Preliminary Overview of the Economies of Latin America and the Caribbean 1997

Despite the instability in international financial markets in recent months and the turbulence it has created in Latin American stock markets, in 1997 the region's economies put out their best performance in a quarter of a century, combining an average growth rate of 5.3% (compared to 3.20% during the period 1991-1996) with an average rate of inflation of under 11 %. Although the current account deficit has widened considerably, from US$ 35 billion in 1996 to US$ 60 billion in 1997 (3% of GDP), inflows of foreign capital will more than cover the gap; they are expected to reach unprecedented levels. totalling at least $73 billion. Of that amount, nearly two thirds will be in the form of direct investment. The employment situation has improved slightly, although the percentage of the population unemployed continues to be very high in a number of countries. High unemployment rates are undermining efforts to move ahead more rapidly in reducing the extent of poverty -a serious problem in an otherwise generally positive scenario. This growth was the consequence of a strong recovery in investment and continued expansion of exports, the latter due entirely to increases in volume, since, on average, export prices for the region remained stationary. Intraregional trade showed great dynamism, reinforcing economic interdependence between some countries, especially in the Southern Cone. Imports, however, exceeded exports; in part this was due to increased investment, as imports of capital goods increased sharply. The restrictive fiscal and monetary policies applied in prior years helped reduce inflation to its lowest level in half a century, an accomplishment aided by sometimes overvalued exchange rates, which also contributed to the deterioration in the trade balance. Thanks to the improved macroeconomic environment, Governments were able to allocate more funds to public investment and apply more flexible credit policies without undermining domestic stability. As 1997 draws to a close, the chief question is whether this relatively happy state of affairs can be maintained through the coming year. The main grounds for doubt are to be found in the external context: in prices of primary products, interest rates and foreign capital flows -the latter in particular. The Asian financial crisis is expected to have negative repercussions in the region in terms of both trade and capital movements. Some countries still have heavy flows of short-term capital, which introduces a note of instability into the picture. Nevertheless, the region should be less vulnerable financially because the composition of the capital entering Latin America is more stable than it was some years ago. Moreover, the banking sector is on its way to resolving some of its problems. Putting together the effects of the external factors, often contradictory in tendency, with macroeconomic policies adopted to reduce inflation or current account deficits, the most likely scenario is that in 1998 the region will return to a lower rate of growth, perhaps close to the average for the 1990s, than it enjoyed this year. In that case, the employment situation will continue to be cause for concern. On the other hand, it is likely that inflation will continue to slow, and the current account deficit may be reduced. In view of the determination already shown by a number of Governments to take hard measures when necessary to maintain macroeconomic stability , it seems unlikely that the Asian financial crisis will have repercussions powerful enough to provoke new foreign exchange crises in the region.