Latin America and the Caribbean are forecasted to expand 4.3% next year following this year’s 4.8% and 4.4% in 2005, according to the latest review from the International Monetary Fund, IMF, released this week.
Domestic demand will be the main engine for expansion this year and the following in the region points out Markus Rodlauer, chief advisor to the IMF’s Western Hemisphere Department.
Mr. Rodlauer who participated of a seminar organized by Chile’s Central Bank added that the lesser growth in 2007 can be attributed to the slowing of the global economy, a possible drop in the prices of commodities and the recovery maturing of several economies in the region.
Hefty trade surpluses, plus the influx of investments have helped build strong international reserves without having a major impact for the competitiveness of local currencies, according to Rodlauer.
Among the risks he pointed out the trade dependency on United States of Mexico and Central America, particularly if there’s a contraction of US demand and a second risk in a drop in the prices of commodities which could rapidly erode "fiscal parameters" in the region.
The IMF annual economic outlook for Latinamerica, released Thursday in Washington, said that the region is experiencing its "most vigorous three-year period of growth since the 1970s", but also cautioned that the rate of expansion lags behind that of competitors and without more investment it will begin to slow down.
Similarly despite reduced indebtedness, a recent increase in current public spending was "a significant source of concern".
"Things are positive, but they can be even better, they are still not growing at 7% a year," said Anoop Singh, director of IMF’s western hemisphere department. "In the end you can’t get away from focusing on investment and productivity. There is no other magic bullet."
According to the IMF report since the end of 2002 the price of oil has risen by 150% per cent and other commodities by an average of 80%. Only Chile, Uruguay, Central America and some Caribbean countries import fuel, so this trend has paved the way for a significant improvement in the terms of trade, 23% in South America and by 9% in Mexico.
Falls in interest rates and a rapid expansion in credit growth, especially consumer and mortgage credit have also helped boost private investment, especially in Mexico and Brazil.
IMF also praised successful income transfer programs, such as Brazil’s "Bolsa família" (Family Voucher), Chile’s "Solidario" and "Oportunidades" in Mexico, which it said "show considerable promise as a tool for poverty reduction".
Mr Singh singled out such programs as models of micro-economic reform that are being widely copied in the region. Peru and Uruguay both introduced similar schemes in 2005. "Despite the fact that these are relatively small, there is a general consensus that the programs have worked".
Singh said the current expansion compares favorably to previous upswings, mainly because governments had been running sizeable current account and primary fiscal surpluses and reducing debt burdens. "Compared with previous cyclical recoveries this expansion is on a solid footing".
The report also points out that Caribbean and Central American countries will continue to benefit from massive remittances sent from overseas, mainly the United States, where millions of people from those countries have migrated. In some countries remittances represent 10% of GDP.