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IMFSurvey Magazine: Countries & Regions

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Latin America Resilient, But Risks Are Growing

Auto factory in Puebla, Mexico. Growth in Latin America remains strong but global risks persist (photo: Imelda Medina/Reuters)

IMF Annual Meetings

Latin America Resilient, But Risks Are Growing

IMF Survey online

September 23, 2011

  • Economic growth in Latin America remains robust
  • But weak global recovery poses great risks
  • Region should prepare by enhancing room for policy maneuver

Economic growth in Latin America and the Caribbean, expected to moderate to 4½ percent in 2011, is still strong but the uncertain global recovery could cause growth rates in the region to fall further, said Nicolįs Eyzaguirre, Director of the IMF’s Western Hemisphere Department.

“Fears of a global slowdown and waning confidence have started to weigh on the region’s financial markets. Equities and more recently currencies are taking a hard hit,” Eyzaguirre said September 23 at a press briefing during the IMF-World Bank Annual Meetings.

However, compared with past episodes of financial stress, balance of payments and funding pressures have been relatively contained thus far, Eyzaguirre told reporters. That said, the situation is fluid, and risks are high.

At the same time, commodity prices—a critical external factor for the region—remain high by historical standards but are showing signs of stress.

In this environment, Latin America and the Caribbean should preserve or enhance policy room for maneuver to cushion the impact of large downside risks if they materialize, said Eyzaguirre.

Risks from weak global recovery

The IMF now expects the outlook for Latin America and the Caribbean to be modestly weaker than six months ago—at 4½ this year and 4 percent next year. Growth will continue to be driven by strong domestic demand, with commodity exporting countries in South America leading the way.

But Eyzaguirre, a former Finance Minister of Chile, cautioned that the IMF’s projections for the region are “surrounded by severe downside risks that would inevitably slow growth in the region.”

In advanced economies, including the United States, growth is stalling. In its latest forecast, the IMF said that economic growth in the United States—a main trading partner and source of remittances for many countries in Latin America and the Caribbean—is expected to average 1½ to 1¾ percent in 2011–12.

At the same time, if government and bank balance sheets in Europe are not decisively resolved, global confidence and credit market conditions could worsen even further, with very negative consequences for the region, Eyzaguirre warned.

Also, if emerging Asia slowed sharply—for example, triggered by a recession in advanced economies—this could hit commodity prices, with knock on effects to commodity exporters in the region.

Complementary policies

Against this backdrop, Eyzaguirre said that Latin America and the Caribbean should avoid policies that exacerbate vulnerabilities and continue to rebuild the policy buffers used during the 2008–09 global financial crisis. At the same time, he said countries in the region should stand ready to shift course if global winds change, starting with monetary policy.

“In South American economies, where output hovers above potential and domestic demand is still strong, overheating risks remain relevant,” Eyzaguirre noted. Where inflation pressures have lessened, monetary tightening could pause until global uncertainty fades. Meanwhile, fiscal consolidation should continue as planned, he added.

Countries with strong real linkages to the United States, like Mexico and much of Central America, face a weaker outlook, Eyzaguirre stressed. Still, because budgets are more stretched, priorities should center on reducing public debt to precrisis levels. Monetary policy can play a more active role in managing the economy in countries with credible inflation targets, like in Mexico.

Eyzaguirre also said Caribbean countries need greater resolve in bringing down high debt levels while addressing financial sector vulnerabilities.

• The IMF’s Regional Economic Outlook for the Western Hemisphere will be published October 5.