Journal Issue

Regional Focus: IMF Sees Continued “Vigorous Expansion” in Latin America

International Monetary Fund. External Relations Dept.
Published Date:
November 2006
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Latin America has been growing rapidly, well above its historical average, with low inflation and rising employment, and is expected to continue on this favorable path next year, according to the IMF’s Regional Economic Outlook: Western Hemisphere, released in Mexico City on November 2.

Anoop Singh, director of the IMF’s Western Hemisphere Department, told reporters that Latin American and Caribbean countries are experiencing “their most vigorous three-year expansion since the 1970s.” In 2006, real growth is expected to average around 4¾ percent, about ½ of 1 percentage point higher than in 2005. Growth is expected to recede slightly to about 4¼ 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 (see chart 1).

Chart 1Economic growth continues

Latin American economies, including Central America, will remain strong next year, but growth will taper off in the United States.

Citation: 35, 21; 10.5089/9781451968866.023.A004

(annual percent change)

Note: Shaded area respresents projections.

Data: IMF staff estimates.

The ongoing recovery has led to rising employment rates and declines in poverty in a region that suffered severe economic dislocations in the final two decades of the 20th century. The IMF said that during 2005 and the first six months of 2006, employment growth accelerated in many countries and unemployment fell toward 10 percent, on average.

The portion of the population living in poverty—which is defined in terms of the ability to purchase a basket of basic consumption goods—fell across the region from about 44 percent in 2003 to 40 percent in 2005, with sizable declines in South America’s two biggest economies, Argentina and Brazil.

Speaking at the annual meeting of the Latin American and Caribbean Economic Association in Mexico City (see page 329), Singh emphasized that this expansion is more solid than earlier ones. Although there is regional variation, 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 (see chart 2). External current accounts and primary fiscal balances are generally in surplus, and exchange rates are more flexible than in previous expansions. The structure of public debt has become safer, with lower shares of short-term and foreign currency debt in most large countries.

Chart 2Prices remain generally stable

Although there is regional variation, inflation has generally been subdued and is expected to decline further in 2007.

Citation: 35, 21; 10.5089/9781451968866.023.A004

(percent, annual average)

Note: Shaded area represents projections.

Data: IMF staff estimates.

Potential risks

Still, the IMF’s report emphasizes that a number of factors warrant monitoring.

Uruguay to repay IMF loan

Uruguay said it plans to repay early all outstanding obligations to the IMF, amounting to SDR 726.7 million (about $1.08 billion). IMF Managing Director Rodrigo de Rato welcomed the decision. “This decision reflects the quick recovery of Uruguay from crisis, supported by the international community and the Fund, and its renewed access to international capital markets,” de Rato said on November 8. “The track record of sound macroeconomic policy management has provided the basis for the consolidation of market confidence, strong economic outcomes, and an improved profile of public debt.”

Total drawings by Uruguay under its two Stand-By Arrangements were equivalent to SDR 2.25 billion (about $3.35 billion). Uruguay made three early repayments between September 2005 and August 2006, amounting to SDR 1.14 billion ($1.69 billion). Under the original schedule, the final repayment of outstanding loans from the IMF would have taken place in 2010.

  • 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 non-oil 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 more than 50 percent of GDP on average (see chart 3). Budgets remain rather rigid, with a high proportion of mandated expenditures and a large share of earmarked revenues. 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, although not yet a source of concern in most countries, high real credit growth requires close monitoring.

Chart 3Public debt remains a concern

Public debt has come down but on average remains high, at more than 50 percent of GDP

Citation: 35, 21; 10.5089/9781451968866.023.A004

(percent of GDP)

1 Latin America and the Caribbean, weighted average.

Data: IMF staff estimates.

Policy challenges

To entrench macroeconomic stability and raise growth, it is important to address the long-standing causes of crises in the region, including high income inequality (see chart 4). Singh emphasized that there need not be any contradiction between reforms that are good for equity on the one hand and reforms that promote growth and stability on the other. Such reforms include fiscal reforms to make the tax system fairer and focus public spending on social programs for the poorest, labor market reforms, and other reforms that extend public services and economic opportunity to disenfranchised groups.

Chart 4Income inequality still widespread

There are too few “haves” and too many “have-nots,” especially compared with Asia and industrial countries.

(Gini coefficient)1

Citation: 35, 21; 10.5089/9781451968866.023.A004

1 The larger the number, the greater the income inequality. For Latin American countries, 1990s represents the observations closest to 1990, and the 2000s are the most recent available observations.

Data: Economic Commission on Latin America and the Caribbean, Social Panorama, March 2006.

Singh also pointed out that investment rates in Latin America remain far below those in the most dynamic emerging market economies. Higher investment and productivity growth are likely to be linked to efforts to make Latin American economies more open and competitive.

The full text of the Regional Economic Outlook: Western Hemisphere (November 2006) is available on the IMF’s website (

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