Developing countries must adjust quickly to deal with the "new reality" of prolonged economic slowdown, Chile's finance minister Rodrigo Valdes said on Thursday. Valdes told Reuters at the World Economic Forum in Davos that emerging markets lacked the credibility and tools to counter capital flight. The world's largest copper exporter is among the emerging economies hit hard by the slump in prices for the metal, and Valdes said the government might need to review growth and budget forecasts.
"(Emerging markets) are seeing headwinds that we have not seen for at least 10 years, this is a different shock from 2009 when we had a v-shaped shock and we could do many things for the short term," Valdes said. "Here it is a gradual shock. It's important that we adjust to this reality. The worst thing you can do is to think this is not happening and act as if it were not happening."
Emerging markets last year saw their first annual capital outflows since 1988, according to the Institute of International Finance which earlier this week estimated the total as $735 billion and said another $450 billion would flee in 2016. Most reckon a quick bounce back is unlikely. The huge falls in emerging currency, stock and bond markets have prompted a suggestion by Mexico's central banker Agustin Carstens that emerging policymakers should emulate their developed market counterparts by becoming "market markers of last resort", possibly in a co-ordinated fashion. Valdes said he was not aware any such discussion was underway between emerging market policymakers.
"The big question mark is that emerging markets do not have the credibility and history that the developed world has, the tools available for us are not the same." He said Chile may have to revise some original growth and budget forecasts, having predicted 2.75 percent expansion in 2016, based on a copper price of $2.5 per pound and a 3 percent budget deficit. Copper accounts for around half of Chile's exports and prices have slumped to 6-1/2 year lows.
"Clearly our growth forecast of 2.75 percent is too high to meet," Valdes said, noting analysts expected a figure closer to 2 percent. The forecasts would be revised as part of the government's regular fiscal update cycle, he said. "We will be revising (copper price estimates in the budget) in the next few weeks," Valdes added. However, non-mining areas of the economy such as fisheries, winemaking and services were taking up some of the slack and preventing too sharp a fall in budget revenues, he said.
"We are facing a deficit of 3 percent or more perhaps, it's a large deficit for Chile and we have to take care of it. But we did a large tax reform two years ago which allows us to keep spending growing, but at a much slower pace than in past." Valdes said the government would not need to increase borrowing, having pre-financed part of its 2016 needs last year.
Another headwind for Chile and much of Latin America is regional giant Brazil, which is mired in recession and facing a political crisis. This, Valdes said, had already impacted investment flows between the two countries. Valdes also said a key labour market reform which had originally been scheduled to be completed by end-January was unlikely to happen this month as parties within the ruling coalition try to reach a compromise over some of its provisions. The reform will likely pass in early-March, he added.
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