Main Macroeconomic Outcomes and Policy Challenges

Latin America and the Caribbean grew 5.6 percent during 2007, the same as the previous year, according to the latest estimates by the United Nations Economic Commission for Latin America and the Caribbean (ECLAC). Per capita GDP was 18 percent higher than in 2003, and average purchasing power in Latin America was up 22 percent, reflecting the additional positive impact of the terms of trade and international remittances.

Growth rates for almost all the countries exceeded 3 percent in 2007 (see Table I • Latin America and the Caribbean: Main Macoreconomic Results, 2007).  Among the larger countries, Argentina, Venezuela, Peru and Colombia posted the highest rates, all at or above 7 percent; among the smaller economies, Panama, the Dominican Republic, Uruguay and Costa Rica had the highest rates.

To date the lending market crisis in the United States has not had a considerable impact on growth in the region. Surveys of local forecasters by central banks suggest that growth was expected to be slightly higher starting in June 2008. Projections for Bolivia, Chile and Mexico showed some weakening in growth, but just the opposite in nine other countries, with expectations improving, particularly in Brazil, Colombia and Honduras. Optimism was possibly buoyed by strong export prices and factors associated with domestic policies.

Timely provision of liquidity by the Federal Reserve lessened the adverse impact the financial crisis in the United States could have had on Latin American economies. However, the ability of the economies in the region to withstand the crisis was also largely due to sound macroeconomic policies. Most of the countries had primary fiscal surpluses (before interest payments). The region as a whole had a positive current account balance with the rest of the world. The substantial international reserves accumulated were a strong buffer against external disruptions. Inflation held at moderate levels in most countries and the recovery in consumer credit was coupled with improved prudential and regulatory practices.

Despite this relatively promising panorama, there are significant vulnerabilities that need to be addressed. With respect to fiscal policy, the main vulnerability is recent trends in higher public spending in several countries. This will not be sustainable if there is a slowdown or even drop in tax revenue as a result of slackening export prices. If current spending trends continue, the average primary balance, which peaked in 2006 and then began to fall sharply in 2007, could become negative in many countries in 2008, according to the International Monetary Fund (IMF).

Only a few countries have taken steps to shore up tax revenue, which would help mitigate this fiscal risk. Brazil, Costa Rica, El Salvador and Mexico stand out for their recent efforts to increase tax receipts. Argentina, Colombia and Panama have also boosted their tax revenue significantly. The immediate policy challenge is to contain public spending trends in order to safeguard future fiscal sustainability.

In regard to fiscal positions, it is also important to note that even as debt ratios continued to fall in 2007 (down to close to 50 percent of GDP, from 75 percent of GDP five years earlier, based on weighted averages for 17 countries, according to the IMF), they were still above their 1997 levels before the recession in the region. Likewise, although the currency composition and the maturities of government debt improved, some of the drop in debt ratios was due to the appreciation of Latin American currencies—a trend that could reverse course in the future.