Strong Recovery in Latin America, But Eye on Overheating

Latin America's growth stronger than anticipated

Need to proceed with timely removal of stimulative policies

Regulatory policies can complement traditional macroeconomic policy tools

In its new Regional Economic Outlook for the region, issued on October 19 in Bogotá, Colombia, the IMF said that, after posting impressive gains in the first half of 2010, growth in the region is projected to moderate somewhat during the remainder of this year, but remain above trend. This strength shows up especially in South America, where a number of economies are growing at rates of 7 percent.

In Central America, the recovery is also progressing, but more gradually, while in the Caribbean, growth remains muted, following a severe contraction last year, the report said.

“Overall our region is performing very well, with growth close to 6 percent this year,” Nicolás Eyzaguirre, Director of the IMF’s Western Hemisphere Department, said. “This growth has been led by fast domestic demand, pushed to a big extent by very good external conditions—especially higher export prices and very loose global financial conditions.”

Easy conditions, stimulative policies

But the timing and path of the recovery will vary among the region’s economies, depending on external influences and the legacy of their past policies and their policy frameworks, the IMF said.

The current global setting is stimulative for those economies with greater real linkages to the more dynamic emerging economies, and for those likely to be most attractive to foreign investors. Many of the commodity-exporting countries of South America are facing highly favorable conditions—particularly those with stronger fundamentals, who have easiest access to credit. The report predicted that dynamism of China and other Asian economies will keep the price of South America’s key commodity exports high.

On the other hand, the environment is least favorable for those with strong real linkages to the weaker-performing advanced economies. This is the situation for many countries in Central America, with close ties to the U.S. economy, in terms of income from exports and workers’ remittances, and much more so for the tourism-dependent economies of the Caribbean.

Global environment shapes policy challenges

For many countries of South America—where growth recently has been even stronger than expected—policy challenges center on avoiding overstimulation of demand and credit, which would turn unsustainable...