國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
4 How the 7 biggest Latin American’s governments reacted to the crisis
4.1 Argentina
Argentina, in their monetary and financial policies, they lowered their legal reserve in dollars and reduced their legal reserve in local currency. They launched a program of daily automatic repurchase of securities issued by the Central Bank of Argentina maturing within six months. Also, the Central Bank of Argentina tripled the line of credit to local banks. And the refinancing of liabilities issued by the government in 2001 (during their crisis).
In their fiscal policies, 20% reduction in withholding taxes on exports of wheat and corn. An additional one-point reduction for every million tons of production above the recent average. And 50% reduction in withholding taxes on exports of all fresh fruits and vegetables. This was an important policy to establish, because this sector was the hardest hit Exports declined by almost 19 per cent reduction during the first semester of 2009 (mainly through declines in sales from the automotive sector).
They also applied a reduction in employer contributions. All firms creating or regularizing jobs pay 50% of contributions for the first year and 75% for the second. The administration of retirees and pension funds was unified by state regimen.
In their exchange rate and foreign-trade policy, bigger controls over foreign currency demand were adjusted, alteration of rules for the purchase of public securities liquidated overseas. The Customs authorities imposed tighter controls on products sensitive for national industry, such as textiles, footwear, metallurgical goods, white goods and motorcycles.
Argentina, made an important moves in the sectorial policies, they separated the Ministry of Production from the Ministry of Economy & Production. The public works program will focus mostly on housing projects, hospitals, sewerage systems and roads.
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
And in their labor and social polices; they had regularization of unregistered employment, waivers of all debts and interest owed for regularization of the employment situation of up to 10 workers. No reliable unemployment data was found for make any graph representing either or not there was an improvement in the employment sector.
4.2 Brazil
Brazil, in their monetary and financial policies, they reduced their legal reserve, authorized bigger banks to obtain portfolios from medium and small bank and to extend loans in foreign currency. They gave broader powers for the central bank to intervene in failing financial institutions, as well as they gave the authorization to the Bank of Brazil and the “Caja Economica Federa” to buy financial institutions in difficulties (as well as insurance and social security enterprises). The central bank has offered loans to companies to facilitate refinancing of their external debts (allocating up to US$ 20 billion of the country’s reserves). As well, the central bank announced that they are willing to use until 36.000 millions of US dollars from their international reserves to enterprises with difficulties to re-finances their debt in the foreign market. This proved that Brazil is committed and flexible in terms of keeping the health in their local financial market, as well as the local economy.
In their fiscal policies, the government reduced their goal of surplus. The public investment capacity may be increased (by US$ 8.8 billion). The sectors worst hit by the crisis may be granted fresh tax cuts and more resources. The government pumped of over US$ 43.8 billion to keep up consumption levels; as well as they will spend the US$ 6.3 billion reserved for the Sovereign Fund on projects to maintain overall demand and the government to launch an advertising campaign to stimulate consumption.
‧
Source: Latin Macro Watch (LMW), Inter-American Development Bank
As well, Federal government and some States Government have extended the time allowed for monthly tax payments, thus easing pressure on corporate cash flows. A series of tax cuts have been announced. The tax on financial operations will be cut from 3% to 1.5% for direct consumer credit operations. The tax on industrialized products was temporarily cut, especially for automotive sector.
In their exchange rate and foreign-trade policy, the central bank has the possibility to give straight loans to private banks in foreign currency, but they need to be use only in foreign trade. The central bank reassumed the foreign exchange swap auctions in order to provide liquidity to importers. The devaluation of the Brazilian real would not lead, to any type of fiscal pressure on the government. On the contrary, the resulting foreign exchange gains led to a reduction of the debt initially.
The government has adopted a series of non-tariff import restrictions. Although, importers from the 17 sectors, will have to request an import license beforehand. This will have the greatest effects on wheat, plastics, copper, aluminium, iron, capital goods,
0.00
Brazil International Reserves: millions of USD $ -
Monthly
‧
electrical and electronic equipment, auto parts, motor vehicles and transport equipment in general. (The measure was temporarily suspended on 28 January 2009)
In their sectorial policies, the Agricultural received US$ 6.5 billion in support; in the Oil sector, the state/private company PETROBRAS was allowed to expand their borrowing capacity the National Bank for Economic and Social Development (BNDES) to keep up planned investment levels. the Housing sector, implemented a policy to create a real estate credit line for public servants (including staff of public enterprises and mixed public-private firms), as a means to stimulate civil building work. Banco do Brazil and the Federal Economic Fund to grant real estate loans at below-market rates. In their labor and social polices, the government announced the continuance of the unemployment insurance, particularly for economies sectors which have had massive employment cuts.
As we have mention before he Brazilian economy was affected the most in three industry sectors. The exports were highly affected due a sharp drop in sales to emerging countries (Argentina and Mexico were the best markets in terms of national car sales).
This mixed with the drop a in the global commodity prices caused a big upward in Brazilian economy.
4.3 Chile
Chile, in their monetary and financial policies, the 8 January 2009 the central bank announced cut its monetary policy rate by 100 basis points (from 8.25% to 7.25%) and that there may be further cuts in future, depending on inflation. And asked fiscal resources in foreign currency for local banks. The Chilean government has taken a series of measures to ensure that financial markets are protected with higher liquidity and flexibility. This thanks to he government has made a large scale of public savings from recent years' commodity boom with record prices for copper and other mining products.
Providing a solid financial system, with competitive and well-capitalized banks, appropriately regulated and supervised.
Chile had big changes in their fiscal policies; they applied a countercyclical policy in the national budget. They increased their spending in infrastructure, social spending and their total spending. An economic stimulus program (US$ 1.15 billion) was applied,
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
to encourage house purchases and support financing of small companies. Another US$ 7 billion will be spent on public investment. For fiscal stimulation, it is the first time for the Economic and Social Stabilization Fund to be used. Other revenue will come from the debt issue authorized in the 2009 budget (with a maximum of US$ 3 billion) and from a reduction in the fiscal regulation target. And an economic incentive plan (totaling US$ 4 billion, equivalent to 2.8% of GDP) it is purpose is to stimulate growth and employment through the application of short-term measures and structural reforms.
Graph 4.
Source: Latin Macro Watch (LMW), Inter-American Development Bank
Temporary reductions in businesses’ monthly interim corporate income tax payments on the basis of their past profits. In 2009, 15%, and those of larger businesses will reduce payments by small and medium-sized enterprises by 7%. In their exchange rate and foreign-trade policy, the exchange rate intervention ended. A program covering bank loans to exporters was enhanced. The drop in copper prices has hit Chile especially hard.
In their sectorial policies, the medium and small enterprises sector received additional resources (USD$ 500 millions) for Investment Guarantee Fund (FOGAIN) and to enhance the Guaranty Fund for Small Enterprises (FOGAPE). The housing sector
-3.00%
-1.00%
1.00%
3.00%
5.00%
7.00%
9.00%
Chile CPI: 12-month inflation
‧
“Corporación Nacional del Cobre de Chile” (CODELCO) for US$ 1 billion to boost its investment plan.
In their labor and social polices, it is planned an additional budgetary allocation for labor-intensive employment. Also a labor subsidy was planned for low-wage workers between the ages of 18 and 24. And it was planned to broaden the Unemployment Solidarity Fund to give access to all unemployed workers, not only those with permanent contracts.
4.4 Colombia
Colombia, in their monetary and financial policies, decreased the need of reserves in banks for current and savings account (from 11,5% to 11%) and also for term deposits under 18 months (from 6.0% to 4.5%). On 19 December 2008, the central bank cut its intervention rate by 50 basis points to 9.5%. (When the central bank of Colombia cuts its intervention rate it means that the market interest rate, the exchange rate and credit cost suffer a change). This to provide more liquidity in the market, and let banks to work more freely.
In their fiscal policies, they created a new “Infrastructure Fund” with the support of the IADB and CAF (Andean Cooperation Fund), which has the objective to develop infrastructure (the fund is about USD$ 500 millions). Plan from the national central government investments of over US$ 2.5 billion in public works. Investment in infrastructure (concessions, major highways, departmental roads, tertiary roads, housing, drinking water and basic sanitation) will become a priority. The government was able to pre-finance their deficit with the issuance of international bonds and disbursement from multilateral banks, that way taxpayers will benefit by a tax reduction.
In their exchange-rate and foreign-trade policy, decided to assure resources with external financing from international multilateral banks (IADB, World Bank, and CAF) for US$ 2.4 billion. Assurance of US$ 650 million in resources for the Foreign Trade Bank of Colombia (Bancoldex), by means of a government-backed loan from IDB.
‧
coffee export has become the third largest foreign exchange earner for the country and is a good employment resources. The government raised coffee's basic selling price and provided interest-free loans and discounted fertilizer to medium and small-sized coffee planters to protect their interests.In their Sectorial policies, as mention before, they were focusing in a strong investment plan for public works: road building, housing and irrigation districts. And their labor and social polices, they were seeking to protection the social investment despite public spending cuts. The minimum wage was raised to US$ 217 this means a 7.67% increase. And they expect an increase of 1.5 million families covered by the
“Families in Action” Program.
In 2010, inflation is likely to remain within the central bank’s target range of 2% to 4%, because the effects of El Niño, which can loses in the agricultural, particular coffee production and likely to be offset by the output gap and the appreciation of the peso.
4.5 Mexico
Mexico, in their monetary and financial policies, they provided additional short-term credit lines to banks. They allowed a temporary authorization to banks to inject liquidity into their own investment funds. The government announced a plan to buy back medium- and long-term government securities for up to US$ 3.1 billion, know also as Quantitative easing. And the Central Bank created a forward swap program, which will enable banks to swap the exposure of instruments with long-term fixed rates for variable-rate short-term securities. As other countries in Latin America, in Mexico the purpose of these auctions was to provide liquidity to the market in a timely way in order to meet the demand for US dollars that emerged during the last quarter of 2008
In their Fiscal policies, they created reforms to expedite spending on infrastructure (Fiscal stimulus for US$ 6.9 billion) and government purchase program from small and medium enterprises. The government edged the national production of oil against price fluctuation, this ensure the 90% of oil barrel exports. And in a national agreement, they
‧
petroleum gas would be cut by 10% and the price of electric power would be lowered.In their exchange-rate and foreign-trade policy, With the main objective of reducing the exchange volatility, the Central Bank of Mexico intervened directly in the market with an extraordinary selling of 1.060 billions of USD. And with the Secretariat of Finance and Public Credit and the central bank announced a cut in long-term debt issues and the launch of a forward swap mechanism to inject money into the markets. The Central Bank created a forward swap program for US$ 6 billion, which will enable banks to swap the exposure of instruments with long-term fixed rates for variable-rate short-term securities. On 16 January 2009, the central bank announced a cut of 50 basis points in its monetary-policy rate, lowering it to 7.75%. Although the currency depreciation brought considerable financial problems for a number of leading corporations.
The Mexican government cuts in tariffs, particularly for products imported from countries with which Mexico has no free trade agreement. Mexico’s biggest trade partner is United States of America, and as the economy and consumption shrinks as well the exports in Mexico. And Mexico competes head to head with China on nine out of its ten top export products to the U.S. primarily.
In their Sectorial policies, in the Oil sector, it was a reform in the investment scheme of “Petroleos Mexicanos” (PEMEX). And the transport sector would receive federal support for mass transit with an investment of US$ 1.3 billion. Mexico was very smart in hedging against the declines in oil prices. And so it was able to protect itself during this year setting the price at $70 per barrel even as it dropped considerably.
Although it is a good strategy, it is no a long-term strategy; so this is a very big concern of the government even before the crisis began.
In their Labor and social polices, the national employment and training system received on March 2008, US$ 50 million to be used to broaden coverage and quality of the National Employment Service. A new program was launched to support workers affected by the cut in industries (Preservation of Employment Program). The program
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
aimed to provide 0.5 million employment sources with 505 millions USD. Then the government has started two initiatives.
The first one, to improve the flexibility for people to retire. And second is to improve the flexibility, of the National Fund of Housing for the Workers’, so for a part of their contributions can be redistributed for retirement savings.
4.6 Peru
Peru, in their monetary and financial policies, the reserves requirement were adjusted in four occasions for national currency deposits and three times for foreign currency deposits. The Central Bank of Peru (BCRP) provide extended the maturity of its credit to some financial institutions and also reduced their interest rate. And they have focused to maintain liquidity in the financial system for national and foreign currency.
In their Fiscals Policies, they considerable increased their public investment, approximately in a 60%. They planned to finance their deficit with the Stabilization Fiscal Fund. Also by applied a economical stimulus plan (3.2 billion US $), which included paid the debt with oil refineries that caused a downturn of fuel prices, an increase in the drawback tax rate and transfer economic support to local governments. In their Exchange rate and foreign-trade policies, the tariffs were cut or eliminated for 571 food items, in order to soften the inflationary impact of rising international prices.
In their Sectorial policies, the government will allocate some US$ 6 billion to boost the construction industry, make it easier to obtain mortgage loans and develop housing and sanitation plans. Additional, US$ 1 billion were pumped in the construction market, mainly directed to housing social programs. And funds were approved (around US$ 440 millions) for support to small and medium enterprises and the export sector.
And in their Labor and social polices, they implemented funds toward social programs (US$ 97 million) to support workers; to improve the quality of life for the poorest sectors and those who are most vulnerable to the world situation.
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
4.7 Venezuela RB
Venezuela in their Fiscal policy, the government has indicated its intention to maintain an active public investment program; the investment is about some $400 billion USD in health, education, housing, and agriculture in the past 10 years.
Then, they have done public any other action in their monetary and financial policies, Exchange rate and foreign-trade policies, Sectorial policies and Labor and social polices. The ruling government has built up considerable reserves from the last few years’
high oil prices. The bulk of Venezuela’s $43 billion international cash reserve has been deposited since 2005 with the Bank for International Settlements in Basel, Switzerland.
The president claims that this the central bank of the world’s central banks, and if their would have been in an American private bank, they would have nothing by now.
Venezuela, has suffered the consequences of the commodity prices, especially Oil.
Which is the 90% of their exports. More important they did not edge the price if their barrels, like Mexico did. They went trough their reserves to try to maintain the price of the currency. Also the fall price in Oil means a reduction in the budgeted expenditure.
The President introduced currency controls in 2003 in a bid to prevent capital flight during a period of political turmoil in the South American oil-exporter. He fixed the bolivar at 1,600 to the dollar and put restrictions on foreign currency purchases.
Graph 5.
Source: Latin Macro Watch (LMW), Inter-American Development Bank
1.5 2.5 3.5 4.5
Venezuela Bolivar Nominal Exchange Rate per USD $
monthly average
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
The President vowed to fight speculation and price increases that could result from the devaluation, which raises the price of imports. Harried by recession and sliding popularity, The President weakened the bolivar to 4.3 per dollar from 2.15 in a bid to shore up government finances, which have been hit by weaker oil prices, and to stimulate economic growth ahead of key elections.