Washington, DC – The economy in Latin America and the Caribbean is “on a glide path to steady growth” as the internationally economy picks up pace but “dangers remain,” the International Monetary Fund (IMF) said in its latest World Economic Outlook report, released on Tuesday.
The swings in risk aversion in global markets over the past six months have had significant effects on the region (Latin America and the Caribbean –LAC),” according to the report, which forecasts “moderate” growth of 3.75 per cent in the region this year and 4 per cent in 2013.
Specifically, the Caribbean economy is expected to grow by 3.5 per cent, while Latin America’s is forecast to expand by 4 per cent.
“High public debt and weak tourism and remittance flows continue to constrain the outlook for the Caribbean. The outlook for Central America, like that for Mexico, is closely tied to developments in the United States,” the IMF said.
“Spillovers to the region, both real and financial, from renewed crisis in Europe are likely to be limited,” the IMF added, however.
The IMF said that among commodity exporters in LAC, strong domestic demand growth moderated, as tighter macroeconomic policies began to bear fruit and the external environment weakened.
And while economic activity in LAC is still subdued, strong real linkages with the United States “offer some upside prospects as the United States slowly recovers,” according to the report.
“Spillovers to the region through trade, financial, and banking channels were active during recent months but with only limited effects on activity,” the report said.
It said that initially “a rise in risk aversion took some pressure off a number of economies in the region that were threatening to overheat”.
“But, after this pause, capital flows are returning and exchange rates are once again under pressure. Earlier policy tightening, however, is beginning to bear fruit,” the international financial body said.
It further stated that this combination of policy gains and recent resilience in the face of global sentiment swings means that the outlook is “promising”.
It, however, said, “inflation remains above the midpoint of the target band in many economies and credit growth is still elevated.
“At the same time, there is continued potential for downdrafts from Europe. While risks are broadly balanced, these tensions are complicating the tasks of policymakers,” the IMF further stated.
While the region grew strongly in 2011 external factors significant influenced these developments, the report said.
High commodity prices supported activity in many of the region’s commodity exporters despite a general slowdown in global growth and capital flows, which helped contain overheating pressures.
Internally, the tightening of fiscal, monetary, and prudential policies also helped moderate the pace of expansion.
Spillovers, the IMF said, are predominantly commodity related and, therefore, linked to Asian growth.
Financial spillovers, however, have been more closely related to European developments – “a rise in risk aversion stemming from concerns about developments in Europe led to a temporary reduction in capital flows to the region”.
The IMF warned that policies “must be alert to domestic overheating and must build on a strong foundation of prudential measures developed during the most recent periods of robust capital flows”.
It said that external pressure, which had abated briefly, are returning and would be premature to relax policy settings while inflation is still above the midpoint of target bands and risks tend to the upside.
“… Fiscal consolidation should continue (especially where it is needed to maintain debt sustainability), but social and infrastructure spending should be protected too.
“Fiscal policy in commodity exporters should focus on saving any windfall revenue gains while commodity prices are still strong, to build room for supportive action in case downside risks to the outlook begin to materialize
“In Central America, policies should shift toward rebuilding the policy buffers used during the crisis and adopting structural reforms aimed at boosting medium-term growth. Greater resolve is required in reducing debt overhang in the Caribbean while addressing weak competitiveness,” the IMF said in the report.