Latin America and the Caribbean Better Prepared to Face U.S. Economic Slowdown

April 9, 2008

Washington, DC, April 9, 2008— Latin American countries rich in oil and other commodities will likely weather the expected slowdown in the U.S. economy better than they would have even five years ago, thanks to growing trade with China and stronger domestic economies, according to the World Bank’s Chief Economist for Latin America and the Caribbean region, Augusto de la Torre.

"Steeply rising food and energy prices along with declining remittances could, however, adversely affect growth and negatively affect antipoverty strategies, particularly in Central American and Caribbean countries that are net oil importers," said  de la Torre at a press briefing on the impact of U.S. financial turmoil on the region.

While the impact of the crisis on Latin America will not be “trivial,” the region is “less vulnerable to financial contagion than in the past,” he added.

Latin American growth forecasts have remained high even as U.S. growth projections have fallen. Countries of the region are also better cushioned financially than in the past and have less need to borrow from abroad. Many have been able to move to flexible exchange rates and lower their exposure to currency risk.  Capital from international investors is continuing to flow to the region, attracted in part by higher interest rates than in the U.S.

While economic growth in Latin American countries is still strongly linked with growth in high income countries, those links have loosened since 2003, as “Latin America and China’s growth has become more closely aligned through commodities trade and investment,” added de la Torre.

“There are several factors to explain why countries in the region are stronger than they were in the past to face these challenges,” he said. “One of them is the growth of China, and the second is the stronger domestic economies that some of the countries in the region have.”

“A U.S. recession is obviously of concern, but its impact will be mitigated to the extent that China continues to grow at a high rate,” he added. China is expected to grow at about a 9 percent rate in 2008.

Uneven Impact
A U.S. recession would affect the region unevenly, with some countries more immune than others to its effects.

Mexico and Chile, though closely aligned to the U.S. economy through trade agreements, are showing economic resilience, thanks to reforms that have strengthened the investment climate.

The perception of risk has decreased in Colombia, Peru, Brazil, and El Salvador, where growth has picked up in recent years. Peru achieved investment grade very recently, and remarkably, in the midst of the current international financial turmoil.

Slowing Remittances
Central American and Caribbean countries whose economies are buffeted by the money migrant workers in the U.S. send home to their families could keenly feel the impact of declining remittances in the wake of the U.S. slowdown, said de la Torre.

Remittances currently represent 10 to 20 percent of GDP in eight Caribbean and Central American countries, and 3 to 10 percent of GDP in 10 countries in the region. Although the decline of remittances would not raise national poverty levels significantly among recipient countries, it could increase poverty substantially among recipient households.

According to World Bank projections, a contraction in remittances inflows of 2.5 percent of GDP could translate to an 18 percent increase in the poverty levels for those households that depend on remittances.