Latin America: With Economy Humming, Good Time to Pursue Reforms

Region buoyed by easy financing conditions and high commodity prices

Fallout from euro area crisis and U.S. fiscal tightening are main near-term risks

Key policy challenges: rebuild policy buffers, safeguard financial stability

“In particular, it must work harder at strengthening policy buffers and at safeguarding financial stability,” Werner said, referring to the need for fiscal consolidation to shield economies from external shocks in the future. He spoke at a press briefing held as part of the IMF-World Bank Spring Meetings.

Werner noted that the current juncture also provides an opportunity to carry out growth-enhancing structural reforms that could support growth over the medium term if and when the tailwinds ease.

Growth in Latin America and the Caribbean is projected to pick up from 3 percent in 2012 to about 3½ percent in 2013, supported by the gradual global recovery, continuation of easy financing conditions and high commodity prices, as well as the effects of ongoing policy easing in some countries. Brazil, the region’s largest economy, is expected to rebound from under 1 percent in 2012 to about 3 percent this year.

Risks to growth

While economic conditions remain favorable for much of the region, Werner pointed out that the outlook is subject to considerable risks, particularly over the medium-term.

“An escalation of the crisis in the euro area, which would have negative effects on global confidence, trade and external financing flows, cannot be ruled out,” Werner warned. And a larger-than-expected fiscal tightening in the United States could hinder the pickup in economic activity expected in 2014, hurting growth in economies with close ties to the United States.

In addition, medium-term risks persist. Lack of decisive actions in key advanced economies to put their public finances on a sustainable path could trigger an increase in sovereign and corporate risk premiums, with large spillovers on confidence and global activity. “Sharply lower growth in emerging economies, particularly in Asia, would reduce global growth, with large knock on effects on commodities prices,” Werner...