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Unformatted text preview: agnitude that its recessionary impact is already being felt. Moreover, if the global crisis becomes more acute or extends beyond 2009, fiscal and financial conditions can weaken to a point where they could well become an increasing part of the problem. Finally, while vulnerabilities have decreased for the LAC region as a whole, there is considerable heterogeneity across LAC countries. A few countries are still saddled with significant fiscal and public debt complications which limit budgetary maneuvering room. Many others, particularly among the smaller countries in Central America and the Caribbean, have heavily‐managed or pegged exchange rates and cannot therefore undertake counter‐ cyclical monetary policy. … and perhaps also, at least in some respects, compared to other emerging regions Unlike many past experiences, some evidence suggests that LAC was this time in a relative good position vis‐à‐vis other emerging regions when the crisis hit. For instance, countries in LAC had on average lower inflation rates and were equipped with more flexible exchange rate arrangements compared to Eastern Europe and East Asia (Figures 8 and 9). Furthermore, in contrast with large current account deficits in Eastern Europe and South Asia, LAC was running current account surpluses before the crisis. Also, while significantly below South Asia, LAC’s ratio of international reserves to short‐term external debt compared favorably to those of East Asia and was above that of Eastern Europe (Figure 10). Moreover, 15 financial systems in LAC, although smaller on average than in other emerging regions, had a larger share of loans backed by local deposits, a factor contributing to resiliency to reversals in capital inflows. East and South Asia had a lower loan to deposit ratio while in Eastern Europe a very high share of credit was funded by foreign inflows (Figure 11). LAC will most likely endure a recession this year The 4th quarter of 2008 marked a clear point of inflexion for LAC and the world economy. Prior to that, LAC (a net commodity‐exporting region) had been enjoying a short‐lived decoupling stage underpinned by an accelerated rise in commodity prices. During that stage, even as the subprime crisis and economic slowdown spread through the economies of the center, LAC currencies strengthened, foreign direct investment continued flowing in, and growth kept apace. The key policy concern for LAC then was inflation, which was being pushed by rising international prices of foods and fuels. That situation began turning around as commodity prices fell, and came to an abrupt end with the financial devastation unleashed by the failure of Lehman Brothers in September 2008. As a result, financial flows and economic activity throughout the world took a highly synchronized nose dive, and LAC fell into a sort of global economic whirlpool. The overall deterioration of economic conditions that was registered in the 4th quarter of 2008 has been unprecedented. During that quarter, on average for LAC, the cost o...
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