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Latin America and the Caribbean Region Resilient So Far, But Risks Ahead

by Mary Swire, for, Hong Kong

14 April 2008

Economies in the Latin American and Caribbean (LAC) region have generally held up well so far in the face of recent global financial strains, according to the IMF's latest Regional Economic Outlook: Western Hemisphere, released late last week.

Many countries in the region are benefiting from stronger fiscal and external positions and improved credibility of policy frameworks, according to Anoop Singh, Director of the IMF's Western Hemisphere Department.

The IMF observed that stresses in US financial markets have had less impact on the region's financial markets and external funding than in past episodes of global financial disruptions.

Although external funding conditions have tightened, especially for the LAC corporate sector, this has been by less than in the past, and also less than in some other emerging markets. However, Mr Singh noted that a deteriorating global environment will weaken fiscal and external positions, especially because public spending continues to be procyclical in many countries.

Mr Singh added that the prospects for a number of countries have been strongly supported by still-strong commodity prices.

Growth in the LAC region is expected to slow this year and next given the weaker external conditions, he noted.

In the baseline scenario, the region's growth is projected to slow gradually from 5.6% in 2007, to 4.4% in 2008, and to 3.6% in 2009. This reflects the impact of weaker external demand and financial conditions, as well as moderating commodity prices and remittances.

Mr Singh added that the balance of risks for growth is tilted to the downside. The financial shocks currently playing out in the global economy introduce a particularly high degree of uncertainty for the region.

Moreover, the possibility that commodity prices could unwind, as in previous global slowdowns, remains an important downside risk for the commodity-exporting countries in the region.

At the same time, the IMF official observed, inflation pressures remain a concern for monetary policymakers, with strong domestic demand and very rapid credit growth, combined with exogenous shocks, especially to food and fuel prices, in many countries.

"Navigating this period of financial turbulence and heightened uncertainty is the key near-term policy challenge," Mr Singh explained.

While the region has entered this situation with reduced vulnerabilities, balancing the expected growth slowdown against ongoing inflationary pressures is a key test of the generally improved policy frameworks in the region, and will require careful policy management.

Monetary policy has, in the view of the IMF, been correctly oriented toward containing inflation, and the efforts of central banks need to be supported by flexibility in other aspects of the macroeconomic policy mix, especially exchange rate and fiscal policies.

The staff's analytical work cautions against discretionary fiscal stimulus in many countries, especially given the procyclical fiscal stance in many countries, and favors better targeted public spending to enhance infrastructure and social support, and catalyze higher overall investment and productivity over the medium term.

Financial supervisors need to continue to monitor closely the risks in the financial sector, as well as maintain a close dialogue with regulators in other countries, given the international nature of the current shocks, the regional economic outlook report concluded.

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