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Latin America Avoiding US Double Dip 

Latin America -- led by Brazil, Peru, Argentina and Chile -- should avoid the brunt of any potential US double dip recession.

Inter-American Dialogue 

Investors were rattled in the past month by disappointing economic news in the United States, including a record low for new-home buying and weaker-than-expected demand for durable goods. Meantime, Brazil's pace of job creation has been slowing, and while Mexico's foreign direct investment increased in this year's first half, retail sales there slid in June from May. Where does Latin America's economic recovery stand? Is there a chance for a double-dip recession? Which countries are seeing the most sustainable growth and where is the recovery on shakier ground?

Rogelio Ramírez de la O, president of Ecanal in Mexico City: Latin America suffered little from the Great Recession in 2009, with the region's GDP contracting 1.8 percent last year and growing again this year. The outlook for 2011 is still promising, though it would most likely be slower growth than at the 2010 peak, owing to a less favorable external environment. The region is dependent on external markets and demand for commodities. A global slowdown should hit both demand and prices. Even so, activity will most likely remain dynamic in those countries which have their own development projects continuing. That should keep domestic demand and investment up (Brazil, Peru, Argentina and Chile—in Chile's case partly related to reconstruction). In those countries that remain too dependent on export markets, especially Mexico, the slowdown in the United States will be fully reflected in lower-than-potential growth. Sustainable growth is a real possibility for most countries, but specific problems would exist for some. Mexico faces the problem of security, which is already discouraging investment and hurting the business climate. Also, oil revenues are falling in the midst of a very weak economy with low job creation. Venezuela faces major macro distortions and deficits which will take a long time to correct. On the other hand, Argentina has a good outlook as it benefits from a foreign debt renegotiation and untapped growth opportunities. Brazil has a good outlook, though high current account deficits suggest it will need to moderate growth and/or allow greater currency depreciation. Peru has everything to sustain growth at high rates, though the currency is too strong for a global slowdown. And Chile has an excellent record of macroeconomic management.

Gabriel Torres, sovereign risk analyst at Moody's Investors Service in New York: Generally speaking, Latin America's growth this year looks solid, but with clear regional differences. South America's commodity exporters look set to be the fastest growing of all, as demand and prices for their main products remain high. Central America and Mexico, with closer ties to the United States and most lacking any commodity production, will lag South America, but show signs of recovery from last year. Finally, the Caribbean nations, highly dependent on tourism and financial services, will barely see any growth this year after a harsh 2009. Among the larger Latin American countries, only Venezuela will continue in recession this year, a result of policy mismanagement that has impacted investment and oil production. The upcoming September midterm elections in Venezuela will continue to test that country's political stability. Brazil, Argentina, Chile and Peru have all surprised on the upside this year, some more than others. Paraguay, which has become an important agricultural exporter, recently announced its fastest growth in 30 years. Mexico will recover from last year's sharp decline, but its closer links to the U.S. economic cycle make it much more vulnerable to a possible U.S. double dip. Similarly, in Central America an increase in remittances and a recovery in the United States has helped, but concerns about continued U.S. economic weakness remains. And in the Caribbean, low growth continues to be the norm. Trinidad and Tobago has an important energy export sector, but for the rest, the impact of reduced tourist arrivals from the United States looms large.

Joydeep Mukherji, senior director of Latin American Sovereign Ratings at Standard & Poor's in New York: S&P does not expect a double-dip recession in the United States. We forecast U.S. economic growth of 2.5 percent to 3 percent in 2011. Hence, Latin America should continue to enjoy good economic performance. The GDP-weighted growth rate for the region may exceed 6 percent in 2010, and be around 4.5 percent next year. Good growth reflects more than good luck (i.e., high demand for commodities from China). South American commodity exporters (especially Venezuela, Chile and Bolivia) have gained from sustained high export prices in recent years, but many countries have suffered from falling terms of trade—specially in Central America—or have seen near-stagnant terms of trade since 2000, such as Brazil, Mexico and Uruguay. Nevertheless, the regional recovery is broad-based, reflecting stronger domestic engines of growth, which compensate partly for weaker external demand. Greater macroeconomic stability, lower debt and more exchange rate flexibility than before have given governments scope to pursue fiscal and monetary policies to sustain GDP growth. Moreover, national elections create less uncertainty about economic policies than before (as seen this year in Chile, Colombia and Brazil), boosting investor confidence. Mexico and Central America remain most affected by sluggish growth in the United States. Growth should be higher in much of the rest of the region in coming years. Bank lending is picking up across the region, helping sustain domestic demand. A recent increase in investment in physical infrastructure in many countries augers well for continued growth. Latin America has not de-linked from the global economy but it has strengthened its domestic engine of growth.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter. 


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