The outlook for the region is subject to a number of downside risks.
A sharp or disorderly slowdown in China could result in a protracted slump in commodity prices, thereby eroding regional export and government revenues. Investment, especially in mining industries, would fall, providing an additional drag on overall economic growth.
Venezuela is currently experiencing high inflation along with a number of other macroeconomic imbalances and microeconomic distortions, and could see investment contract and slow sharply. Argentina has an uncertain economic outlook but the recent agreements on Paris Club debt, settlement with Repsol, and efforts to strengthen national statistics introduce upside risks to the outlook. From a more stable condition, Brazil, the region’s largest economy, with its tighter credit conditions, weakened investor confidence and microeconomic structural impediments, is expected to remain in a low but still positive growth environment in the short-run. The baseline forecast assumes a soft slowdown in growth for these economies this year, and a gradual improvement in 2015 and 2016. Given the systemic nature of these economies in the region, a sharper-than-expected slowdown in one or more of these three economies would have a ripple effect on growth across the region.
Lastly, more than a cyclical downturn, the key concern for the region is that slower long-term growth becomes the new normal. With the end of the double tailwind era of a booming commodity market supported by a surging China, and economies near or at full employment and domestic credit growing at slower rates, the region must turn to productivity growth in order to boost long-term GDP growth. Structural reforms such as upgrading the quality of the workforce, and fostering research, development and innovation, would go a long way in averting slower growth as the new normal.