Latin America's Growth Outlook Dampens Amid Global Uncertainty
Latin America's growth prospects have weakened following the slowing of growth among advanced economies and other emerging markets. Standard & Poor's Ratings Services expects real GDP in the region to rise by 4.2% in 2011 and 3.8% in 2012--down from our previous forecasts of 4.5% and 4.2%, respectively, in June.
The slower growth outlook reflects our expectations that the global slowdown will hurt both domestic demand and net exports across the region. We believe that weaker growth in the U.S. will hit growth in Mexico and Central America harder because of trade and worker remittance ties to the country. In South America, larger trade links with Asia and the Eurozone mean that expectations for slower growth in China, other parts of Asia, and Europe will have a greater impact.
The risk of a more pronounced global economic crisis stemming from the sovereign debt crisis in Europe and its effect on the European banking system also weigh heavily on market sentiment and provide additional downside risk. More global risk aversion could prompt a slowdown or reversal of foreign capital flows to Latin America, which have contributed to abundant liquidity in the region.
While Latin America cannot escape a global slowdown, its governments do have some flexibility to soften any external hits through policy actions. The region demonstrated unprecedented resilience amid the Great Recession of 2008 and 2009 and will have a projected $680 billion in international reserves by year-end to help cover external financing for both the public and private sectors. Fiscal deficits, while still not back to their pre-2008 levels, are relatively low, and Brazil and Peru already plan for more expansionary fiscal policies over the next year.
Central banks are poised to cut monetary policy base rates, responding to expectations of slower growth and some easing of inflation. In a controversial action, given that inflation was running significantly above its target, Brazil initiated an easing cycle at the end of August, specifically citing the deteriorating global economy. Central banks in Mexico, Colombia, Chile, and Peru, where actual and projected inflation is lower, have all voiced similar concerns and seem prepared to cut rates later this year or in 2012.
The slower growth outlook reflects our expectations that the global slowdown will hurt both domestic demand and net exports across the region. We believe that weaker growth in the U.S. will hit growth in Mexico and Central America harder because of trade and worker remittance ties to the country. In South America, larger trade links with Asia and the Eurozone mean that expectations for slower growth in China, other parts of Asia, and Europe will have a greater impact.
The risk of a more pronounced global economic crisis stemming from the sovereign debt crisis in Europe and its effect on the European banking system also weigh heavily on market sentiment and provide additional downside risk. More global risk aversion could prompt a slowdown or reversal of foreign capital flows to Latin America, which have contributed to abundant liquidity in the region.
While Latin America cannot escape a global slowdown, its governments do have some flexibility to soften any external hits through policy actions. The region demonstrated unprecedented resilience amid the Great Recession of 2008 and 2009 and will have a projected $680 billion in international reserves by year-end to help cover external financing for both the public and private sectors. Fiscal deficits, while still not back to their pre-2008 levels, are relatively low, and Brazil and Peru already plan for more expansionary fiscal policies over the next year.
Central banks are poised to cut monetary policy base rates, responding to expectations of slower growth and some easing of inflation. In a controversial action, given that inflation was running significantly above its target, Brazil initiated an easing cycle at the end of August, specifically citing the deteriorating global economy. Central banks in Mexico, Colombia, Chile, and Peru, where actual and projected inflation is lower, have all voiced similar concerns and seem prepared to cut rates later this year or in 2012.
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