Latin America's Economic Growth Will Rebound in 2010

Latin America has withstood the stress test of the global economic and financial crisis relatively well.

By Shelly Shetty | Member of the Advisor Board and Senior Director of Latin American Sovereign Ratings at Fitch Ratings in New York

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter.

Latin America has withstood the stress test of the global economic and financial crisis relatively well. The region entered the period of the global financial crisis in relatively good health with record-high international reserves, manageable external account imbalances, modest government debt burdens and comparatively healthy financial systems that were not exposed to "toxic" assets or highly dependent on external funding. Moreover, expansionary economic policies, an increase in commodity prices since the trough in early 2009 and a recovery in external private capital inflows have provided significant support to the ongoing economic recovery in the region.

Fitch expects the regional economic growth to recover to 3.6 percent in 2010 from -2.9 percent in 2009. The region's recovery will be underpinned by a more favorable global financial and economic environment, a further modest increase in commodity prices and continued capital inflows.

On the domestic front, demand will be underpinned by a recovery in consumer and business confidence indicators and continued supportive economic policies. However, in Fitch's view, the pace of economic recovery will vary across countries. A stronger economic rebound is likely in Brazil, Chile, Peru and Panama, with all these countries likely to record growth of at least 4 percent in 2010. Brazil's economic recovery will be supported by its fiscal and quasi-fiscal stimulus, the strength of the private consumption and a recovery in investment. Chile's recovery will also be underpinned by stronger consumption and investment as well as continued albeit moderating fiscal stimulus. The recovery in global trade as well as the continued expansion of the Panama Canal will support the economic rebound in Panama, while improving terms of trade, a recovery in domestic demand and continued credit growth will support growth dynamics in Peru.

On the other hand, growth prospects for Mexico and some countries in Central America and the Caribbean will be weighed down by the sluggish recovery in the United States as these countries are quite dependent on the United States for exports, tourism and overseas workers' remittances. Mexico's relatively large domestic economy, as well as the severity of its 2009 recession (and in turn the favorable statistical base effect), should allow the economy to grow by 3 percent in 2010. Colombia's growth will also be modest due to the electoral uncertainty, the continued strained trade relationship with Venezuela and a subdued recovery in private consumption. Finally, despite stimulative policies and supportive commodity prices, economic growth in Argentina, Ecuador and Venezuela will be constrained by interventionist policies that have deterred private investment in recent years. However, Argentina may recover more quickly owing to higher growth in Brazil as well as stronger soya production next year.

Fitch expects inflation to inch up only modestly in the majority of countries in the region on the back of higher commodity prices and economic recovery. Central banks in the region are expected to begin the process of normalizing interest rates after the significant reductions seen in most countries in 2009. A bigger challenge for Latin American authorities could be to cope with the appreciating currency pressures, which may continue due to the increase in capital inflows to the region, higher commodity prices, hikes in domestic interest rates and a faster economic recovery compared with the developed markets. The other significant challenge facing Latin American policymakers in 2010 is to decide the timing and pace at which to withdraw fiscal stimulus in order to proceed with fiscal consolidation as the economic recovery takes hold and before fiscal concerns begin to undermine creditworthiness. On the external front, in 2010 Fitch anticipates the region's current account deficit to increase modestly to 1.6 percent from 1 percent in 2009, although greater private sector capital inflows, continued multilateral disbursements and higher rollover-rates on external debt will help in comfortably financing the higher deficit. In addition, Fitch forecasts the region's stock of international reserves to strengthen further in 2010 to $581 billion from a relatively high level of $546 billion estimated for end-2009.

***Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter.


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