Latin America's run of record growth will cool this year, as US interest rates rise and commodity prices begin to ease, according to key reports released this week.
The Latin American and Caribbean region grew by 5.7% in 2004 – its strongest growth in over two decades – but is expected to slow to about 4.3% and 3.7% in 2005 and 2006 respectively, in line with global trends, according to a new World Bank report.
Similarly, the Institute of International Finance (IIF), a private-sector lobby group, in its recent regional overview sees growth letting up over the coming year. "We expect growth to moderate this year, as global conditions turn somewhat less favourable, and a further fall in debt-to-GDP ratio is in doubt in many countries."
Latin America's record growth last year was the result of strong world demand for the region's exports. High commodity prices, low international interest rates and spreads also contributed to large gains in output in Mexico, Chile, and to some extent Brazil, according to the World Bank.
A substantial recovery in Argentina, Uruguay and Venezuela, following the crises of previous years, also contributed to the strong regional performance.
"The region just experienced the strongest growth in 24 years," says Guillermo Perry, the World Bank's chief economist for Latin America and the Caribbean, commenting on the report's release. "The country fundamentals are solid, but the region has to follow a prudent policy to reduce vulnerabilities to higher interest rates and a global growth slowdown."
Perry says countries in the region should take advantage of these favourable times to prepare for the future by being prudent with public social spending, building fiscal surpluses and reducing the public debt.
This cautionary note is echoed in the IMF's Word Economic Outlook 2005, released today, which warns on fluctuations in output growth in Latin America. It notes that such output volatility is significantly more pronounced in the region than in industrialized countries, and could harm long-term economic performance while making poverty reduction more difficult.
Both IMF and World Bank reports emphasize the importance of continued remittance flows to Latin America – the region with the highest such flows in the world – that are the key source of foreign exchange for the region.
The reports also note that the oil market will continue to be tight in coming years; high and volatile oil prices will continue to present a serious risk to both Latin America and the global economy.
The World Bank report estimates a global economic growth of 3.8% in 2004 -the highest in four years – but projects a slowdown to 3.1% in 2005, as a result of expected increases in US interest rates, fiscal tightening, and the effects of the 25% real effective appreciation of the Euro.