The chief economist of the IDB research department, Guillermo Calvo, predicted an economic growth rate of 4.6 percent for Latin America and the Caribbean in 2005, along with rises in the region's stock markets, better employment rates and increased investment. Calvo reviewed the macroeconomic outlook for the region at a presentation at Bank headquarters, adding that much of the boom is due to external factors.
Among them, he mentioned international financial and monetary conditions, such as the steep drop in international interest rates, depreciation of the dollar, better terms of trade in the region thanks to higher commodity prices for Latin American exports, and increased capital inflows to emerging markets prompted by the relative stagnation of Wall Street and other international stock markets.
Contrary to previous instances, the monetary adjustment by the Fed (Federal Reserve System, the central bank of the United States) led to a reduction in the spread—the difference between lending and borrowing rates—in emerging markets, while credit risk in Latin America dropped by almost half.
The region has become even more attractive to international investors, said the chief economist, because the expected dollar yield of its local-currency assets increased considerably, given expectations for exchange appreciation in the region. Calvo noted that in this context, investment in the region rose significantly. A 10.2 percent increase in investment in the region was forecast for 2005, he added, citing LatinFocus statistics.
The boom in commodity prices in Latin America stemmed partly from demand from China and from the U.S. dollar depreciation, explained the IDB chief economist. During the discussion that followed Calvo's presentation, a number of participants agreed that China is playing an increasingly important role in the economic development of Latin America and the Caribbean.
The IDB chief economist also pointed out that unlike their past approach to capital inflows, many countries in the region have recently carried out rigorous fiscal adjustments, demonstrating that they are well aware that financial soundness is one of the pillars of any development strategy.