Economic growth in Latin America and the Caribbean (LAC) is expected to rebound to 3.5 percent in 2013 after 3 percent in 2012, thanks to stronger external demand and the effects of earlier policy easing in some major countries in the region, the IMF said in its latest Regional Economic Outlook for the Western Hemisphere. Looking ahead, the combination of relatively easy financing conditions and strong demand for commodities should support this momentum as growth in 2014 is forecast to reach about 4 percent.

 

The outlook is not without clouds, the report said, reiterating its warning that a reversal of the favorable tailwinds is a risk. In particular, medium-term risks revolve around the tightening of global financing conditions and the possibility of a sharp slowdown in Emerging Asia, with knock-on effects on commodity prices. Also, the risk of a deterioration of external and financial sector balance sheets has increased, according to the IMF report.

 

“Our advice has not changed much from a year ago,” said Alejandro Werner, Director of the IMF’s Western Hemisphere Department at the launch of the report in Montevideo, today. “Conditions are still very favorable, but they won’t last forever. We are observing a moderation of commodity prices that may intensify and interest rates will eventually go up as the situation in advanced economies improves. The challenge for many countries in the region is to take advantage of this environment to rebuild buffers and build the foundation for stronger and more inclusive growth,” Mr. Werner commented.

 

Different Priorities Across The Hemisphere

 

For Latin America’s financially integrated economies (Brazil, Chile, Colombia, Mexico, Peru, and Uruguay), which are projected to grow 4.3 percent in 2013, the priorities should be strengthening public finances and financial sector stability. It is important for these countries to set macroeconomic policies based on a realistic assessment of the economies’ supply potential, the report said. This includes a more prudent fiscal stance to ease pressures on capacity and slow the widening of current account deficits while allowing exchange rate flexibility to discourage speculative capital flows.

 

South America’s less integrated commodity exporters (Argentina, Bolivia, Ecuador, Paraguay, and Venezuela), would benefit from saving a larger share of commodity revenues,

 

according to the report. On average, primary public spending has increased by 10 percentage points of GDP since 2005. Given that these countries are highly vulnerable to terms of trade shocks, spending will need to be reined in to ensure fiscal sustainability.

 

Turning to countries in Central America, which are operating near potential and have for the most part debt-to-GDP ratios above pre-crisis levels, the report calls for a prompt consolidation of their fiscal positions and for some countries to increase exchange rate flexibility to help buffer against external shocks. Finally, many Caribbean countries face a difficult situation as high debt and weak competitiveness continue to constrain growth. The key challenges for these countries remain broadly the same: reducing high public debt, containing external imbalances and reducing financial sector vulnerabilities, the report said.

 

LAC’s Potential Growth And Commodities Windfall

 

The report also features short analytical notes on the region’s growth potential and income windfall associated with the commodities boom. On the former, the report suggests that the strong growth momentum of the last decade is unlikely to be sustained unless productivity growth improves significantly. In this context, the region should prioritize structural reforms, including improving the business climate, increasing competition and investing in human capital.

 

The study finds that the income windfall from the region’s recent terms of trade boom has been unprecedented. However, the share of the windfall that has been saved is smaller than in previous episodes.

 

Read the report here

 

(Source: IMF)