TIME TO REBUILD BUFFERS

The International Monetary Fund (IMF) says while the economic challenges facing Latin America (LatAM) and the Caribbean differ across countries, they should rebuild policy space and be watchful for downside risks.

In its latest Regional Economic Outlook for the Western Hemisphere, the Washington-based financial institution warned on April 25 that supportive external conditions facing some countries, such as abundant and cheap external financing, and favorable commodity prices, may persist for a while, but are likely to dissipate over time.

“Conditions remain favorable. The double tailwinds of easy external financial and high commodity prices are likely to persist for a while but not forever,” said Nicolás Eyzaguirre, director of the IMF’s Western Hemisphere Department at the presentation of the report in Bogotá, Colombia.

“Now, the challenge for many countries is to take advantage of this environment to rebuild buffers, to enhance the resilience and flexibility that has served them so well the last few years,” he added.

Eyzaguirre, however, said growth in Latin America and the Caribbean continues to be firm, despite a slowdown in the second half of 2011 due to tightened policies following the post-crisis rebound and the effect of global uncertainties.

The Fund projects that the region will grow at 3.7 percent in 2012, and 4.1 percent in 2013, up modestly from forecasts published in January.

The regional outlook report indicates that near-term risks are still tilted to the downside, and revolve most notably around possible renewed tensions in European markets and an oil price shock.

But the report also notes different conditions with the region that imply differing policy challenges.

It says South America’s financially integrated economies – Brazil, Chile, Colombia, Peru and Uruguay – grew at an average rate of 5.5 percent in 2011, down from over 6½ percent in 2010.

The report urges countries in Central America, which are near potential and have debt-to-Gross Domestic Product (GDP) ratios above pre-crisis levels, to redouble their efforts to consolidate fiscal positions, while strengthening monetary and prudential frameworks.

Meantime, the report says Caribbean countries continue to face “sluggish growth in tourism-intensive countries and stubborn fiscal imbalances.

“The near-term focus should thus remain on working off fiscal overhangs and addressing financial fragilities,” it says.

“Looking further ahead, greater efforts are needed to tackle structural weaknesses to boost competitiveness and growth,” it added.

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