Latin America Needs to Rebuild Resilience and Flexibility

Latin America's growth expected to moderate in 2012, but tailwinds remain

Risks remain from renewed tensions in Europe and oil prices

Countries should strive to rebuild fiscal buffers, with flexible monetary policies

The IMF’s Regional Economic Outlook for the Western Hemisphere, released on April 25, projects growth in Latin America at 3¾ percent in 2012, before returning to about 4 percent in 2013.

According to the report, growth continues to be led by commodity exporters, where favorable external conditions—in the form of high commodity prices and cheap and abundant external financing—continue to push domestic demand and credit.

Meanwhile, growth has held up reasonably well in Mexico and Central America, in part as a result of the steady, yet still tepid, recovery in the United States.

The Caribbean region finally turned the corner in 2011 after a long recession, although high debt levels and tourism dependence continue to constrain the outlook.

In its latest forecast, the IMF projects that global growth will ease from close to 4 percent in 2011 to about 3½ percent this year, returning to over 4 percent next year. For the United States, the IMF raised its projection to an average of 2¼ percent during 2012–13, compared with roughly 1¾ percent in 2011.

Risks to the outlook

The report says that Latin America continues to face potential problems, given the still fragile global recovery. It highlights three main risks to the outlook:

• Tensions in Europe. Renewed bouts of financial stress in the euro area could accelerate bank deleveraging, disrupt markets, and hit activity, both in Europe and beyond. However, the subsidiary model of European banks operating in Latin America, and their reliance on local funding, are likely to mitigate the risk of deleveraging.

• Oil-price shock. Geopolitical tensions in the Middle East could drive up oil prices, dampening global demand as well as nonoil commodity prices. Countries highly dependent on oil imports (Central America and Caribbean) and nonoil exports (for example, Chile, Paraguay, Peru) would be particularly affected.

• Medium-term risks. Looking beyond the near term, persistent fiscal imbalances in the United States and Japan could unsettle...