Economic growth in Latin America is expected to hold strong this year at a 3.6 percent average if Europe avoids a deep recession and China maintains steady growth, the Inter-American Development Bank (IDB) said in a report released on Sunday.
A report released for the 53rd meeting of the regional development bank said the main risks for the region would be a worsening of the European debt crisis and a deceleration in China.
“We are cautiously optimistic for Latin America and the Caribbean. The region has grown strongly in the last couple of years and it has shown it is resilient to shocks,” said Santiago Levy, an IDB vice president.
“Most importantly, the region has developed a set of policy tools that have proven to be effective during economic downturns,” he said.
Though most forecasts do not anticipate a major crisis in Europe or a strong slowdown in China, “the world is quite uncertain right now — it really is one of forking paths,” said Andrew Powell, a coordinator of the report.
“Our report shows that resilience has increased for the region, but certain vulnerabilities remain and may limit the scope for countercyclical policies if the crisis were to worsen in Europe,” he said.
The region’s dependence on commodities remains high and a surge in capital inflows has increased some vulnerabilities. The presence of a large number of European banks could make the region’s banking sector vulnerable to a credit squeeze if the crisis in the eurozone worsens, it said.
If Europe’s woes persist into next year, that could deal a blow to major economies in the region such as Brazil and Mexico, it said.
However, the report said most of the larger economies in the region have adopted flexible exchange rates to help weather a global crisis.
Many have also taken steps to slow currency appreciation, “which have all enhanced the region’s resilience against another possible international financial crisis,” the report said.