Political Risk Latin America Blog @PolRiskLatam

Latin America economy: Key issues in 2011

Posted in News and Articles, Political Risk by politicalrisklatam on January 3, 2011

by The Economist Inteligence Unit, January 2nd, 2011.

Latin America enters 2011 from a healthy economic position, having emerged from the recent global downturn quicker and stronger than many other regions. After a robust 2010, growth will slow this year, but regional performance will remain better than the global average. Brazil, in particular, is a leader not only in Latin America but also in the world, and will be keen to consolidate its newfound global importance. Nonetheless, policymakers will face potential challenges when trying to sustain the recent positive performance. Following is a list of some of the key issues that will concern governments and investors in the year ahead.

* Lower economic growth and its social impact. Economic recovery will weaken in 2011 as external conditions deteriorate. Overall regional growth will ease to 3.8% (from 5.6% in 2010), but some countries, especially Mexico and those in Central America and the Caribbean, will be worse affected, given their high dependence on the US for their exports, foreign investment, workers’ remittances and tourism. In only a few exceptional cases, notably Chile (owing to post-earthquake reconstruction spending) and Venezuela (where the protracted recession will finally ease) will growth be stronger in 2011 than the prior year. As economic activity, job generation and consumption ease, public frustrations in some countries will rise. This suggests sustained pressure on a number of governments and a still significant risk of social instability in some countries.

* Capital inflows and currency appreciation. Monetary stimulus in the developed countries has encouraged strong capital inflows into Latin America’s higher-yielding financial assets. This has triggered currency appreciation, a loss in export competitiveness and fears about overheating. Brazil has been most affected, and has been most vocal about the impact of a surge in capital inflows by alluding to the risk of “currency wars” if developed economies keep their currencies artificially low. These concerns will persist in 2011 and could trigger additional countermoves by Latin America governments, such as more currency-market interventions, new or higher taxes on dollar transactions, and other controls on incoming capital. Absorbing large inflows will be challenge particularly for Brazil but also for smaller markets like Peru and Colombia, unless a major event, such as a crisis in the euro zone, triggers a rise in risk aversion. (continue reading… )



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