IMF Calls on Latin America to Aid Corporate Borrowers Amid Slump

  • `Policymakers should stand ready to provide liquidity'
  • Argentina and Brazil corporate risk has risen since 2011

Latin American governments should be prepared to provide liquidity to companies suffering amid tighter financial conditions and a prolonged recession, the International Monetary Fund said in a report released Wednesday.

The region boomed in the last decade, riding a wave of high commodity prices that enabled governments to juice their economies with fiscal spending. Companies also took on debt, often in foreign currency. Now, the tide has turned. Exchange rate depreciations, commodity price declines and economic slowdown in 2015 caused some stress to companies, if not yet widespread distress, according to the IMF report.

“Margins have been stretched thin, and future risks are elevated,” the report said. “Public sector equity should not be used to stave off needed adjustments, but policymakers should stand ready to provide liquidity to solvent firms.”

Argentina, Brazil

Rising sovereign credit-default swaps, which reflect the perception of greater weakness in policy frameworks, have affected corporate risk levels. The report highlighted South America’s two largest economies, Argentina and Brazil, as needing to rein in risks to fiscal sustainability and inflation.

The two nations since 2011 have “started to persistently display higher corporate risk levels, accompanied by concerns regarding their policy frameworks.”

Argentina will post a deficit of more than 5 percent for the second straight year, according to economists surveyed by Bloomberg. Brazil is running a near-record high budget deficit that’s double that level.

The Argentine peso has plunged 38 percent over the past year after the newly-elected government removed controls of the currency. The real has dropped 17 percent, the most of 16 major currencies tracked by Bloomberg. Argentina will contract 1 percent this year, while Brazil will record its second straight year of a 3.8 percent contraction, according to IMF projections.

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