Latin America Faces a Major Test in 2008

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Latin America continued to expand [its economy] strongly during the first six months of 2007, after a solid performance in 2006, the best in many years for several of those countries. Economic growth in the region in 2007 will average about 5%. The global economic conditions that began in the middle of this year -- caused by high-risk mortgage crisis in the U.S. -- have led to a downward revision of growth forecasts from the main global organizations as well as financial institutions.

Generally speaking, forecasts now call for a modest reduction in the growth rate of the overall region in 2008. Nevertheless, according to the most recent global forecast of the International Monetary Fund (IMF ), expansion will continue at a strong rate of about 4.25%. That would make 2008 the fifth consecutive year in which growth exceeds 4%.

The IMF report notes that economic growth has risen unexpectedly in those countries where growth was relatively modest in 2006. That's especially true in Brazil, where the GDP grew by 5.5% in the second quarter of 2007. In most of the other countries, expansion continued to be strong, in some cases reaching historic heights.

Even after the turbulence of financial markets in the middle of this year, prices of raw materials remained strong, stimulating economic activity in the countries that export such products, including Peru and Bolivia. In Colombia and Uruguay, growth has been fueled most of all by internal demand, although both countries have also benefited from the strength of their exports. Strong agriculture markets have helped stimulate output in that sector in Argentina and Paraguay in 2007.

Trial by Fire

Looking to the future, studies forecast that growth in Latin America could drop by as much as 2% from current levels. That's because of the contraction in credit markets and the significant economic slowdown in the U.S., which has had repercussions for global growth and weakened prices for raw materials. For 2008, the IMF anticipates that growth will fluctuate between 3% and 4% in Mexico, Ecuador and Uruguay; between 4% and 5% in Brazil, Chile, Colombia and Paraguay; and between 5.5% and 6% in Argentina, Bolivia, Peru and Venezuela.

Although a slowdown can be expected, current economic conditions do not mean that there has been any weakening in overall confidence. "Latin America continues to enjoy a very favorable economic cycle," says David Tuesta Cardenas, professor at the Pontifical University of Peru.

"We believe that it will continue over the coming year. Two factors help. The first is that they are making progress in the structural reforms that began in the 1990s. They have continued to make improvements despite doubts and fears at the beginning of this century. Above all, they have made significant progress toward providing these countries with a greater degree of competitiveness through tariff cuts, trade agreements and so forth. International investors are starting to arrive because of these visible improvements, which they perceive as more permanent."

Second, he says, "Emerging countries such as China and India continue to lead the way in global growth, so [Latin America] has enjoyed strong demand for its raw materials [in those countries]. This seems to be continuing despite the global financial situation."

The economies of Latin America will undergo an important trial by fire during the new year -- a possible deterioration of the external environment. In its latest report on the economies of the region, the IMF notes that "recent global financial turbulence and the slowdown in growth in the United States and other industrial countries will provide the first real test of Latin America's ability to recover from the shocks it has undergone since 2002." The big question asked by experts is what impact all these developments will have on growth in the region.