Latin America: From sizzle to simmer

Economic growth in Latin America has been eclipsed recently only by Asia, but economists foresee a retreat in the region in 2007 as part of the expected wider global slowdown. As major raw goods exporters, many of the key Latin economies — and their exchange rates — will hinge upon the market for global commodities, as well as actions taken by their central banks to curb excessive currency appreciation.

After Latin America posted an overall gross domestic product (GDP) reading of approximately 5 percent in 2006, a pullback to 3.5-3.8 percent is expected for 2007.

A number of factors play into this moderating growth forecast, including a cyclical slowing after four years of expansion, repercussions from an expected pullback in U.S. growth, a correction in global commodity prices, and the impact of extremely high interest rates in countries such as Brazil.

Nonetheless, despite the forecasts for slightly weaker overall output, economists say Latin America has made significant strides in recent years, and key structural reforms will ultimately allow the region to withstand setbacks.

“The continuation of the profound progress of structural changes, combined with economic discipline, has armored the region’s economy against negative shocks,” says Alfredo Coutino, senior economist for Latin America at Moody’s Economy.com.

The past several years have been positive for Latin America, with the region emerging from the 2001-2002 recession. Most Latin currencies rallied strongly amid sharply rising global commodity prices and soaring exports. Specifically, higher metals, energy, and agricultural prices boosted the terms of trade for many of the commodity-exporting countries in Latin America.