Latin American and Caribbean economies growing 3.5 percent to 4 percent this year and next will make the region attractive for foreign investors and pose challenges for policy makers as currencies and prices increase, the World Bank said.
The region will expand at a faster pace than Eastern Europe and Central Asia and similar to East Asia, bank economists said today at a briefing in Washington. Foreign investment climbed eightfold in the first two months of this year from the same period in 2011, and inflation will average 6.25 percent in 2012, they said.
Countries including Brazil, Mexico and Colombia have “healthy” foreign reserve and exchange-rate flexibility to respond to risks such as a slowdown in Europe, a sluggish recovery in the U.S., a downturn in China or decline in commodity prices, the bank economists said. Ecuador and Venezuela are more vulnerable to a spike in oil prices and would benefit from financial reforms, they said.
“The risks are not in how much you are exposed but, more importantly, in how little policy response capacity you have to cope with such unpredictability,” said Augusto De la Torre, the bank’s chief economist for Latin America and the Caribbean. “Several countries in Latin America are exposed to both a slowdown in U.S., Europe and China and a reduction in commodity prices and investment. However, since policy makers in these countries have space to maneuver, their level of vulnerability remains low.”