Latin American Growth to Edge Higher in 2013

Growth in Latin America expected to pick up in 2013

Tailwinds continue, but medium-term risks have not abated

Region should strengthen public finances, protect financial sector stability

In its Regional Economic Outlook for the Western Hemisphere, released on May 6 in Montevideo, Uruguay, the IMF said that external risks to the near-term outlook have receded. Policy actions in the euro area and the United States have removed immediate threats to global growth and financial stability, the report said.

That said, in the United States, failure to replace the automatic fiscal spending cuts (“the sequester”) with more backloaded measures before the start of the next fiscal year (in October) would affect growth in late 2013 and beyond.

Lower U.S. growth would have a negative impact on the region, particularly in Mexico and Central America, where links through trade and remittances are the strongest.

Mounting risks

According to the report, medium-term risks for Latin America remain tilted to the downside. The key risk is a reversal of the favorable tailwinds of easy financing conditions and strong commodity prices that have prevailed since 2010.

The region would be particularly affected if a sharp slowdown in China or other key economies triggers a drop in commodity prices.

Another risk is that lack of progress in addressing the medium-term fiscal challenges in key advanced economies leads to a sharp increase in sovereign and corporate risk premiums, with negative impact on global growth.

Domestically, the risk of a deterioration of external and financial sector balance sheets has increased in some countries, the report said.

Current account balances have weakened in recent years, and asset prices are on the rise. Credit growth has moderated, but remains high in a number of countries.

Responding to risks

The report reaffirmed its earlier message that countries in the region should take advantage of the current favorable economic conditions to build a strong foundation for sustained growth in the future. Policy priorities include building stronger fiscal buffers, improving policy frameworks, and pressing ahead with structural reforms to increase productivity and potential growth.

Growth in the...