Why Latin America is Feeling the Brunt Of

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Why Latin America is feeling the Brunt of chinas Slowdown

Why Latin America is feeling the Brunt of chinas SlowdownPresented by G shankar Rao

Introductionthe Peoples Bank of China allowed the yuan to depreciate nearly 2% against the U.S. dollar in mid-August,the Brazil real lost 33% of its value relative to the dollar, the Mexican peso dropped by 19%, the Colombian peso by 35%, and the Argentine peso by 10%Needing a Boomsenior fellow at the Peterson Institute for International Economics, the whole economy of Latin America is in a very discouraging position.Chinas official growth figure of 7% this year is an overestimate, given that figure does not comport with the industry figures for imports and exports.The question is whether [the devaluation of the yuan] is going to get a whole lot larger as the Chinese policy evolves.Gary Clyde HufbauerMore Volatilitythere is a lot of uncertainty not only in terms of government policy, but also in terms of corruption.finance minister Joaquim Levy is pursuing an austerity plan aimed at reducing Brazils fiscal deficit and restoring business confidence.producing nations of the region. The yuan has been appreciating for a long time versus the real, in large measure because of political and economic events in Brazil and concerns about whether the rating agencies are going to downgrade Brazil, he explained.The problem resulting from the economic crisis and the violent devaluation of these currencies is definitely a political one.Additional Reversalsan extended period of historically low interest rates in the U.S. between 0 and 0.25% starting in December 2008 led to the depreciation of the dollar, and a peak in the prices of raw materials, a key component of many regional economies

there has been a relatively rapid drop in the price of raw materials, and a withdrawal of capital from those countries, with a resulting devaluation of their currencies. Along with that, economic growth rates [in emerging economies] have been cooling at the same pace that they have been growing in the mature economies, Ugarteche points out.

Devaluations ImpactDevaluations will have direct consequences economies undergoing them though not always negative ones. According to Ugarteche, Direct investments in those countries are already declining because most of them involve primary productsCosta, meantime, forecasts a significant increase in inflation, and a loss of purchasing power which will lead to a decline in internal demand. But imports will become more expensive, which will reduce demand for foreign products and may increase domestic demand. Thus, higher exports and lower imports should increase overall demand and GDP.What Next?While each country must adopt its own distinctive monetary and fiscal policies, analysts point to some key considerations. In its latest report on economic prospects for Latin America, Finally, Costa notes that authorities should do everything possible to prevent inflation rates from reaching uncontrollable levels, and to assure themselves that the economy can continue to grow in a sustained way, without generating too much social inequality. Governments must make labor markets more flexible, while searching for productivity growth, because under such [unfortunate] conditions, unemployment often grows as a result of the economic imbalances that are generated