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05/09/2008 | Latin America - External factors may compromise growth

Oxford Analytica Staff

Improvements in fiscal management in many of Latin American countries and the use of budget surpluses to pay down public debt have helped to cushion the region against the effects of deteriorating international economic conditions. According to a report by the Economic Commission for Latin America and the Caribbean (ECLAC), the region will continue to expand next year and, for the first time in 40 years, will complete a seven-year cycle of average per capita GDP growth of over 3% per year.

 

Slower growth. However, higher inflation, declining current account surpluses and deteriorating terms of trade are causing the region's growth to slow. ECLAC estimates that it will reach 4.7% this year, down from 5.7% last year, before slowing to 4.0% next year. This reflects a number of factors: Growth variations. Behind this forecast, there are wide differences between individual countries. Although these differences are partly the result of domestic policies, they also reflect the differing vulnerability of LAC countries to weaker growth in industrialized countries:

•Manufactured versus commodity exports. In LAC as a whole, 45.2% of exports are basic commodities and 54.8% correspond to manufactures. However, this distribution varies significantly by sub-region, with manufactures accounting for only 25.3% of South America's exports and 14.8% in the case of the Caribbean. Partly as a result, ECLAC expects that South America will expand by 5.6% this year and 4.5% next year, ahead of the regional average. At the other end of the scale, manufactures account for 74.1% of Mexico's exports, rendering it more vulnerable to weaker demand in industrialized markets and, particularly, the United States.

•Export markets. Similarly, 90.5% of Mexico's exports and 61.9% of Caribbean exports go to industrialized markets while, in South America, the figure reaches just 35.4%. Mexico's heavy dependence on the US market is identified as the single most important factor in its declining growth.

•Remittances. After increasing by a fifth in 2006, remittances rose by only 3.8% in 2007, according to ECLAC, and a study by the Inter-American Development Bank suggests they could show a drop this year. This would seriously affect Central American and Caribbean countries. In 2007, remittances to El Salvador, Haiti, Honduras, Jamaica and Nicaragua represented between 17.3% and 30.4% of these countries' GDP. In Mexico, where they represent only around 2-3% of GDP but are worth more than foreign direct investment, remittances fell by 1.1% year-on-year in the second quarter, according to the Bank of Mexico.

Poverty and inflation. An estimated 35.1% of LAC citizens, or close to 200 million people, still live below the poverty line, although the region's poverty rate has dropped sharply in recent years, helped by job creation, particularly in the formal sector and the social security coverage this implies. However, inflation has also increased and will reach an estimated 8.9% this year, up from 6.5% in 2007.

According to ECLAC, higher food prices could undo almost a third of the poverty reduction achieved in the region since 2002. It calculates that, if the population's income and all other prices were to remain constant, a 15% increase in food prices would raise the poverty rate to 37.9%, pushing 15 million of LAC citizens back below the poverty line.

Although improved economic and, particularly, fiscal management has put Latin America and the Caribbean on a better footing than ever before to withstand the macroeconomic consequences of adverse external factors, continuing growth will depend significantly on the behaviour of international commodity prices. Moreover, unequal income distribution, combined with food-price inflation, means that recent progress in reducing poverty could easily be undermined, with important social consequences.

Oxford Analytica (Reino Unido)

 


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