Latin America’s fastest growth in 25 years took shape in the past two years with more balance and breadth than past recoveries due to sound macroeconomic policies and market-based reforms, an IMF report said on Wednesday.
“These developments give hope that the current expansion will be more enduring than that of previous cycles,” the International Monetary Fund’s Western hemisphere director Anoop Singh wrote in a report.
“The region has made important strides in addressing the roots of macroeconomic stability and still faces a relatively favorable environment for making further progress,” he said.
The most important factor in the region’s five percent growth in 2004 and 2005 is the sharp nine percent improvement in its terms of trade since the end of 2002 for its oil and non-oil commodity exports.
Low interest rates around the world then supplied plenty of liquidity that benefited investment-grade countries like Mexico and economies in recovery like Brazil’s, but the output gap is now closing in many countries, the report said.
“Looking ahead, and against the background of the region’s history, it is not surprising that I would give primary importance to the need for continued policy and institutional steps to reduce public debt and strengthen fiscal frameworks,” Singh said.
Current account surpluses have raised reserves markedly and reduced the dependence on external capital inflows, adding to prospects that the current expansion may be longer lasting.
Another reinforcing factor: Moves by Brazil, Chile, Colombia, Mexico and Peru to adopt inflation targeting while other countries are shifting in that direction, he said.
“The new regimes have been extraordinarily successful in anchoring inflation expectations and ... in allowing monetary policy to play a more active countercyclical role,” he said. “This, in turn, suggests that countries in the region will be much more resilient to shocks going forward.”
But inflation targeting is not the practice of all Latin American countries and even those that have will face tests as global interest rates rise, global current account imbalances unwind and output gaps close, Singh said.
Efforts to strengthen banking systems should also bolster Latin America against crises although more work needs to be done to cut the level of non-performing loans and raise capital adequacy ratios.
Another key success is the region’s 19-percentage-point reduction in the average public debt-to-gross domestic product ratio by the end of 2005 from the end of 2002.
Brazil, Chile, Colombia, Mexico and Peru have done well to switch more of their debt to domestically denominated obligations from foreign-currency denominated debt, the IMF’s report noted. (Reuters)