reserves and inflation will decline across many EM countries next year, providing greater flexibility for the sovereigns to provide support.  We also expect virtually all of the major EM central banks to ease rates by 2009.

AS/COA: What actions can policymakers in the Americas take to better insulate their countries from financial contagion?

Chang: Across a range of EM countries, including Brazil, Chile and Mexico, authorities have responded to the ongoing crisis of confidence in the financial sector by injecting liquidity into the system (via lower reserve requirements, lower rates, longer tenors in deposit auctions, augmented repo facilities, and reduced taxes.)

AS/COA: What can be the role for international financial institutions in facilitating emerging market economic stability during these unsettling times?

Chang:  Many EM countries lack contingency financing, while EM corporates are facing a "sudden stop" in credit with further deleveraging to go. Multilaterals have significant resources that can be tapped as few EM countries were borrowing heavily over the past three years. International financial institutions (IFIs) can focus on measures to increase liquidity to domestic banks and corporates that may face transitory difficulties in accessing foreign and interbank capital lines.