Rising current account deficits and falling foreign direct
investment flows, combined with deteriorating fiscal positions,
could dampen Latin Americas economic feelgood factor.
Most Latin American countries in the region expect to return
to growth next year after muddling through the global financial
crisis but Brazil, Argentina, Mexico, Chile and Colombia
are all due to register larger fiscal deficits next year,
according to the International Institute of Finance (IIF).
This suggests that long-term sustainable growth will only be
achieved if some of the pitfalls that have marred public policy
in Latin America in the past can be avoided.
Brazils fiscal deficit is expected to grow from 1.5%
of GDP this year to 3.5% in 2010, the IIF estimates. Standard
& Poors, the credit rating agency, has hinted at a
possible sovereign downgrade in Mexico, as the fiscal deficit
may hit 4% of GDP next year. Argentina is also expected to
register a fiscal gap in 2010, following a surplus of 0.8% of
GDP this year.
Latin Americas performance in difficult times has also
benefited from the rebound in commodity prices and capital
flows, and general policy trends have been positive, the IMF
has said. The Fund is forecasting a 2.5% average drop in GDP
this year, followed by a 2.9% rebound next year. The IIF
forecasts are -2.4% and 3.9% respectively.
Joerg Decressin, head of the World Economic Studies Division
at the Funds Research Department, said: Latin
America has come through this crisis much better than they did
during previous crises. That is a testament to the strength of
the macroeconomic framework that you have in many Latin
We see just a modest current account deficit emerging
in the future, he said.
Nevertheless, a deterioration in the global environment, or
even a sluggish recovery in the developing economies, would
have an adverse effect.
Nicolas Eyzaguirre, Western Hemisphere director at the Fund,
said that a double dip recession in the US would be a
mess although he rates the probability of such an
event as low. Latin America is better prepared than in
the past, but Central American countries and Mexico are more
Daniel Volberg, Latin America economist at Morgan
Stanley in New York, said: With final demand in advanced
economies still weak, relying on export-driven growth may be a
risky bet for Latin America.
There are also conflicting views regarding the inflation
outlook, which reflects the degree of uncertainty about the
global economy. While the IMF has forecast declining inflation
amidst renewed growth with some notable exceptions, such
as Venezuela the IIF has forecast higher inflation
next year with a measured tightening of monetary
Interest rates are expected to go up during the first half
of 2010 in Mexico and Colombia, and in Brazil and Chile by the
end of that year, according to the IIF.