Spring Is in the Air in Parts of Latin America

IMF Blog, April 25, 2012

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Most of Latin America stands out for good performance in a subpar environment.
Growth is generally solid, despite a slowdown late last year owing to policy tightening and global volatility.
Under the baseline scenario, regional growth is expected to moderate to near 3¾ percent in 2012, down from 4½ percent last year (but modestly up from our January projections).
Short-term risks, while receding, still tilt downwards: renewed European tensions or a large oil price shock could hit financial markets and global growth, triggering safe haven flows out of emerging markets, including Latin America.

Countries highlighted: Brazil, Chile, Colombia, Peru, and Uruguay.
These countries represent close to 60 percent of the region’s total GDP.
They have generally fared well thanks to:
- Good economic policy management.
- Favorable external conditions (the “twin tailwinds” of high commodity prices and easy international financing).
The twin tailwinds may persist for a while, unless large shocks appear; even modest-sized shocks would probably not disrupt capital flows into the region for too long.

Capacity and policy stance:
- The group of economies is mostly near or above full capacity; policies need to continue moving to neutral.
- The stimulus deployed to combat the 2008–09 financial crisis has been only partially unwound.
- Overheating remains a risk—credit and import growth have slowed but are still strong.
Fiscal policy:
- Continued fiscal normalization is essential to avoid driving an overheating cycle.
- Fiscal normalization helps reduce the burden on monetary policy, preserve credibility, and make space for a response if downside risks materialize again.
- Authorities should manage the abundance well, recognizing favorable conditions will not last forever.
Monetary and liquidity policy:
- Monetary policy should remain nimble and continue to serve as a first line of defense in case of adverse global shocks.
- The Lehman and European crises share the global propagation of liquidity shocks; effects included tightening in local markets and shortages of dollars.
- Policymakers need to be alert for droughts punctuating the rainfall and stand ready to support liquidity in their markets in the short term, as needed.
Strategic stance:
- Policymakers should carry both an umbrella and sunscreen: rebuild resilience and flexibility rather than resting easy or fighting risks that haven’t materialized yet.

Spring Is in the Air in Parts of Latin America — Nicolás Eyzaguirre, April 25, 2012