The Balance Sheet
Where does Latin America stand after the crisis? Since early 2010, OECD governments have started to look at the damage to their own balance sheets, which have suffered greatly as a result of their counter-cyclical stimuli. Latin America as a region has a long history of episodes of unsustainability, not only in terms of the balance sheets of its governments, but also within its private sector and in the relationship of both with the rest of the world. It is therefore natural to look at where balance sheets are now in Latin America. We assess these by breaking total savings down into key qualitative components: fiscal (government) savings – the difference between total government revenues and expenditures; private-sector savings – the excess of saving by households and firms over their investment expenditure; and external savings – net capital inflows from abroad less foreign-reserve accumulation.
Figure 0.13. Composition of savings flows (1993-2009) in Argentina
Figure 0.13. Colombia
Figure 0.13. Brazil & Mexico
Figure 0.13. Peru & Chile
The corresponding data are shown as a proportion of GDP for selected Latin American countries in Figure 0.13. A negative value can be interpreted as a "financial need" – in the case of the private sector, financial need would be the excess of investment over savings. External savings – equal to current-account deficits – have been disaggregated further into net capital inflows and changes in foreign reserves.
The figure shows that during the boom years leading up to the 2009 crisis, positive net capital inflows did not translate into lower domestic savings or an investment boom. This is in notable contrast to the position in Colombia and Argentina prior to their 1999 and 2001 crises. The difference this time was reserve accumulation. Central banks were clearly actively using monetary policy to smooth liquidity inflows from abroad. Although exchange-rate interventions have proven costly and ultimately ineffective when trying to set long-term exchange rates, they have proven useful in managing volatile capital markets over the shorter term. Several countries used their accumulated reserves to counteract sudden liquidity pressures from abroad during the crisis.
The public sector, it seems, has weathered this crisis better than previous ones. Can the same be said of the region’s banks?