Regional focus: Region builds resilience to shocks, less crisis prone

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Abstract

The Web edition of the IMF Survey is updated several times a week, and contains a wealth of articles about topical policy and economic issues in the news. Access the latest IMF research, read interviews, and listen to podcasts given by top IMF economists on important issues in the global economy. www.imf.org/external/pubs/ft/survey/so/home.aspx

Latin America is becoming more resilient against economic shocks and less prone to crises as a result of a range of difficult policy measures that have been undertaken in many countries of the region in recent years, Anoop Singh, Director, of the IMF Western Hemisphere Department, told a press conference on September 23. This is good news given Latin America’s need to keep growing and to grow faster, in a sustainable way. But risks remain, including from global developments, he said.

Recent developments in Latin America have been encouraging. Over the last year or two, he said, the region has benefited in different ways from commodity price developments, from terms of trade gains, and from diversifying and strong export growth. Financial market conditions have been favorable, and sovereign spreads have reached record lows. Domestic demand growth has remained healthy; inflation is still generally well-contained; unemployment is on a downward trend; and poverty indicators are improving. The IMF projects growth in the region to reach about 4 percent in 2005 and 3.75 percent in 2006, still above historical averages, although below the near-record rate of 5.6 percent in 2004 because many post-crisis countries are returning close to capacity.

Latin America has built up greater economic resilience through:

Strengthening fiscal policies. Governments have generally maintained tight control over spending and avoided the pro-cyclical tendencies of the past, which have contributed to declining public debts and improved debt profiles. Several countries—most notably Brazil, Chile, Colombia, Mexico, and Peru—have increased their reliance on domestic debt issuance, reducing their vulnerability to exchange rate risk and deepening local-currency markets.

Prefinancing obligations. Many countries have taken advantage of benign financial market conditions to prefinance their external public sector borrowing requirements for this year, with some already covering requirements for 2006.

Improving monetary policies. Better monetary policy frameworks have contributed to a remarkable reduction in inflation over the past decade, anchored in many cases on inflation targeting regimes. Commitments to broad price stability have been illustrated by the willingness of many monetary authorities to tackle inflationary pressures at an early stage, although inflation remains relatively high in some countries.

Strengthening external positions. Much of the region is running trade and current account surpluses, and rising reserves in many countries are providing a larger buffer against external shocks. Most countries have also adopted more flexible exchange rate systems.

Risks ahead

Singh underscored that countries need to take advantage of the currently benign external environment to “strengthen underlying policy positions further and boost the region’s long-run growth potential.” The region can safeguard against risks, benefit fully from globalization, and sustain and strengthen growth, if governments preserve stable economic policies and press ahead with reforms to remove barriers to private investment and growth.

He said the biggest risk is continued high and volatile oil prices. But so far, the impact of recent oil shocks, including from Hurricane Katrina, “has been surprisingly moderate” both on the global economy and the region. The impact has been larger in Central America and the Caribbean, where countries are net oil importers. For them, it is a major challenge to try to balance the pressure on their fiscal positions and the pass-through into domestic prices of the higher oil prices.

Another risk is a possible abrupt tightening of global financial market conditions—with the emphasis on abrupt, given that some tightening is inevitable as a result of cyclical developments. This is particularly a problem, he said, because of the still relatively high external public debt ratios in many countries of the region.

Finally, there is the risk of continuing competitive pressure from other countries in export markets and a possible rise in protectionist sentiment globally. But, on the plus side, he noted, export growth in the region has been impressive; the Central America Free Trade Agreement should help as countries strengthen their institutions to maximize benefits from the agreement; and the Doha Round holds the promise of gains for the global community—which is why the world at large should apply pressure to conclude the global trade talks successfully.

IMF Survey, Volume 34, Issue 18
Author: International Monetary Fund. External Relations Dept.