Published on Friday, May 8, 2009

GEORGETOWN, Guyana -- The International Monetary Fund (IMF) said in its Regional Economic Outlook 2009 report that Latin America and the Caribbean will recover more quickly from the global crisis than advanced economies because they are less exposed to subprime fallout and have more scope to spur growth.

In the report released on Wednesday the bank says it is expected that Latin American and Caribbean growth to rebound around 1.5 percent by 2010 while prices of the region's commodity exports should recover 3 percent next year.

It forecast that output in the Caribbean region will decline by 0.2 percent this year from an estimated 3 percent growth in 2008.

The steepest falls this year will be in the Bahamas and Barbados with Suriname and Guyana projected to show the strongest expansion.

The fund expects the world economy to likely contract 1.3 percent this year with the U.S. economy at the epicenter of the crisis forecast to shrink 2.8 percent in 2009.

"Our best estimate continues to be that Latin America will quarter by quarter begin to improve from the middle of the year while the United States will possibly start to improve quarter by quarter from next year," Nicolas Eyzaguirre, IMF director for Western Hemisphere affairs said.

The IMF has previously estimated the Latin American and Caribbean region would contract 1.5 percent this year after growing 4.5 percent in 2008.

Latin American and Caribbean countries have been hit by sliding exports, a fall in vital commodity prices and lower remittances. But the IMF sees the region as better prepared than before to recover from the economic fallout.

Eyzaguirre said the dollar could be expected weaken against the euro and yen as the market builds in the forecast slower recovery of the US economy.

As industrialized countries recover, commodity prices would also rise, leading to a reverse in the depreciation in Latin American countries, he said.

"History proves that whenever there is a macro and a financial crisis, the recovery is slower," he said. "If markets begin to factor in that fact, probably they will create some downward pressures on the dollar."

Eyzaguirre added that there is no doubt that the region is being hurt by the global turmoil,” but the region has a much higher level of preparedness today in terms of stronger public finances and financial sectors, and policies that help cushion external shocks. As a result, the region is not facing a fiscal crisis, as some other developing regions, or a banking crisis, as the United States and much of Europe. Looking back at previous global downturns, the LAC region would normally trail the world economy by one or two percentage points. Now, however, we expect the region to keep up with world growth, which, in relative terms, is a positive development.”

Eyzaguirre noted that, in contrast to past downturns, when policymakers in the region had to react defensively to external shocks with spending cuts and interest rate hikes to avoid a deeper downward spiral, this time around they have been able to respond in a very different way: with active policies to boost output and employment.

The external shocks hitting the region have been unusually severe, the latest outlook notes.

All countries have sustained a loss of external demand, and many have also suffered deterioration in their terms of trade as commodity export prices plunged. Countries with relatively large manufacturing sectors have been especially hard hit. Income from remittances and tourism is also sinking. And external financing has become more costly for all, with some borrowers cut off from financing, the regional outlook explains.

Against all this, the region had accumulated many sources of strength and resilience during the past decade—although to varying degrees. Many countries have made important strides in strengthening fiscal positions and public debt structures, solidifying financial systems and their regulation, anchoring inflation expectations, and building more credible policy frameworks. And a significant number of countries count on greater flexibility of their exchange rates as part of their adjustment process. “The lesson emerging from Latin America is that stronger fundamentals pay important dividends when external conditions deteriorate,” Eyzaguirre said.

The Regional Economic Outlook also discusses the impact of the crisis on the region’s financial systems and concludes they are much more resilient than in the past because earlier weaknesses, such as exposure to currency depreciation and reliance on external financing, have been reduced considerably.