Press Release No. 06/237

Press Release No. 06/237

The Latin American and Caribbean region continues to grow robustly and above its historical average, the International Monetary Fund concludes in its 2006 Regional Economic Outlook.

In 2006, real growth should average around 4.75 percent, making the ongoing expansion the most vigorous three-year period since the 1970s. This is about a half percentage point higher than in 2005.

Mr. Anoop Singh, Director of the IMF's Western Hemisphere Department, presented the 2006 Regional Economic Outlook today in a conference in Mexico City, during the 11^th Annual Meeting of the Latin American and Caribbean Economic Association, hosted by the Instituto Tecnologico Autonomo de Mexico.

The report's main findings are as follows:

Strong economic performance

Recent economic performance in Latin America and the Caribbean has been strong, and is expected to remain solid in 2007. Moreover, this expansion is generally on a sound macroeconomic footing.

· Latin America and Caribbean growth is projected to reach around 4.75 percent in 2006. The growth pace is expected to recede slightly to about 4.25 percent in 2007, in line with a more measured global expansion, the likely easing of commodity prices, and the maturing of recoveries within the region.

· The region's recovery in recent years has contributed to an increase in employment and falling poverty rates. In many countries, employment growth has accelerated, with formal unemployment declining toward 10 percent on average. Reductions in poverty have been widespread. In Brazil, for example, the poverty rate fell from 28 percent in 2003 to 23 percent in 2005, with the income of the poorest half of the population growing over twice as fast as that of the top 10 percent.

· Inflation has generally remained subdued and is expected to decline moderately further, to a regional average of about 5 percent in 2007, testimony to the growing credibility of central banks in the region.

· This expansion is supported by solid economic fundamentals. External current accounts and primary fiscal balances are generally in surplus, exchange rates are more flexible than in previous expansions, inflation is much lower, and the structure of public debt is safer, with lower shares of short-term and foreign currency debt in most large countries. In this regard, further progress was made in recent months, with Peru and Brazil issuing 20-and 16-year bonds in their own currencies, and Mexico issuing a 30-year peso bond.

Potential risks

Notwitstanding this solid performance, a number of factors warrant monitoring.

· External risks to the outlook include a sharper-than-expected slowdown in U.S. growth; an unexpected tightening of global financial markets; commodity price volatility (particularly sharply lower nonoil commodity prices); and trade pressures following the erosion of preferential access in the Caribbean and lack of progress on agreements to liberalize trade further.

· Some domestic vulnerabilities remain. Public debt remains relatively high, at over 50 percent of GDP on average. Budgets remain rather rigid, with a high proportion of expenditures mandatory and a large share of revenues earmarked. Government spending in a number of countries has recently accelerated, and lower commodity prices could erode fiscal surpluses. Public revenue remains low in some countries, particularly in light of social needs. And, while not yet a source of concern in most countries, high real credit growth requires close monitoring.

Policy challenges

To entrench macroeconomic stability, raise growth, and help more countries in the region move toward investment grade ratings, countries are preparing to confront these vulnerabilities, and address the longstanding causes of crises in the region, including high inequality.

· Although making societies more equitable is inherently a slow and difficult process, policy levers exist that could be used more, including fiscal reforms to make the tax system fairer and focus public spending on social programs for the poorest; labor market policies; and other reforms that extend public services to economic opportunity to disenfranchised groups.

· To raise investment and productivity growth to the levels of the most dynamic emerging market economies, these reforms need to be matched with greater efforts to make Latin American economies more open and competitive, to build stronger institutions, and to raise the level of human capital in the region.

· Achieving lasting improvements in these areas will require building constituencies that support reform.