LatAm-5: Improving macroeconomic fundamentals support medium term outlook

November 6, 2007

Argentina, Brazil, Chile, Mexico and Venezuela are Latin America’s largest economies. With a total population of more than 370 million people they account for almost 70% of the region‘s overall population and contributed more than 80% to Latin America‘s nominal GDP in 2006. However, viewed from a global perspective, LatAm-5 is still a relatively small player: in 2006, the five countries accounted for only 6% of both world GDP and world population. By contrast, China alone shows a higher nominal GDP and in the past LatAm-5’s growth performance has been dwarfed especially by those of the emerging Asian economies.

Although there are profound differences among the five countries – with Chile and Venezuela marking the boundaries of the spectrum – most of them show improving fundamentals which in turn support medium-term prospects. Average GDP growth rates have been relatively stable and – with the exception of Argentina – inflation rates declined or at least remained stable. Export performance rebounded strongly since 2001-02 on the back of rising commodity prices and except for Mexico all countries show increasing trade surpluses and improving current account balances. This in turn helped to lift foreign exchange reserves to record levels and to significantly reduce external indebtedness.

The improvements in macroeconomic fundamentals should also help financial markets in the region to develop further. The banking sector also benefited from improved macroeconomic conditions and many banking systems in LatAm-5 recovered from the 1990´s crisis and improved their profitability, solvency and loans quality. The majority of these countries will implement Basel II in the following years.  The exception is Venezuela but although Venezuelan banking indicators worsened they are currently at an average level.

There is still potential for the region to benefit from ongoing strong export demand from China and India, not least due to favourable resource endowments which should foster export growth and FDI inflows. However, continued efforts are needed in areas like human capital, business and investment climate, as well as social indicators, to secure the region’s medium to long-term growth outlook. Our LatAm-5 chartbook gives a visual comparison of the economic and social developments:

see LatAm-5 Chartbook