Latin America Resilient, But Risks Are Growing

Economic growth in Latin America remains robust

But weak global recovery poses great risks

Region should prepare by enhancing room for policy maneuver

“Fears of a global slowdown and waning confidence have started to weigh on the region’s financial markets. Equities and more recently currencies are taking a hard hit,” Eyzaguirre said September 23 at a press briefing during the IMF-World Bank Annual Meetings.

However, compared with past episodes of financial stress, balance of payments and funding pressures have been relatively contained thus far, Eyzaguirre told reporters. That said, the situation is fluid, and risks are high.

At the same time, commodity prices—a critical external factor for the region—remain high by historical standards but are showing signs of stress.

In this environment, Latin America and the Caribbean should preserve or enhance policy room for maneuver to cushion the impact of large downside risks if they materialize, said Eyzaguirre.

Risks from weak global recovery

The IMF now expects the outlook for Latin America and the Caribbean to be modestly weaker than six months ago—at 4½ this year and 4 percent next year. Growth will continue to be driven by strong domestic demand, with commodity exporting countries in South America leading the way.

But Eyzaguirre, a former Finance Minister of Chile, cautioned that the IMF’s projections for the region are “surrounded by severe downside risks that would inevitably slow growth in the region.”

In advanced economies, including the United States, growth is stalling. In its latest forecast, the IMF said that economic growth in the United States—a main trading partner and source of remittances for many countries in Latin America and the Caribbean—is expected to average 1½ to 1¾ percent in 2011–12.

At the same time, if government and bank balance sheets in Europe are not decisively resolved, global confidence and credit market conditions could worsen even further, with very negative consequences for the region, Eyzaguirre warned.

Also, if emerging Asia slowed sharply—for example...