Opening Remarks by Anoop Singh, Director, IMF Western Hemisphere Departmentat a Press Briefing on the Regional Economic Outlook for Latin America and the Caribbean
Singapore, September 16, 2006
As prepared for delivery
1. Good morning. It is a pleasure to welcome you to our update of the economic situation and the outlook for the region. I will open this press conference with some brief remarks on the key regional trends. Before I do that, let me inform you that our full presentation of the regional economic outlook will be made this year in Mexico City at the LACEA meetings in early November.
The Global Context
2. I would like to start by briefly discussing the global context, which I am sure you have heard described by the Managing Director and Mr. Rajan during their press conferences. The key message is that global economic growth remains solid. The United States continues to play a major role in propelling the world economy forward. Growth in the United States is projected to reach about 3½ percent in 2006-still the highest in the G-7 economies-and slowing modestly to 3 percent in 2007, with inflation easing as reaffirmed by yesterday's August CPI data. Growth in Canada is forecast at around 3 percent in both 2006 and 2007, in line with capacity. In both the United States and Canada, healthy corporate profits and business investment provide key support to the outlook. Nevertheless, as the Managing Director and Mr. Rajan have cautioned, downside risks remain a concern, and many of these have important implications for Latin America and the Caribbean.
Latin America and the Caribbean: Recent Developments
3. Turning to Latin America and the Caribbean, this region continues to enjoy robust growth for the third successive year, which has helped achieve further reductions in unemployment and poverty. Real growth in 2006 is now projected to average around 4¾ percent, about ½ a percentage point higher than we forecast in the spring, and to stay in the 4 percent range in 2007. The moderating trend over the next 12 months reflects the more measured global expansion, the projected easing of commodity prices, and the maturing of strong recoveries in several countries.
4. The region continues to benefit from a favorable global environment, including strong commodity prices. Between 2002 and 2006, primary fuel and non-fuel commodity prices have risen by some 170 and 70 percent, respectively. Although higher world oil prices have placed a difficult burden on a number of countries, the broad-based boom in commodity prices has helped many countries in the region to achieve large trade and current account surpluses and accumulate external reserves. Favorable global financing conditions and continuing record low sovereign spreads have also sustained the growth momentum, notwithstanding some bouts of financial market volatility in the first-half of the year.
5. Encouragingly, growth has generally been quite broad-based, and domestic demand is expected to remain the main driver of the expansion in the near term. Private consumption is projected to account for more than two-thirds of regional growth in 2006 and 2007, and private investment ratios are set to increase further.
6. It should be underscored that hard-won improvements in macroeconomic stability have provided an important foundation for the continued economic expansion, and placed the region in a much better position to take advantage of global growth. And the commitment to stability has been reinforced significantly this year, with strong macro policies maintained during political transitions in a number of countries. This is a further signal that the region's commitment to macroeconomic stability is grounded on broad political and social support.
7. Most notably, perhaps, inflation has remained subdued during this upswing, despite sustained increases in commodity prices. After dropping to 6 percent in 2005, inflation is projected to decline further in 2006 and to 5 percent in 2007. This progress toward price stability provides further testimony to the growing credibility of monetary policy frameworks in most countries. This, in turn, has allowed for lower interest rates in a number of countries, markedly so in Brazil and Mexico, and helped to support increases in credit and investment.
8. The favorable macroeconomic performance has been generally well grounded in better fiscal policy and declining public debt ratios. Primary fiscal balances have been in surplus and are projected to strengthen further this year. In some cases, this reflects in part the impact of high oil and commodity prices on revenues. But large primary surpluses are also being maintained in some countries that do not have sizeable commodity revenues, such as Brazil, that continues to show exemplary fiscal discipline.
9. However, government spending increases have recently begun to accelerate in a number of countries, in a trend that needs to be monitored. Looking ahead, rising spending is projected to lead to a slight decline in fiscal surpluses next year, although these remain high by historical standards. Growth in real primary spending averaged 7½ percent in 2005 and is projected to accelerate further in 2006 (to 9 percent). These increases have outpaced real economic growth, thereby pushing up the average primary spending-to-GDP ratio by some 1½ percentage points since 2004 compared with a decline in spending ratios during 2003-04. It appears that the bulk of the recent increase reflects current spending. However, while higher commodity revenues have led to spending pressures, some countries in the region-most notably Chile-have shown exemplary discipline in channeling these revenues for debt reduction, rather than large spending increases.
Latin America and the Caribbean: Risks, and Policy Priorities
10. While the outlook remains solid, there are downside risks-some related to the global outlook, and others rooted in domestic conditions-and important challenges. Turning first to the roles:
- Tightening global financial market conditions. The compression of bond spreads to historic lows in recent years was partly driven by high levels of liquidity in mature financial markets. A tightening of global liquidity, especially if coupled with an abrupt shift in risk aversion, could lead to a much less favorable financing environment, although the region is less vulnerable to this risk than in years past.
- U.S. demand. A sharp slowdown in the United States, triggered, for example, by a sharper-than-expected cooling of the housing market, would affect the region. For some Caribbean, Andean, and Central American countries, the risk is compounded by the challenge of adjusting to the loss of trade preferences.
- Volatile commodity prices. While oil prices have recently fallen sharply, they remain high by historical standards and the oil market is expected to remain tight and volatile. Moreover, non-fuel commodity prices are projected to begin a gradual decline in 2007.
- Domestic policies. Given still-high levels of public debt, deviations from macroeconomic policy discipline could undermine the region's progress toward entrenching macroeconomic stability. In this regard, a key risk is whether governments will be able to rein in the growth of public spending, especially if commodity-based revenues decline.
11. The key challenge for the region continues to be to raise growth on a sustainable basis, and to share its benefits broadly so as to reduce poverty and improve living standards across the board. The favorable global environment and sustained economic recovery provide the region with a rare historical opportunity to reduce resolutely its macroeconomic vulnerabilities and emerge from its history of macroeconomic volatility. This requires entrenching recent improvements in macroeconomic stability, improving financial intermediation, and reducing remaining barriers to investment and long-term growth. Fortunately, the policy agenda that will achieve this should also have a positive effect on equity, and I will have more to say on this framework when I present the regional outlook in Mexico.
12. In summary, the region continues to prosper. Furthermore, the widespread strengthening of macroeconomic policies achieved throughout the region has greatly improved its resilience to shocks compared with the start of the decade. Looking ahead, the overriding challenge today is to seize the opportunity afforded by the expansion to achieve a further and lasting reduction in the region's macroeconomic volatility and vulnerability to shocks, and allow a shift to a faster sustained rate of growth.
13. Before we move into the Q and A phase of this press conference, I would like to take a few moments to announce the launch of a new volume from the IMF entitled "The Caribbean: From Vulnerability to Sustained Growth"-there are a number of copies available at the back of the room.
14. This volume is in many ways a tangible demonstration of the increased focus in the Fund on the regional dimension of surveillance. The issues covered are those that I know are uppermost in the minds of policy-makers in the region [and I see several of them in the room today], including the challenge of coping with natural disasters, the decline in official development assistance, and the erosion of trade preferences. And I would like to take this opportunity to thank the authorities throughout the Caribbean for their cooperation in our work in the region. I am pleased that one of the principal authors of the book is here today-Ms. Ratna Sahay-and I am sure she would be happy to meet with you afterward and brief you more fully.