LatAm Seen Moving to Low Deficit

Turbulence in the global economy may erode cushions that have been built up over the past few years in LatAm and the Caribbean, according to the IMF’s latest World Economic Outlook. “The region’s current account balance is expected to move to deficit in 2008 and 2009, after being in surplus since 2003, but the deficit will remain quite low,” says the fund. “Moreover, reserve levels are high, and flexible exchange rates provide room to maneuver in a number of countries,” it adds. The fund also notes that a combination of tighter conditions for dollar funding and a sustained drop in commodity prices could stretch macroeconomic policy frameworks. “A deeper downturn in global growth could trigger a sharp drop in commodity prices, while external financing conditions facing Latin America could continue to tighten. Such a scenario would slow growth in the region even more, and although inflation would moderate considerably, external positions could come under serious stress,” says the IMF. Policymakers need to be ready to adapt policies as needed to preserve macro stability and growth. Those with very strong fiscal positions may have some scope for a countercyclical fiscal response. “Flexible exchange rate management would provide resilience in the face of potentially volatile foreign exchange flows,” the fund adds.