IMF urges Latin American countries to take advantage of favourable economic winds

by Ray Clancy on May 8, 2013

IMF urges Latin American countries to take advantage of favourable economic winds

IMF urges Latin American countries to take advantage of favourable economic winds

The International Monetary Fund (IMF) has called on countries Latin America to take advantage of still favourable external conditions to lay the grounds for sustained growth by strengthening its policy buffers. Economic growth in Latin America is expected to rebound to 3.5% in 2013 after 3% growth was recorded in 2012 thanks to stronger external demand and the effects of earlier policy easing in some major countries in the region, the IMF said in its latest report.

It says that looking ahead, the combination of relatively easy financing conditions and strong demand for commodities should support this momentum and growth in 2014 is forecast to reach about 4%. The outlook is not without clouds, the report said, reiterating its warning that a reversal of the favourable tailwinds is a risk. In particular, medium term risks revolve around the tightening of global financing conditions and the possibility of a sharp slowdown in emerging Asian markets, with knock on effects on commodity prices. Also, the risk of a deterioration of external and financial sector balance sheets has increased, according to the IMF report.

‘Our advice has not changed much from a year ago. Conditions are still very favourable, but they won’t last forever. We are observing a moderation of commodity prices that may intensify and interest rates will eventually go up as the situation in advanced economies improves. The challenge for many countries in the region is to take advantage of this environment to rebuild buffers and build the foundation for stronger and more inclusive growth,’ said Alejandro Werner, director of the IMF’s Western Hemisphere Department.

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The report says that for Latin America’s financially integrated economies such as Brazil, Chile, Colombia, Mexico, Peru, and Uruguay which are projected to grow 4.3% in 2013, the priorities should be strengthening public finances and financial sector stability. ‘It is important for these countries to set macroeconomic policies based on a realistic assessment of the economies’ supply potential, the report said. This includes a more prudent fiscal stance to ease pressures on capacity and slow the widening of current account deficits while allowing exchange rate flexibility to discourage speculative capital flows,’ the report explains.

South America’s less integrated commodity exporters such as Argentina, Bolivia, Ecuador, Paraguay, and Venezuela, would benefit from saving a larger share of commodity revenues, according to the report. On average, primary public spending has increased by 10% of GDP since 2005. ‘Given that these countries are highly vulnerable to terms of trade shocks, spending will need to be reined in to ensure fiscal sustainability,’ it adds.

For countries in Central America, which are operating near potential and have for the most part debt to GDP ratios above pre-crisis levels, the report calls for a prompt consolidation of their fiscal positions and for some countries to increase exchange rate flexibility to help buffer against external shocks.

The report also suggests that the strong growth momentum of the last decade is unlikely to be sustained unless productivity growth improves significantly. ‘In this context, the region should prioritize structural reforms, including improving the business climate, increasing competition and investing in human capital,’ it points out. The study finds that the income windfall from the region’s recent terms of trade boom has been unprecedented. However, the share of the windfall that has been saved is smaller than in previous episodes.

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