Alicia Bárcena

Executive Secretary

Antonio Prado

Deputy Executive Secretary

Jürgen Weller

Officer-in-Charge

Economic Development Division

Ricardo Pérez

Chief

Documents and Publications Division

The Preliminary Overview of the Economies of Latin America and the Caribbean is an annual publication prepared by the Economic Development Division of the Economic Commission for Latin America and the Caribbean (ECLAC). This 2011 edition was prepared under the supervision of Jürgen Weller, Officer-in-Charge of the Division.

In the preparation of this edition, the Economic Development Division was assisted by the Statistics and Economic Projections Division, the ECLAC subregional headquarters in Mexico City and Port of Spain, and the Commission’s country offices in Bogota, Brasilia, Buenos Aires, Montevideo and Washington, D.C.

The regional analyses were prepared by the following experts (in the order in which the subjects are presented: Luis Felipe Jiménez, Osvaldo Kacef and Jürgen Weller (introduction), Juan Pablo Jiménez (fiscal policy), Ramón Pineda and Rodrigo Cárcamo (monetary and exchange-rate policy), Sandra Manuelito (economic activity and domestic prices), Jürgen Weller (employment and wages), Fernando Cantú and Luis Felipe Jiménez, (external sector). The text boxes were prepared by Dillon Alleyne, Rodrigo Cárcamo, Michele Dookie, Luis Felipe Jiménez, Cornelia Kaldewei, Isabel López, Beverly Lugay, Oceane Seuleiman and Ricardo Zapata.

The country notes are based on studies conducted by the following experts: Martín Abeles (Argentina), Dillon Alleyne (Guyana, Jamaica and Suriname), José Manuel Arroyo (Paraguay), Claudio Aravena (Ecuador), Rodrigo Cárcamo (Bolivarian Republic of Venezuela), Álvaro Fuentes (Uruguay), Juan Alberto Fuentes (Cuba), Randolph Gilbert (Haiti), Michael Hendrickson (Bahamas and Belize), Luis Felipe Jiménez (Chile), Beverly Lugay (Eastern Caribbean Monetary Union), Sandra Manuelito (Peru), Rodolfo Minzer (Panama), Carlos Mussi (Brazil), Ramón Padilla (Costa Rica and Mexico), Willard Phillips (Barbados), Benjamin Rae (Plurinational State of Bolivia), Juan Carlos Ramírez, Olga Lucía Acosta and Alejandra Corchuelo (Colombia), Juan Carlos Rivas (Guatemala), Francisco Villareal (Dominican Republic and El Salvador), Kohei Yoshida (Trinidad and Tobago) and Willy Zapata (Honduras and Nicaragua). Benjamin Rae coordinated the notes on the Caribbean countries. The economic projections were produced by Claudio Aravena, Fernando Cantú and Sandra Manuelito. Alejandra Acevedo, Vianka Aliaga, Leandro Cabello, Jazmín Chiu, Cameron Daneshvar, Daymler O’Farrill, Andrea Podestá, Omar Velasco and Ann-Kathrin Zotz were responsible for the processing and presentation of the statistical data and graphical presentations.

Notes

The following symbols have been used in the tables shown in the Survey:

• Three dots (…) indicate that data are not available or are not separately reported.

• A dash (-) indicates that the amount is nil or negligible.

• A full stop (.) is used to indicate decimals.

• The word “dollars” refers to United States dollars unless otherwise specified.

2011-882

Content

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SUMMARY

ECLAC projects growth of 4.3% for the Latin American and Caribbean economy in 2011, lower than the rate in 2010 when the region was rebounding from the impacts of the economic and financial crisis of 2008-2009. The forecast growth rate for 2011, which represents a 3.2% rise in per capita GDP, reflects two main factors: the slacking of global economic growth and the cooling of domestic demand in Brazil, the region’s largest economy, prompted by the government’s measures to keep the economy from overheating after its growth surge in 2010.

During the first part of the year, however, external conditions remained benign for the region, with strong demand for its exports, improvements in the terms of trade and advantageous access to external financing. Several countries posted a more robust performance than in 2010, including oil exporters which gained from high international prices and several Central American and Caribbean countries which benefited from increased exports to the United States and remittances from emigrant workers. GDP growth was 4.6% in South America slightly above the 4.1% rate for Central America, while expansion of only 0.7% for the Caribbean is due to a contraction in Trinidad and Tobago, the subregion’s largest economy.

In the first half of the year, macroeconomic policy faced a number of challenges stemming partly from developments in international markets. The countries tackled these in different ways, depending on their structural characteristics, the severity of the respective impacts, the instruments available to them and their policy priorities. First of all, the positive outlook for the region’s economy and the interest rate spreads with respect to global financial markets —widened, in some cases, by the monetary policies deployed to contain the inflationary impact of rising international prices, especially for foods and fuels— spurred capital inflows which contributed to real currency appreciation in the region. In this context, a number of countries also withdrew the fiscal stimulus, seeking at the same time to regain the fiscal space consumed by the measures implemented to soften the impacts of the 2008-2009 crisis. Even so, the central government overall balance rose by 0.4 percentage points on average, mainly owing to higher fiscal revenues. As the year advanced, however, and the global and regional economic slowdown began to take hold, the focus of economic policy turned increasingly to maintaining an acceptable rate of growth, especially as the euro zone situation and outlook deteriorated.

At the regional level, growth in all demand components was down for the year overall, after the brisk recovery in 2010 from the lows during the global financial crisis. Household consumption continued to grow at rates above output, however, thanks to rising real wages and to strong job creation which brought the regional unemployment rate down from 7.3% in 2010 to 6.8% in 2011. Credit also continued to expand rapidly. Readily available credit at rates of interests which in many countries actually fell in real terms also contributed to a fresh rise in gross fixed capital formation, which took the investment ratio to a new record for recent decades, although it is still not high enough to sustain the growth rates required to satisfy the many economic and social needs of the region. Imports surged in response to buoyant domestic demand, while exports climbed mainly because of higher prices, while volumes increased less. In this context, the deficit on the balance-of-payments current account widened slightly to 1.4% of GDP, and was more than offset by voluminous inflows of foreign direct investment and, to a lesser extent, portfolio investment, which enabled fresh rises in international monetary reserves.

Driven mainly by high international prices for foods and fuels, the inflation rate rose in the first part of 2011, but began to ease later and ended the year at a rate of around 7%, only slightly higher than end-2010.

The slowdown in regional growth steepened in the second half of the year, reflecting slackening export growth, falling prices for the region’s main export commodities —which nonetheless remained at historically high levels— and cooling domestic demand. Particularly in the fourth quarter, regional growth expectations took a more negative turn as uncertainty mounted over the future of the global economy, especially in view of doubts over whether a sustainable solution will be found to the debt crisis in several euro zone countries, and the resulting volatility in international markets.

This is the scenario underlying 2012 economic growth projections for Latin America and the Caribbean. With global economic growth remaining sluggish, the regional slowdown is likely to continue, with a fresh, albeit moderate fall in the growth rate to 3.7%. A bleaker scenario cannot be ruled out, however, if the euro zone crisis deepens. This would take a toll on global markets and would certainly hurt the region’s growth prospects by impacting on both the real economy and the financial markets. Amid such great uncertainty and facing the possibility of sharp changes in the external environment, the Latin American and Caribbean countries should prepare the best possible measures in light of their national situations to protect and strengthen the bases of their economic and social development. Standing them in good stead are voluminous international monetary reserves and —with the exception of some Caribbean countries— low levels of public and external debt. On the other hand, less leeway is now available for some of the countercyclical instruments deployed during the 2008-2009 crisis and some of the external factors which contributed to the rapid recovery of the global economy at that time, especially the developed countries’ fiscal and monetary coordination, are now weaker.

Chapter I

INTRODUCTION

Economic growth slowed in Latin America and the Caribbean in 2011 after a brisk recovery from the economic and financial crisis of 2008-2009. The growth rate of 4.3% estimated for the year would be equivalent to a 3.2% rise in per capita output. As in the two previous years, however, economic performance has been uneven from one subregion to another: GDP growth is expected to be 4.6% in South America, 4.1% in Central America and 0.7% in the Caribbean.

Generally speaking, external conditions remained benign for the Latin American and Caribbean economies during the first part of the year. Strong demand for the region’s exports pushed up export volumes and rising international commodity prices underpinned a fresh gain in the terms of trade. In addition, abundant global market liquidity, combined with the positive economic and financial expectations prevailing for many of the countries of the region, facilitated relatively advantageous access to external financing. Domestic demand remained buoyant thanks to positive labour market trends, readily available credit and good expectations regarding the economies’ performance. In this context, the Latin American and Caribbean countries had to deal with a number of challenges which arose to a greater or lesser degree depending on their structural characteristics.

The first of these challenges was entry of large capital inflows in the form of both foreign direct investment (FDI) and portfolio investment, fuelled by interest rate spreads between markets in the region and in developed economies traditionally perceived as low-risk, together with the positive growth outlook and limited risk perception for the Latin American countries. Partly as a result of this, early in the year currencies in the region came under strong upward pressure (although with significant differences from one country to another), which eroded the competitiveness of all tradable activities other than commodity-based production.

Second, similarly to the pattern in 2008, international prices surged for many commodities, including foods, minerals, metals and hydrocarbons, chiefly owing to strong global demand driven by several Asian economies. Although this was a positive development for the external accounts of the region’s commodity-exporting countries, it also helped to drive up consumer prices, especially for these same products or others which use them as inputs. But with domestic demand burgeoning as well, prices for products reflected in core inflation also rose fairly steadily, albeit below the rate for the first group.

Lastly, in several countries the economic recovery of 2010 and 2011 was sustained in part by the countercyclical policies implemented to offset the impacts of the economic and financial crisis of 2008-2009. This posed the challenge of rebuilding the countercyclical policy space needed to ride out future downswings, while also dealing with the issues mentioned above without dampening the economic upturn which, in many countries, had been fuelled by expansionary macroeconomic policy. Accordingly, facing mounting inflationary pressures, upward currency pressure and the need for investment and growth, administrations in the region had to deal with certain trade-offs. In this connection, as will be discussed, the mix of policies implemented varied from one country to another.

Starting mid-year, the markets began to show mounting uncertainty over the course of the world economy, especially the debt crisis in a number of euro area countries and, to a lesser extent, the sluggish growth and macroeconomic management of the United States economy and doubts over the ability of the Asian economies to offset the slower growth in these regions. This fed growing volatility in the international financial markets and dampened growth expectations for Latin America and the Caribbean, generating fresh challenges for the authorities. The prospect of slackening external demand had a negative impact on international commodity prices, which dropped back from the year’s high point in the second semester, especially in the cases of metals and some agricultural commodities. The external context became more complex as of September, owing to worsening economic conditions in the euro zone and the difficulties of the governments and authorities concerned in managing the debt crisis.

The complex external context began to threaten domestic demand in Latin America and the Caribbean as well, owing to its impact both on gross national disposable income and on business and household expectations in the countries.

Amid growing uncertainty in international financial markets over the outcome of the debt crisis in several euro zone countries, capital flows into the region dropped off and risk premiums rose reflecting a flight to quality. The pressure on the currencies also shifted from upward to downward. These developments show that United States Treasury bonds continue to be perceived as a lower-risk investment and suggest that the region would not be immune to a rapid cooling of the global economy.

In these circumstances, all the components of demand lost momentum with respect to 2010 and many of the region’s countries achieved lower economic growth rates than the previous year (see figure I.1 and table A-2).

FIGURE I.1

LATIN AMERICA AND THE CARIBBEAN: GROWTH RATES, 2011

(Percentages)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures.

Inflation climbed throughout the year, mainly as a result of rising international prices for food and petroleum, but eased in the second semester. Towards the end of 2011 the year-on-year inflation rate was 7%, slightly higher than the figure for 2010.

However, the various factors accounting for the pattern of growth at the regional level affected the performance of the countries and subregions in rather different ways. Specifically, the terms of trade which benefited the South American countries and —to a lesser extent— Mexico, worsened for the Central American countries and probably also for some Caribbean countries which are not large exporters of commodities. Much of the fall in the regional rate of expansion is also explained by the cooling of economic growth in Brazil, which was largely desired and deliberately instigated by policymakers to avoid overheating after the growth surge in 2010.

Expectations for 2012 are for slacker growth of the global economy and a heavy dose of uncertainty and volatility in financial markets. In this context, ECLAC forecasts that the region will see its growth slow again —to 3.7%— but will be spared a fresh economic crisis. Nevertheless, the Latin American and Caribbean countries should be prepared for a deterioration in external conditions, especially in view of the risks associated with the euro zone. If some of these come to pass, the repercussions in global markets would certainly be felt in Latin America and the Caribbean as well.

The following section looks at the external context, which strongly affected the performance of the region’s economies in 2011. Section B examines the macroeconomic policies instruments deployed by the countries to deal with the shifting challenges they faced over the course of the year. Section C summarizes developments in the region’s main indicators of domestic and external performance. The final section discusses the outlook in 2012, the main challenges the external context is expected to throw out during the year and the strengths the region may draw upon —and its vulnerabilities— in facing them.

A. THE INTERNATIONAL CONTEXT

The global economy continued to show two-tier growth, with the developed countries expanding more slowly than the emerging economies. Global activity seemed to be staging a slow recovery during the first half of the year led by growth in the emerging countries, while some developed economies managed to sustain a positive, albeit very low, rates of growth.

The main challenge for the developed economies has been to stabilize their public debt in a context of low growth and amid serious doubts as to whether some States would remain solvent enough to honour their commitments. In the case of the United States, disagreements over fiscal consolidation programmes remain to be resolved. Meanwhile, in Europe, particularly in the euro zone, tensions have mounted over how to solve the debt crisis in five countries (Greece, Ireland, Italy, Portugal and Spain), following a series of unsuccessful attempts to reach a credible agreement and to find the resources necessary for meeting the massive financing needs of major economies such as Italy and Spain. In the absence of a plan backed up with sufficient resources, the prospect of a disorderly exit from the crisis has become more likely. At this point, if any euro zone country declares bankruptcy other States will be forced to assume losses in their financial systems to prevent the debt crisis from unleashing a bank crisis —which would compound the previous one from which the banks have still to fully recover. The failure to agree is thus worsening expectations as regards the public debt situation.

At the same time, uncertainty as to whether and to what extent the banks, the State in each country and the euro zone institutions are capable of absorbing the cost of the debt reduction, coupled with the fact that no exchange-rate instrument exists to allow a real devaluation —such as might help to tackle the competitiveness problems at the heart of some countries’ difficulties— tends to railroad governments into resorting to fiscal consolidation. Unfortunately, the contractionary impact of this course undermines growth prospects and has weakened economic activity (actually pushing growth into negative territory in some cases), thus drying up sources of fiscal revenue and increasing borrowing needs, so deepening the debt crisis yet further. This vicious cycle has undermined confidence even in economies which, prior to the crisis, boasted apparently sustainable public debt levels and sound credit ratings. The upshot has been that the proposed solutions, which to a certain extent rely on the ability of States in the zone with a better risk-rating to absorb part of the cost, are losing credibility.

As a result, risk premiums, which had already begun to rise, albeit hesitantly, in 2010, escalated sharply as of July 2011, even in Germany. This drove up public borrowing costs and hampered the stabilization of fiscal positions in systemically important countries experiencing major sustainability problems (Italy and Spain, see figures I.2A and I.2B). Following the downturn in expectations, indices of purchase orders in the manufacturing sector fell in the third quarter, auguring a contraction in activity levels in many of the euro zone countries in the short term.

FIGURE I.2

EUROPE (SELECTED COUNTRIES): FIVE-YEAR CREDIT DEFAULT SWAP RISK PREMIUMS, 2009-2011

(Basis points)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of information from Bloomberg.

The United States, meanwhile, has been unable to overcome problems in its real estate and financial sector and continues to battle with persistently high unemployment. Failure to agree on fiscal policy guidelines has had a contractionary fiscal impact and growth has slowed significantly compared with 2010 (1.7% down from 3.0%). The Japanese economy is still feeling the impact of the March 2011 earthquake, in particular on power generation in the country, and this is hindering the fragile recovery currently under way.[1]

1 United Nations, World Economic Situation and Prospects 2012. Global Economic Outlook, New York, Department of Economic and Social Affairs, December 2011.

By contrast, in 2011, China continued to experience robust growth (9.3%), albeit somewhat slower than previously owing to the removal of certain investment incentives (China invested approximately 50% of its GDP in 2010) and to the monetary and credit controls introduced to check rising inflation. Towards the end of the year, however, signs that the economy was cooling down too rapidly prompted the authorities to take measures to stimulate domestic demand. India continued to perform strongly in 2011, recording 7.6% output growth driven by buoyant investment and private consumption. Here, rising inflation has been the main threat to the continuation of this pace.

The performance of the emerging Asian economies was not sufficient to counteract fully the slowdown in the developed economies, leading to a global growth projection of 2.8% for 2011, below the 2010 figure. The outlook for 2012 is for another year of weak growth in the developed countries, due mainly to the euro zone members’ difficulty in reaching a solution to the current predicament, which has imposed drastic —and contractionary— fiscal adjustments amid uncertainty in European financial markets. The Japanese economy is expected to expand following the contraction caused by the earthquake and tsunami of 2011, which would leave overall growth in the developed countries at a similar level to that of 2011 (see figure I.3).[2]

2 Persisting high risks tend to pull down the forecasts for 2012 presented in figure I.3. For example, in early December 2011, the Deutsche Bank projected a 0.5% contraction in the euro zone in 2012 (Deutsche Bank, Emerging Markets 2012 Outlook. Survival of the Fittest, 6 December 2011).

FIGURE I.3

GROSS DOMESTIC PRODUCT (BY REGION), REAL GROWTH RATE, 2009-2012 A

(Percentages)

Source: United Nations, World Economic Situation and Prospects 2012. Global Economic Outlook, New York, Department of Economic and Social Affairs, December 2011.

a Estimate.

b Projection.

These shifts in global activity levels and expectations produced sharp fluctuations in commodity prices over the year (see figure I.4). In the first part of the year commodity prices in general continued to rise, boosted by demand from the emerging economies. In the first quarter they actually matched —and in some cases exceeded— the record highs observed before the global financial crisis broke out in September 2008 (indicated by a vertical line in the figure). From that point, as risk levels rose in international markets, expectations and purchase orders adjusted downward, so that the pattern was thrown into reverse and prices dropped heavily towards the end of the year. Overall, the average level for the year exceeded that of 2010 in most cases.

FIGURE I.4

SELECTED COMMODITY PRICE INDICES, 2002-2011

(Index: average for 2002=100)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of International Monetary Fund, Primary Commodity Prices, December 2011.

B. MACROECONOMIC POLICY

The macroeconomic policies of countries of the region faced a shifting set of challenges during the course of the year, influenced both by the external context and by domestic developments. Countries tackled these challenges in a variety of ways, depending on their structural characteristics, the severity of the impact, the available instruments, and policy priorities.

During the first half of the year some countries, in particular those that had adopted formal inflation-targeting schemes, raised their benchmark interest rates, while others kept them steady or reduced them. The public banking system (which in several countries had expanded the supply of credit as part of the anti-crisis measures of 2008 and 2009) generally refrained from further credit increases. Some countries also took steps to reduce fiscal spending.

Central banks for the most part boosted their international monetary reserves in order to dampen upward pressure on the exchange rate, to moderate its volatility and to reduce vulnerability to potential turbulence on international financial markets.

During the second half of the year, as the external environment changed, countries that in the first half had gradually withdrawn monetary stimulus reversed that stance and stopped raising interest rates or began to cut them. Toward the end of the year Brazil, the region’s biggest economy, began to take additional steps to stimulate investment and consumption, while other countries announced the acceleration of public investment or other measures to cope with the possibility of a deeper-than-expected cooling of the economy.

1. Fiscal policy

On average, the fiscal accounts of Latin America will close the year 2011 with a small primary surplus, after two years of deficits that reflected the impact of the global economic and financial crisis of 2008-2009 and the efforts on the part of the region’s administrations to counter that crisis. In terms of primary balances, most countries reduced their deficits, transformed them into surpluses, or expanded existing surpluses. On average, the primary balance improved by 0.6 percentage points, moving from a deficit of 0.3% of GDP to a surplus of 0.3%. In turn, the overall deficit declined on average from 1.9% of GDP to 1.5%. This slight improvement was the result of an increase in revenues of 0.4% of GDP, while spending remained nearly constant as a proportion of GDP.

FIGURE I.5

LATIN AMERICA (19 COUNTRIES): CENTRAL GOVERNMENT FISCAL INDICATORS, 2000-2011

(Percentages of GDP at current prices)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures.

While most of the Latin American countries (13 out of 19) saw improvements in their overall balances, the global deficit of central governments rose in three of the six Caribbean countries for which information is available.

Regionwide, the increase in revenues was due above all to a generalized rise in tax receipts in Latin American countries, in a setting of relatively buoyant economic growth. The commodity-exporting countries also saw higher prices for their goods, which boosted fiscal revenues. With their slight increase in 2011, fiscal revenues are almost back to their levels of 2007-2008 as a proportion of GDP.

On the expenditure side, primary spending contracted slightly as a proportion of GDP, while interest payments rose. On the whole, expenditure remained at levels clearly above those recorded in 2008 and earlier years, after a sharp jump associated with the countercyclical policies of 2009. Individual country performance varied: 8 out of a total of 19 increased their spending at rates above the growth in output.

The region as a whole resumed the process of building down its public debt in terms of GDP, thereby bolstering the longer-term process that had marked much of the previous decade, when countries were striving to reduce their vulnerabilities. In fact, on average across 19 Latin American countries, central government debt was brought down by around 28% of GDP, i.e. to less than the 2008 level, which had been the lowest in the region’s recent economic history. This reduction in central government debt occurred almost across the board in Latin America: only 4 out of these 19 countries experienced increases. On the other hand, Caribbean countries continue to carry high levels of public debt, severely restricting their fiscal policy options in a climate of sluggish economic performance. Lastly, since 2010 the bulk of central government debt across most of the region has been domestic, in clear contrast to the situation in the past.

2. Monetary and exchange-rate policies

With rising inflation induced by high prices for imported products that figure heavily in the consumer basket, several countries responded to concerns over the impact on the prices of other goods and services by raising their monetary policy interest rates. Other countries kept them steady and some, primarily in the Caribbean, reduced them in an attempt to boost economic growth. As inflation continued on an upward trend through most of the year this meant that bank lending rates declined in real terms in most countries.

In addition to the demand stimulus implied by this fall in real interest rates, efforts to extend banking services to a greater proportion of the population,[3] combined with optimistic expectations on the part of economic agents,[4] led to a rapid expansion of credit, which did much to boost domestic consumption and investment. In general, the main source of credit was the private banking system, while the role of the public banks was mixed: in some countries the volume of public bank credit rose sharply, while in others it expanded at a more moderate pace.[5]

3 Peru, for example, saw a 10% increase in the number of banking system borrowers between October 2010 and October 2011, while in Argentina the number of individual loan transactions rose by 9% between September 2010 and September 2011.

4 According to the economic climate indicator published by the IFO World Economic Survey, during the first three quarters of 2011 the economic experts surveyed about the situation and prospects of selected Latin American countries were bullish, to a similar extent as in 2005 and 2006 and only slightly less so than in 2007 and the first half of 2008. However, in the fourth quarter of 2011 they signaled a sharp deterioration (CESifo World Economic Survey, November 2011).

5 In interpreting figure I.6 it must be recalled that the size of the banking sector as well as the relative weight of public banks vary significantly between the countries.

FIGURE I.6

LATIN AMERICA (12 ENTRIES): PRIVATE, PUBLIC AND TOTAL BANK CREDIT GROWTH, AVERAGE REAL BALANCE JANUARY-JULY 2010 AND JANUARY-JULY 2011

(Percentages)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures.

The massive capital flows into many economies of the region, particularly during the first part of the year, strengthened many currencies. As a result, especially those countries most closely integrated into international financial markets recorded real currency appreciation against the dollar on average in comparison to the previous year. However, this trend reversed in September as international financial markets became more volatile, and year-on-year comparisons toward the end of the year showed real exchange rates fairly similar to 2010, and even a slight currency depreciation in some cases (see figure 1.7a).

FIGURE I.7

LATIN AMERICA AND THE CARIBBEAN (20 COUNTRIES): CHANGE IN REAL EXCHANGE RATES, COMPARISON OF AVERAGES JANUARY-OCTOBER 2011 TO YEAR-EARLIER PERIOD AND OCTOBER 2011 WITH DECEMBER 2010

(Percentages)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures.

Given the diversity of the region’s trading partners, the real effective exchange rate did not in general rise to the same extent as the bilateral real exchange rate against the dollar. This reflects the fact that, between January and October 2011, the real effective extraregional exchange rate appreciated only modestly on average (by 2.1%), compared to the same period of 2010.

As noted earlier, thanks to the governments’ efforts to contain the real currency appreciation, limit exchange-rate volatility and reduce vulnerabilities, the great majority of countries built up their international monetary reserves, both in absolute terms and (in most cases) as a proportion of GDP. Thus the region’s reserves as a whole swelled by more than US$ 100 billion. Brazil alone accounted for around 60% of this increase.

C. THE PERFORMANCE OF THE REGION’S ECONOMIES

1. Activity, prices and labour markets

Economic activity was underpinned by strong domestic demand driven partly by the surge in disposable national income generated by high commodity prices, which fed into profits and wages in the various sectors and indirectly fuelled credit growth. For the year overall, household consumption was up by 5.2%, only slightly less than the previous year, and contributed 3.5 percentage points to regional growth (see figure I.8). This expansion was supported by labour market performance, since in real terms the wage mass increased by around 5%, which also helped to further reduce poverty levels in the region.[6] In addition, as noted earlier, credit —especially consumer credit, which expanded faster than total credit in many countries— continued to show dynamic growth.

6 See Economic Commission for Latin America and the Caribbean (ECLAC), Social Panorama of Latin America, 2011 (Briefing Paper), Santiago, Chile, November 2011.

FIGURE I.8

LATIN AMERICA: ANNUAL VARIATION IN GROSS DOMESTIC PRODUCT AND IN COMPONENTS OF DOMESTIC DEMAND, 2009-2011 A

(Percentages, in dollars at constant 2005 prices)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures.

a Estimate.

Gross fixed capital formation showed its rate of growth from 13.4% in 2010 to 8.1% in 2011, but nonetheless rose as a proportion of GDP, to 22.8%, which was the highest level (in constant prices) for the past three decades. Even so, this rate is still insufficient to sustain the economic and social needs of the region.

The expansion in government consumption slowed to below the regional GDP growth rate, as many governments endeavoured to rebuild fiscal space.

Buoyant domestic demand caused sharp growth in imports, which were also fuelled by the currency appreciation occurring during most of the year. Consequently, goods and services imports were up by 11.3% on 2010. Goods and services exports in turn grew by 7.0% and, like imports, slowed towards the end of the year.

The economic slowdown from 2010 to 2011 did not occur across the board in the region. In fact, of the 20 Latin American countries, 11 posted higher growth than in 2010. This group includes some whose economic growth had suffered the impact of major natural disasters in 2010 (Chile and Haiti), others which benefited particularly from high prices for hydrocarbons (especially Bolivarian Republic of Venezuela and Ecuador) and, lastly, several Central American countries which reaped delayed benefits from the slight upturn in the United States economy, since both exports and current transfers (mainly remittances) outperformed the 2010 figures in these countries. In the English- and Dutch-speaking Caribbean, 8 out of 13 countries posted higher rates of economic growth, partly thanks to higher remittances. Central America maintained a growth rate of around 4%, while the Caribbean (0.7%) achieved an improvement over the stagnation of 2010 —this performance would have been better but for the economic contraction in Trinidad and Tobago. Despite widespread slowdowns in the individual countries, however, the South American economies as a whole expanded by 4.6%, more than other subregions once again.

In the first part of 2011, as in 2010, inflation continued to trend upwards, particularly in the Caribbean countries, which recorded considerably higher inflation than other subregions between mid-2010 and mid-2011.

As was the case for the inflation surge of 2008, rising international food and fuel prices were again the main factor fuelling the higher rates, although the impact this time was not as severe. During much of the year currency appreciation softened the impact of international inflation on domestic prices. The wide range of external factors impacting on price trends is nonetheless reflected in the difference of between 3 and 5 percentage points between core inflation and food prices. In many countries, however, core inflation also rose during the year.

From the second quarter of the year onward, amid falling international prices for some food products and hydrocarbons, year-on-year consumer price inflation tailed off in all subregions, and towards the end of the year the rate actually fell slightly. Consequently, based on the weighted average for the countries in the region, inflation at the end of the year is projected to be only moderately higher than at the end of 2010 (7.0% compared with 6.6% the previous year).

FIGURE I.9

LATIN AMERICA (SIMPLE AVERAGE): YEAR-ON-YEAR INFLATION BY COMPONENT, 2007-2011

(Percentages)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures.

The robust recovery of the region’s labour markets in 2010 continued into 2011, albeit at a slower pace. A further rise of 0.5 percentage points in the urban employment rate led to a fall of the same magnitude in the urban unemployment rate, which thus stood at 6.8%. This is fairly low for a region which was posting double-digit unemployment rates less than ten 10 ago. However, unemployment trends were less positive in Central America and the Caribbean, whose economies performed less strongly than those of South America.

FIGURE I.10

LATIN AMERICA AND THE CARIBBEAN: RATES OF EMPLOYMENT AND OPEN UNEMPLOYMENT, 2000-2012

(Percentages)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures.

a Estimate.

b Projection.

The quantitative rise in employment was accompanied by qualitative improvements too, since the new posts created were concentrated in wage employment and in many countries the number of jobs covered by the social security system rose considerably. In general, the number of people underemployed in terms of number of hours also declined.

Amid high labour demand, real wages improved overall, despite the higher inflation. The median for 11 countries shows real wages in the formal sector rising by an average of 2.2%.

2. The external sector

The deficit on the balance of payments current account widened again slightly, partly owing to rising goods imports (23.2%) fuelled by burgeoning domestic demand and currency appreciation in several countries. Much of the increase in imports thus reflected greater volumes, while higher prices

—especially for food and fuels— also helped to push up the overall value of imports.

FIGURE I.11

WORLD EXPORTS AND IMPORTS BY REGION (THREE-MONTH MOVING AVERAGE), 2007-2011

(Annual percentage rates of variation)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures.

The region’s exports benefited from higher commodity prices, especially for the export basket of the South American countries. In the course of the year, growth in export volumes slipped below 5% as economies cooled in several main buyers of the region’s export goods. Especially in the second half of the year, international market turbulence dampened demand for these goods. The fact that exports grew at a similar rate to imports and that the surplus on the regional goods balance rose slightly, from 1.1% of GDP in 2010 to 1.2% in 2011, was therefore more a function of prices than volume.

Although the uptrend in commodity prices slowed and, in many cases, was reversed from the second quarter onward, for the region overall terms of trade are estimated to have improved by 6.1% in the course of the year. But there are major differences between the countries, depending on their export structure. Terms of trade improved by around 14% for hydrocarbon-exporting countries, by between 5.5% and 8% for exporters of mining and agricultural products, and only slightly (by about 2%) for Mexico, with its more diversified export structure. Meanwhile, the food- and hydrocarbon-importing countries of Central America will have suffered a small terms-of-trade loss of around 2%.

FIGURE I.12

LATIN AMERICA AND THE CARIBBEAN: VARIATION IN TERMS OF TRADE, 2005-2012

(Index: 2005=100)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures.

a Projection.

Remittances from migrant workers, a major component of the balance-of-payments current account in many of the region’s countries, posted a modest upturn, mainly thanks to recovering levels of employment among Latin American immigrants in the United States. By contrast, among Latin American migrants in Spain, another important destination in the past few years, employment levels not only continued to fall, but did so more rapidly than those for the Spanish workforce overall (see figure I.13). Be this as it may, the modest upturn in remittances in absolute terms was not sufficient to prevent this variable contacting as a proportion of GDP.

The deficit on the services balance expanded, mainly as a result of the high costs associated with imports. Higher outflows were recorded on the income balance, partly owing to an increase in the profits of mining companies thanks to the high average prices prevailing during the year.

As a result, the region’s current account deficit widened again, to 1.4% of GDP, compared with 1.2% in 2010. This is not a particularly worrisome development in view of the current economic indicators and prevailing financing conditions, but it could become more complex should external conditions take a turn for the worse.

FIGURE I.13

UNITED STATES AND SPAIN: EMPLOYMENT AND UNEMPLOYMENT AMONG WORKERS OF LATIN AMERICAN ORIGIN

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures.

The current account deficit was more than offset by inflows on the capital and financial account in 2011. Specifically, net FDI inflows swelled considerably —by around 75%— with respect to 2010, with an increase of 25% in gross FDI.[7] Especially in the first part of the year, portfolio investment flows also fed into surpluses on the capital and financial account in almost all the Latin American countries. As well as financing the current account deficit, these inflows were large enough to build up reserves by an even larger figure than in 2010. Almost all the subregions reduced their external debt as a proportion of GDP, although external debt remains at worrying levels in a number of Caribbean countries.

7 The large difference between the net and gross measurements is attributable to the steep fall recorded in outward investment by Latin American and Caribbean firms.

FIGURE I.14

LATIN AMERICA (SELECTED COUNTRIES): COMPONENTS OF THE BALANCE OF PAYMENTS, 2011

(Millions of dollars)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures.

D. PROSPECTS AND CHALLENGES FOR 2012

As discussed in the previous sections, the global economy is expected to slacken, with Europe leading the trend; lower growth is forecast for several emerging economies as well. China and other countries in Asia are expected to see a slowdown in 2012, although growth will remain in positive territory. The developing countries as a whole will once again outpace the rate of growth expected in the developed economies (see figure I.3). In this more sluggish environment, cloudy prospects for the larger economies, mixed in with high uncertainty and volatility in the international financial markets, are likely to impact the global economy through different channels.

Economic growth in Latin America and the Caribbean is not immune from this uncertain climate, so the moderate slowdown seen there during the first half of 2011 began to deepen in the third quarter (see figure I.15).

FIGURE I.15

LATIN AMERICA (7 COUNTRIES): QUARTERLY REAL GDP VARIATION, 2007-2011

(Percentages)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures.

a Estimate.

Future growth in the region will be shaped by the magnitude and scope of the global economic downturn. With stagnating euro zone economies and slow growth in the United States —but only limited international financial market volatility— the real sector is expected to bear the brunt, especially in tradable goods and services and remittances.

Cooling economic activity in the developed countries would drive down the demand for goods, to the detriment of the region’s exports. If the emerging economies continue to grow faster than the developed world, the overall impact on exports from Latin American and Caribbean countries will depend on the relative importance of each country’s destination markets and on how much foreign trade contributes to its economy. But slow growth in the developed countries will impact emerging economy exports, too, and thus indirectly affect demand for Latin American commodities.

As in 2011, economic growth in Mexico and Central America will be affected by slow but positive growth of the United States market and see a moderate increase in external sales. On the other hand, some of the countries of South America will be hit by falling demand in Europe, which is the destination for more than 20% of the exports from countries such as Brazil and Chile (see table I.1). That said, a goodly portion of exports from many South American countries goes to the Asian markets, which are expected to post above-average growth rates. Moreover, commodities (which make up a significant share of these countries’ exports) are easier to redirect if demand sags in any given market.

TABLE I.1

LATIN AMERICA: GEOGRAPHICAL DISTRIBUTION OF EXPORTS, AVERAGE, 2007-2010

(Percentage of total exports)

United States

Europe

(27 countries)

China and Japan

Latin America

Argentina

6.9

17.8

9.4

40.9

Bolivia (Plurinational State of)

8.2

8.2

8.1

62.0

Brazil

12.5

23.2

14.0

22.1

Chile

11.6

21.0

29.4

18.7

Colombia

39.1

13.7

4.1

30.4

Costa Rica

37.2

17.4

7.7

24.9

Ecuador

39.1

13.1

2.4

37.5

El Salvador

48.5

5.8

0.5

42.0

Guatemala

40.4

5.6

1.9

41.9

Honduras

45.2

19.7

2.0

26.9

Mexico

80.8

5.3

1.6

6.4

Nicaragua

34.3

11.5

1.2

40.4

Panama

16.1

3.4

1.7

69.3

Paraguay

1.8

8.4

2.8

67.2

Peru

18.1

17.3

19.4

18.1

Dominican Republic

60.1

12.8

3.8

4.8

Uruguay

6.1

17.7

4.1

39.7

Latin America a

41.5

13.7

9.0

19.6

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures.

a Does not include Bolivarian Republic of Venezuela, owing to lack of data.

Although commodity prices are still at historical highs, the upward trend began to reverse in the second quarter of the year. All of the markets have structural components that might help keep prices relatively high, but they will most likely be outweighed by the short-term effects of the global slowdown and financial volatility, driving commodity prices down in 2012. As a result, a moderate (1.2%) decline in the region’s terms of trade is expected in 2012. Consequently, although external prices should remain high, commodity-export intensive economies (especially some in South America) would see slower revenue growth than in 2011.

As for the components of domestic demand, lower trade volumes and declining revenue because of the terms-of-trade effect (for the region as a whole) could chill investment. The extent of this dampening would depend on how the financial markets fare and thus on the availability of credit for financing the purchase of capital goods and consumer durables. Stricter minimum capital requirements for European banks could affect access to credit, especially in countries where bank funding is partly dependent on euro zone bank loans. As much as 8% of the total credit available in these countries comes from euro zone bank loans to the banking systems of Latin America, either directly from the parent bank or in foreign currency through an affiliate. In some cases this could signal a certain degree of vulnerability to sudden scale-backs in such lending (see box I.1). Moreover, the volume of euro zone bank loans to non-bank companies in Latin America is higher than loans to banks: twice as much in Brazil, Chile, Colombia and Peru and three times as much in Mexico.

Some countries could be hit hard by declining foreign direct investment flows.

The direct impact on consumption in some countries will depend on the evolution of remittances from Latin American and Caribbean workers employed in developed countries. The trend would be expected to depend on the migrants’ country of destination (chiefly, the United States and Spain). The moderate increase in remittances from the United States economy seen in 2011 is therefore expected to continue. The economies of Mexico and many Central American and Caribbean countries would benefit the most, with a boost for household consumption–especially among lower-income households.

Overall under the base case scenario, expectations are that the region will continue to grow

—albeit more slowly than during the period 2010-2011. This is partly because many countries have some capacity to implement policies aimed at helping sustain demand, because:

(i) international reserve levels have been restored, so the expected current-account deficit could be financed without draining them;

(ii) public accounts have improved during the period 2010-2011, and (except for some Caribbean countries) indebtedness is low and would enable several countries of the region to place debt in the domestic and external financial markets;

(iii) inflation has stopped rising and is expected to fall in 2012, both globally and in the region; several countries (especially those that had raised their benchmark rates) thus have some monetary policy space for countercyclical action;

(iv) the 2008 global financial crisis left the region a legacy of experience in coordinating countercyclical fiscal and monetary policies and measures for heading off a liquidity crisis in domestic financial markets; hence the countries not only have resources—they have recent, hands-on experience in countercyclical response to a global crisis,[8] and

8 See Economic Commission for Latin America and the Caribbean (ECLAC), The reactions of the Governments of the Americas to the international crisis: an overview of policy measures up to 31 December 2009 (LC/G.3025/Rev.6), Santiago, Chile, December 2009.

(v) The fiscal space available for countercyclical measures is tighter than in 2008, however, and both vulnerability and the capacity to deploy policies to address the impact of the global slowdown in growth differ from country to country.

Against this backdrop, the region’s economy is expected to grow by 3.7% in 2012. This is the lowest figure since 2003, with the sole exception of 2009. In view of the more adverse external environment, though, this is not such a negative performance. The deceleration compared with 2011 is expected to impact most of the countries. The chief exception would be Brazil, which, after the sharp slowdown in 2011 is expected to recover somewhat on the strength of its domestic market and with the aid of specific measures rolled out in late 2011 plus a higher average real exchange rate for the year. The Caribbean is also expected to record somewhat higher growth than in 2011, above all as the economy of Trinidad and Tobago recovers from its contraction. Even so, the Caribbean will see lacklustre performance owing to its close ties to the economies of Europe and the United States, where demand for goods and services from the countries of the Caribbean will remain low.

FIGURE I.16

LATIN AMERICA AND THE CARIBBEAN: GDP GROWTH, 2012

(Percentages)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures.

Economic growth throughout the region should nudge employment rates up again, although any increase would be smaller than in 2010 and 2011. This will affect the variation of the open urban unemployment rate, which will either stagnate or decline slightly by up to 0.2 percentage points. Because real wages would benefit from lower inflation, labour market performance should once more spur domestic demand, although not as much as in previous years.

Based on the 2012 budgets of the countries of the region, their fiscal accounts are forecast to weaken slightly (with a primary surplus in the area of 0.2% of GDP and an overall deficit of 1.7% of GDP), owing mainly to declining fiscal revenue.

On the external front, worsening terms of trade and lower export volume would mean further (though slight) deterioration of the balance of payments current account balance, resulting in a deficit equal to 1.8% of the region’s GDP.

However, the potential for another, bleaker scenario cannot be ruled out if Europe does not overcome the serious difficulties facing its southern economies, sending the euro into a crisis whose consequences could be far worse than those of the 2008 subprime crisis in the United States.

Such a development could do more than exacerbate the negative impact on the drivers of demand for goods and services in the region. It could at the same time weaken some of the macroeconomic fundamentals discussed above.

First, the crisis scenario would not only slow the rate of growth: it would trigger a contraction of some of the principal European economies. This would have spillover effects on the region’s foreign trade volume and prices, both directly and by affecting trade and economic activity in other regions. The same would happen with the expected trend in remittances. And any worsening of the region’s prospects for growth would likely push direct foreign investment flows to below the levels of the baseline scenario. In such circumstances the evolution of the global economy would be expected to have a higher impact than the one expected through the channel of the real economy in the base scenario.

In this case the region would feel the impact of a crisis through the financial channel as well, as volatility and uncertainty mounted. The strength of the impact in each country would depend on how its exchange and financial market institutions are arranged and the degree to which they are integrated in the international markets (see box I.1).

As in late 2008, a situation of this kind could send demand for dollar-denominated short-term financial assets (especially United States treasury bonds) spiralling up in a “flight to quality” in which international investors seek refuge in lower-risk, highly liquid financial assets.

Capital could flow out of the emerging economies; Latin America and the Caribbean would be no exception. This could bring difficulties in accessing external credit, as well as depreciation pressure on local currencies. While this might be good news in that, in the short term, it would make the region’s export sectors and import-substitution sectors more competitive, sudden depreciation of the currencies of Latin America and the Caribbean would impact holders of foreign-currency debt and put pressure on inflation rates. To counteract this movement, the central banks could draw on some of the international reserves accumulated over the past few years.

Any resulting financial turbulence could impact the commodities markets, putting more downward pressure on prices than in the base scenario. This would have a detrimental effect on national income and thus on demand in the countries of the region. Were export prices to fall to the levels seen during the period 2008-2009, export income would drop by the equivalent of 3.4% of the region’s GDP if export volume remained at 2011 levels. However, import prices would contract as well and the income balance deficit would decrease, so the current account deficit would increase to only 2.0% of GDP. Besides, import volume would most likely contract in such a scenario, making the deficit even lower. For the region as a whole, then, the current account would not constitute a vulnerability.

Nonetheless, public revenue in some countries is highly dependent on commodity exports; this could endanger the fiscal accounts and lead to the deployment of procyclical public policies that would intensify the negative effects on domestic demand (see figure I.17).

In several countries (among them, Chile and some of the major petroleum exporters), the impact on public finances would be considerable. Any decision to increase public borrowing, which would be feasible because of the low indebtedness of most of the economies of Latin America (not so for several Caribbean countries), would run into less accessible markets and, as a result, far higher costs.

Such a scenario for European banks could mean that the impact on access to credit in the region’s financial markets would be far more serious than in the baseline scenario.

In any event, the principal economies of the region are less vulnerable than the emerging economies of Europe, the Middle East and Africa and are at levels similar to those of Asia in terms of external, fiscal and financial sector indicators and how much they would be affected by a crisis zeroing in on Europe, the United States or both.[9]

9 See Deutsche Bank, Emerging Markets 2012 Outlook. Survival of the Fittest, 6 December 2011.

FIGURE I.17

LATIN AMERICA (SELECTED COUNTRIES): ESTIMATED IMPACT OF A DROP IN PRINCIPAL EXPORT COMMODITY PRICES ON FISCAL REVENUE A

(Percentages of GDP)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures.

a This exercise assumes that export volumes remain stable and that prices fall to the low for the period 2008-2009.

Even so, it is highly likely that Europe’s political actors and institutions will find a way to preserve their currency and slowly return to normal, with increasing involvement on the part of the European Central Bank (ECB). But given all the delays in crafting an effective solution, a quite likely scenario is a combination of the two described. The faster necessary decisions are taken, the more likely a more positive scenario becomes. Even then, a heavier slowdown than that of the baseline scenario is to be expected for 2012, albeit with a certain stability that should enable the States of the region to ensure that social conditions do not deteriorate.

In any event, the countries should be prepared for a bleaker scenario. To this end, they should prepare measures (and determine how they would be financed) and be poised to deploy them quickly as the external environment unfolds and impacts the economies of the region. An essential component of these strategies should be protecting and fostering the generation of jobs with rights.

The region’s capacity to weather an adverse external environment must be enhanced by deepening the trade and financial ties among the countries. Greater trade integration would expand the markets and thus offset a decline in external demand. Greater financial integration would cushion the expected difficulties in accessing financing. This might require changing the financial architecture of the region to adapt it to the needs of the moment.

Chapter II

MACROECONOMIC POLICY

A. FISCAL POLICY

Government finances are recovering, albeit in different ways, from the impact of the 2008-2009 crisis on the fiscal and financial performance (including revenue, expenditure and indebtedness) of the countries of Latin America and the Caribbean. The uncertain external environment augurs a need to reclaim policy space for countercyclical action in the future.

The countries of Latin America have seen their fiscal accounts improve in 2011, but this positive trend began to slow in the third quarter of the year.

In any event, the trend has made for an improvement in average fiscal balances, and the region will return to primary surplus in 2011.

While the public accounts have been recovering over the past two years, the impact of the 2008-2009 crisis on fiscal variables did lead the countries of the region to use considerable fiscal space as they deployed countercyclical policies.[1] The result was that fiscal policy space contracted substantially during the crisis.[2] The period 2003-2007 saw widespread rebuilding of fiscal space on the strength of rising revenue and falling debt, followed by contraction during the crisis as expenditure rose and revenues shrank.

1 Also see ECLAC, Economic Survey of Latin America and the Caribbean 2010-2011 (LC/G.2506-P), Santiago, 2011; and ECLAC/OECD, Latin American Economic Outlook, 2012, Paris, 2011.

2 For further details on how fiscal policy space is defined, see ECLAC, Preliminary Overview of the Economies of Latin America and the Caribbean, 2009 (LC/G.2424-P), Santiago, December 2009.

Latin America’s fiscal performance in 2011 translated into a primary central government surplus equal to 0.3% of GDP, measured as a simple average, against the deficit of 0.3% recorded in 2010. However, the overall balance (including public debt interest payments) was in deficit, at 1.9% of GDP in 2010 and narrowing to 1.5% in 2011.

During the first half of 2011, fiscal balances improved thanks to brisker economic activity and rising commodity prices. But the easing of these trends amidst general uncertainty would be behind the slower growth of fiscal resources starting in the third quarter of the year.

Fiscal budget estimates point to an average primary fiscal deficit equal to 0.2% of GDP in 2012. However, budget projections might not have factored in the global financial context or the increased volatility of commodity prices.

The general upward trend in the public accounts (in terms of GDP) for 2011 is due to an overall improvement, with smaller fiscal account deficits or larger primary surpluses in 14 countries in Latin America (out of a total of 19).

Even so, the average fiscal balance in the region is lower than pre-crisis levels, not only for the region as a whole but on a country-by-country basis. In 2011, 11 (58%) of the 19 countries of Latin America under review posted a primary surplus (see table II.1) while, in 2003-2008, 15 countries (nearly 80% of the total) did so.

As for the Caribbean, spending cuts and an effort to increase revenues improved the fiscal balance of the countries of the Eastern Caribbean Currency Union (ECCU) by just over half a point of GDP. Suriname also saw improving fiscal accounts as revenue increased thanks to surging oil and gold prices and spending cuts. Belize reduced its deficit by nearly 1% of GDP by cutting back on spending and maintaining revenue. Bahamas marginally decreased its fiscal deficit by selling State-owned assets to raise revenue and cutting back on spending. Last, Guyana is expected to close the year with a larger deficit because of increased capital spending.

TABLE II.1

LATIN AMERICA AND THE CARIBBEAN: CENTRAL GOVERNMENT FISCAL INDICATORS, 2007-2011

(Percentages of GDP at current prices)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures.

a At 31 December each year, except for 2011 which correspond to 30 June, using the year-end exchange rate in the case of external debt.

b Simple averages. Does not include Cuba.

c General government.

d Public sector.

e Fiscal years.

FIGURE II.1

LATIN AMERICA AND THE CARIBBEAN: CENTRAL GOVERNMENT REVENUES, SPENDING AND FISCAL BALANCES, 2000-2011

(Percentages of GDP)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures.

a Projection.

Average fiscal account performance in Latin America is the combined result of an increase in fiscal revenue equal to 0.4% of GDP and public expenditure holding steady as a percentage of GDP (see figure II.1). This is the outcome of different behaviours among the countries of the region, as can be seen in figure II.2 showing the variation in fiscal revenue and expenditure in 2010-2011 as a percentage of GDP. Many countries boosted their resources during the period, with lower spending in some cases and smaller increases in expenditure in others. The result was an improved overall balance for 13 countries. The overall deficit widened in just five countries: Argentina, Brazil, Colombia, Panama and Plurinational State of Bolivia.

Most of the countries where revenue increased (15 out of 19) saw but moderate gains. Only in Chile, Ecuador and Nicaragua was the rise in excess of 1% of GDP (1.1%, 3.3% and 1.5%, respectively). The sharpest drop was in Brazil, with a decrease equal to 1.3% of GDP.[3] On the spending side, the countries that recorded a marked decrease (equivalent to more than 1% of GDP) include El Salvador, Haiti and Mexico. At the other extreme are Argentina, Ecuador, Panama and Paraguay, as the countries where spending rose the most.

3 Note that in September 2010 the central government of Brazil took in 74.8 billion reais (equivalent to 2% of GDP) from the sale of oil concessions, making the basis of comparison extraordinarily high.

FIGURE II.2

LATIN AMERICA AND THE CARIBBEAN: FISCAL REVENUE AND EXPENDITURE VARIATION, 2010-2011

(Percentages of GDP)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures.

Total fiscal revenue rose in 2011, from 19.3% of GDP to 19.7%, thanks to an overall increase in the tax burden. Leading this trend were Argentina, Chile and Nicaragua, where the increase in tax revenues topped 1% of GDP.

In Argentina, the prime cause of the increase in tax revenues and social security contributions (1.4% of GDP) was the pickup in economic activity, higher wages and an increase in registered employment. Chile saw tax revenues rise by the equivalent of 1.3% of GDP on the strength of aggregate demand and the high price of copper. In Nicaragua, the tax reform introduced late in 2009 came fully into effect in 2011 and tax revenues rose by 1.2 GDP points, chiefly reflecting duties levied on imported goods and the widening of the income tax base.

It is worthwhile to assess the extent to which the increases in fiscal revenue over the past year are due to higher revenue from commodities. In Chile and Colombia, for example, copper and oil revenues, respectively, rose by 0.4% of GDP. In Ecuador, oil revenue grew by the equivalent of 2.3% of GDP (see figure II.4). This surge in revenue for Ecuador is due above all to rising oil prices and production volume compared with the previous year, as many private companies resumed production that had been halted by new contract negotiations during much of 2010.

FIGURE II.3

LATIN AMERICA AND THE CARIBBEAN (19 COUNTRIES): CENTRAL GOVERNMENT REVENUES, 1990-2011

(Percentages of GDP)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures.

FIGURE II.4

LATIN AMERICA AND THE CARIBBEAN: CHANGES IN TOTAL CENTRAL GOVERNMENT REVENUES, 2010-2011

(Percentages of GDP at current prices)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures.

a General government.

b Public sector.

c Includes both tax and non-tax revenues derived from the exploitation of commodities.

Quarterly changes in tax revenues for a selected group of countries in the region reveal a surge in tax receipts during the first two quarters. But the average rate of increase began to slow somewhat in the third quarter of 2011 owing above all to the revenue trend in Chile, Colombia and Peru.

FIGURE II.5

LATIN AMERICA (SELECTED COUNTRIES): VARIATION IN REAL TAX RECEIPTS OF CENTRAL GOVERNMENT, EXCLUDING SOCIAL SECURITY, 2008-2011

(Year-on-year quarterly changes, in percentages)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures.

a Includes non-oil tax revenues.

On average, public spending held steady at 21.2% of GDP during 2010-2011, owing to lower current primary spending and an increase in interest payments. But these trends mask very different behaviours.

As explained above, the countries where spending fell by more than 1% of GDP include El Salvador, Haiti and Mexico. In Mexico, the authorities kept the austerity and budget rationalization measures under the National Public Expenditure Reduction Programme announced in March 2010, geared towards holding down administrative and operating expenses as well as spending on personal services. El Salvador focused on meeting the targets under its agreement with the International Monetary Fund, which calls for a substantial decrease in the fiscal deficit and stabilized spending by 2012. As a result, current spending restrictions were implemented at ministries and government agencies by means of expense caps and the postponement of lower-priority projects during the second half of the year.

FIGURE II.6

LATIN AMERICA AND THE CARIBBEAN: CENTRAL GOVERNMENT EXPENDITURE, 1990-2011

(Percentages of GDP)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures.

Conversely, expenditure rose the most in Argentina, Ecuador, Panama and Paraguay. Argentina posted substantial increases in social security benefits due primarily to the social benefits portability policy, pension hikes for the armed and security forces, and assistance for new beneficiaries under the expanded coverage policy. Public transport and power supply subsidies increased,[4] as did national civil servant compensation. In Ecuador, an increase in investment plans and social assistance policies pushed government expenditure up sharply. In Panama, capital spending rose faster than current spending owing to fresh rises in infrastructure outlays, mainly on the expansion of the Panama Canal, cleaning of the Bay of Panama, the extension of the coastal beltway, and the construction of the metro, roads and housing. In Paraguay, the rise in spending was due chiefly to capital expenditure, which increased by the equivalent of 1.6% of GDP because of infrastructure projects, building repairs marking the country’s bicentennial celebrations, housing projects and school repairs (see figure II.8).

4 Towards the end of the year the government announced cutbacks in these subsidies.

In most countries, a combination of factors was behind the substantial decline in total non-financial public-sector debt as a percentage of GDP, most notably economic growth and a primary balance surplus.[5] But during the period 2008-2011 the public debt-to-GDP ratio rose in several Central American countries (Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua), as well as in the Bolivarian Republic of Venezuela and Mexico (see table II.1).

5 The Heavily Indebted Poor Countries (HIPC) Debt Initiative also helped strengthen public finances in Honduras, Nicaragua and the Plurinational State of Bolivia. In other countries, debt reduction programmes emerged from post-crisis negotiations.

FIGURE II.7

LATIN AMERICA AND THE CARIBBEAN: CHANGES IN OVERALL CENTRAL GOVERNMENT SPENDING, 2009-2010

(Percentages of GDP at current prices)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures.

a General government.

b Total spending does not include net lending.

c Public sector.

Public debt remained high in the countries of the Caribbean —over 100% of GDP in the case of Jamaica and Saint Kitts and Nevis. Conversely, Guyana reduced its debt stock thanks to the Heavily Indebted Poor Countries (HIPC) Debt Initiative.

The composition of public debt changed considerably in several countries as maturities were extended, the proportion of fixed-rate debt rose, the share held by residents increased and the proportion of domestic-currency instruments grew. As a result, in 2010 domestic debt overtook external debt as a proportion of total public debt. In December 2008, central government external debt accounted for 53% of total public debt; by June 2011, the ratio had fallen to 47%. But this indicator varies widely among the countries under review. While external debt made up more than 70% of public debt in the Dominican Republic, Panama and Paraguay, the ratio was below 20% in Brazil, Chile, Costa Rica and Mexico.

In sum, the main challenge for many of the economies of the region is how to prudentially manage policy space and macroeconomic response capacity, and ensure a stable and predictable public finance environment for closing gaps in infrastructure, education and innovativeness so as to grow more and better over the long term.[6]

6 See also OECD/ECLAC, op. cit.

FIGURE II.8

LATIN AMERICA AND THE CARIBBEAN (19 COUNTRIES): CENTRAL GOVERNMENT PUBLIC DEBT STOCK, BY CREDITOR’S RESIDENCE

(Percentages of GDP)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures.

Much of the fiscal space regained over the past few years is linked to fiscal revenue from commodities. In this context, the uncertain external environment and weakening global demand could have a significant budget impact.

For the countries of the Caribbean carrying heavy public debt burdens, the challenge lies above all in achieving sustainable public accounts and debt-to-GDP ratios. This is no less of a dilemma, because both experience and the debate over the past few years have shown that the best strategy for decreasing public debt is to promote fiscal policies that stimulate growth. But the constrained fiscal space of these countries leaves them with not much capacity to promote necessary growth and achieve sustainable debt.

The road to fiscal consolidation passes through the planning and design of public policies whose core objectives include enhancing the capacity to generate countercyclical (or at least not procyclical) policies in times of crisis, mainly by means of borrowing capacity and public spending. Planning along these lines is not only compatible with sustainable, lasting growth, but with social cohesion and inclusion as well because it mitigates the inequality and poverty impact of volatility.

B. MONETARY AND EXCHANGE-RATE POLICY

The monetary and exchange-rate policy environment in the region during 2011 may be seen as an extension of the circumstances prevailing since mid-2010. Policymakers tended to maintain their policy stance, especially during the first two quarters of the year.

Countries that had been raising their monetary policy rates since mid-2010 continued to do so. Those that had held their policy rates steady made no significant changes during the year, and the central banks that had been paring them continued this approach in 2011. On the exchange-rate front, both the countries that had tended to build up assets abroad and those that had sought to contain nominal currency appreciation stayed the course in 2011.

Nevertheless, over the last two quarters of 2011 some central banks using formal inflation-targeting schemes have revised their policies and cut rates in an effort to dampen the impact that slower-growth expectations for the developed world would have on aggregate demand in those economies, especially in view of slowing inflation during the closing months of 2011.

Real lending and deposit rates continued to trend down in 2011, while monetary aggregates expressed in real terms generally remained positive despite a deceleration trend in some cases. Judging by the non-performing to total loan portfolio ratio, the region’s loan portfolio showed no signs of impairment despite significant real total portfolio growth.

Because of the peculiarities of each of the countries of Latin America and the Caribbean, monetary policy stance and conduct vary within the general monetary context of the region. So, then, does the performance of the principal monetary aggregates.

In some of the countries with inflation targets (Brazil, Chile, Colombia and Peru), the monetary authorities’ efforts were geared towards containing inflationary pressures related to price shocks associated with rising energy and food costs and swelling aggregate domestic demand. The uptick in inflation, especially in the first few months of 2011, thus led central banks in those countries to raise their monetary policy rates. However, these rates are still below pre-global crisis levels. But from the third quarter of 2011 on, growing uncertainty surrounding the European crisis and its potential repercussions for the economies of the region has led the central banks to halt rate increases and even lower rates in certain cases, such as Brazil. One exception to this group of countries with explicit inflation targets is Mexico, where the policy rate has not been changed since mid-2010 (see figure II.9A).

In countries such as the Dominican Republic, Paraguay and Uruguay, the effort to curb inflationary pressures also led the authorities to raise the monetary policy rate in 2011 despite the lack of formal inflation-targeting schemes (see figures II.9A and II.9C).

Despite these trends, in 2011 the monetary policy focus in most of the non-dollarized countries of the region that have not adopted explicit inflation targets was to maintain liquidity at a level that would sustain the growth in aggregate domestic demand, so policy rates have been held fairly steady or even lowered in some cases.[7] As figure II.9B shows, the monetary policy rate in Argentina and the Bolivarian Republic of Venezuela has remained unchanged since mid-2010. The same is true of several countries in Central America and the Caribbean, such as Barbados and Haiti, as well as Eastern Caribbean Currency Union (ECCU) countries. Among the central banks that lowered their policy rates are those of Bahamas, Costa Rica, Jamaica and Trinidad and Tobago.

7 This is the case in Argentina, the Bolivarian Republic of Venezuela and the Plurinational State of Bolivia in South America; Costa Rica, the Dominican Republic, Guatemala, Haiti, Honduras and Nicaragua in Central America; and Bahamas, Barbados, Belize, Guyana, Jamaica, Suriname, Trinidad and Tobago and the countries of the Eastern Caribbean Currency Union (Antigua and Barbuda, Dominica, Grenada, Saint Kitts and Nevis and Saint Lucia) in the English-speaking Caribbean.

FIGURE II.9

LATIN AMERICA AND THE CARIBBEAN (SELECTED COUNTRIES): MONETARY POLICY RATES, 2009-2011

(Percentages)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures.

Despite these differences in how monetary policy tools are managed, market lending and deposit rates in real terms continued to trend down in 2011 all across the region. The median rate fell by more than 200 basis points between January 2010 and October 2011 (see figure II.10). The exception was Mexico, where real interest rates rose in 2011 because the Mexican economy recorded smaller price increases.

FIGURE II.10

LATIN AMERICA AND THE CARIBBEAN: MEDIAN REAL LENDING RATES, 2009-2011 A

(Percentages)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures.

a Real rates are estimated by discounting inflation for the period.

Falling interest rates are a clear driver of aggregate domestic demand because they bring down the cost of financing consumer and investment spending. These monetary conditions are also reflected in the movements of the region’s principal monetary aggregates, which (other than in the Caribbean) are still growing quickly. Despite the expansion discussed above, real M1 growth is slowing: the median went from more than 13% in September 2010 to values approaching 7% in October 2011. The monetary base and M2 grew at slightly faster rates in 2011 than in 2010, as the median for the region shows.

Comparing the evolution of these aggregates among countries shows that despite the sustained increase in the monetary base, the growth of broader aggregates such as M1 and M2 decelerated significantly in countries with formal inflation targets. In other cases such as, Paraguay and Uruguay, this deceleration was seen in the three aggregates studied; the monetary base even recorded annualized negative growth rates. In economies with more highly managed exchange-rate schemes, the monetary base contracted by nearly 8% in the Bolivarian Republic of Venezuela and by 3% in the Plurinational State of Bolivia. Nevertheless, the monetary base tended to grow significantly from the second quarter on. For broader aggregates (M1 and M2), growth in real terms during 2011 was similar to 2010 and hovered at rates in the area of 15% (see figure II.11).

In the countries of Central America (excluding those that are dollarized), the monetary aggregates grew at positive rates although M1 and M2 tended to slow in 2011 (see figure II.11). In the Caribbean, the monetary aggregates in economies like Jamaica and Barbados contracted in real terms. In Trinidad and Tobago and Guyana they continued to grow in real terms, although the trends were different. The monetary aggregates decelerated in Trinidad and Tobago; in Guyana the real growth of the monetary base, M1 and M2 accelerated.

As for the dollarized economies of the region (Ecuador, El Salvador and Panama), the M1 growth rate slowed in El Salvador in 2011 and held fairly stable in the other two countries. The M2 growth rate in Panama remained positive despite a deceleration; in El Salvador it was negative in 2011.

FIGURE II.11

|LATIN AMERICA AND THE CARIBBEAN: MONETARY AGGREGATES, 2009-2011

(Regional median percentage variation)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures.

The median real growth rate for region’s financial system loan portfolio is in excess of 12%; growth has been steady since mid-2010. However, a breakdown between public and private sources of credit reveals a marked deceleration of public credit (see figure II.12). Credit from public institutions went from a median growth rate of some 20% in early 2010 to below 5% in July 2011. This nosedive was more significant in 2011 in the Bolivarian Republic of Venezuela, Brazil, Colombia, and El Salvador. Credit from public institutions recorded negative real growth rates in Mexico, Paraguay and Uruguay in 2011.

FIGURE II.12

LATIN AMERICA AND THE CARIBBEAN: CREDIT PORTFOLIO, REAL VARIATION, 2008-2011

(Regional median percentage variation)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures.

Another variable showing the same trend in 2011 as in 2010 was loan portfolio in arrears. The median past-due to total portfolio ratio in the region fell by more than 0.75 percentage points compared with 2010 and approached 2.7% by midway through the second half of the year. This reflects the low credit default exposure of the region’s banks.

The countries of the region continued to accumulate international reserves, with several countries facing nominal currency appreciation during the first half of the year and exchange-rate market interventions that were sterilized only in part by issuing debt and that led to the rapid expansion of monetary aggregates mentioned earlier. The level of reserves as a percentage of GDP in the non-dollarized countries of the region increased during the first three quarters of 2011, from an average of 19% to 20.1%, although with considerable differences among them (see figure II.13).

The accumulation of international reserves was particularly notable in the countries that are more fully integrated in the international capital markets. Central bank reserves thus grew substantially in Chile, Uruguay, the Plurinational State of Bolivia, Brazil, Mexico and Colombia, with all of them posting nominal growth in excess of 20%. Foreign-exchange market intervention played a key role, especially in Brazil, Colombia and Chile during the first quarter of 2011, when currency appreciation pressure was particularly intense, with something of a pull-back during the following two quarters. The largest increase in reserves as a percentage of GDP was in Uruguay (3%) and the Plurinational State of Bolivia (2%). Reserves declined in Argentina and the Bolivarian Republic of Venezuela.

FIGURE II.13

LATIN AMERICA AND THE CARIBBEAN (SELECTED COUNTRIES): NET INTERNATIONAL RESERVES, 2010-2011

(Percentages of GDP)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures.

Despite increasing reserves, some countries also saw a marked expansion of imports and monetary aggregates. Notwithstanding, in countries like the Plurinational State of Bolivia, Peru and Uruguay, the accumulation of reserves was therefore high in relation to most of the indicators of external vulnerability.

As in 2010, comparing averages for the period shows that, overall, nominal exchange rates in Latin America and the Caribbean appreciated against the dollar in 2011, with 12 countries recording average exchange rate appreciation.[8] Unlike 2010, though, only three countries (Paraguay, Chile and Brazil) saw appreciation in excess of 5%. The only countries with nominal depreciation of 5% or more were Argentina (with substantial monetary expansion and inflation and efforts to protect domestic industry) and Nicaragua (resulting from the crawling-peg exchange rate scheme used to offset inflation). The Plurinational State of Bolivia, where the nominal exchange rate is used as an anti-inflationary tool, saw virtually no variation in the value of its currency.

8 However, the outcome changes when the comparison is with December 2010, because only six countries were showing slight nominal appreciation as of October 2011 and Paraguay was the only country with significant appreciation, at 10.3%. Some countries for which the comparison of the annual average between 2011 and 2010 shows currency appreciation posted nominal depreciation against the dollar between December 2010 and October 2011, as is the case with Mexico (8.5%), Chile (7.5%), Brazil (4.6%) and Costa Rica (1.8%).

Nominal currency appreciation in the region especially affected the countries of South America that are more fully integrated in the international capital markets. Appreciation pressure continued until midway through the third quarter of 2011. Facing strong appreciation pressure on the real in 2010 and the first half of 2011, in March and April 2011 Brazil raised to 6% the financial transaction tax rate on direct foreign loans and inbound funds from securities issued on the international market with maturities up to 360 days and 720 days, respectively,[9] having taken similar measures in 2010. Between July and October 2011, uncertainty surrounding the European crisis and the resulting capital markets and commodity price volatility triggered rapid nominal currency depreciation in the countries more closely integrated in the international capital markets, i.e., Brazil (13.3%), Chile (10.2%), Colombia (8.2%) and Mexico (15.2%). To a lesser extent, the same thing happened in Paraguay (6.2%) and Uruguay (7.7%). Interest in domestic-currency denominated assets waned in extraregional commodity-exporting countries such as Australia, the Russian Federation, New Zealand and South Africa. Costa Rica, Guatemala and Jamaica saw moderate exchange rate appreciation. Expectations are that nominal exchange rate volatility in the region will carry over into early 2012, owing to the European crisis and commodity price volatility.

9 For more information, see ECLAC, Economic Survey of Latin America and the Caribbean (LC/G.2506-P), Santiago, Chile, 2011.

Nominal exchange rate and inflation trends in the region resulted in real effective extraregional exchange rate appreciation in Latin America and the Caribbean that was, on average, 2.1% higher for the first 10 months of 2011 than for the same period in 2010. In the countries of South America appreciation during the period was 2.9% (owing primarily to sharp appreciation in the first half of the year). In Central America, Mexico and the Caribbean, appreciation was slight, at 1.4%. Figure II.14 shows that, on average, the real effective extraregional exchange rate depreciated from July 2011 on, in response to global financial turbulence and its impact on the countries more closely integrated with the international financial markets.

FIGURE II.14

LATIN AMERICA AND THE CARIBBEAN: REAL EFFECTIVE EXTRAREGIONAL EXCHANGE RATES, 2008-2011

(Base: January 1990-December 2009=100)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures.

During the first 10 months of 2011, 11 countries of the region recorded average total real effective exchange rate appreciation; 9 countries posted effective depreciation.[10] Because of nominal depreciation during the third quarter of 2011 for those economies with formal inflation targets, only two posted effective appreciation above 10% for the period: the Bolivarian Republic of Venezuela (where high inflation during the year led to 12% effective appreciation) and Paraguay (which recorded 10.8% appreciation owing above all to nominal depreciation in its trade partners (Argentina and Brazil). In Nicaragua, effective depreciation was slightly above 5%.

10 But a comparison between October 2011 and December 2010 in some countries with explicit inflation targets (such as Mexico, Chile and Brazil) shows effective depreciation of 11%, 9.5%, and 4.1%, respectively, for the period. This stands in contrast to effective appreciation in the three countries upon comparing the first 10 months of 2011 and 2010.

At October 2011, then, the total real effective exchange rate was more than 20% below (appreciation) the historical average for the past 20 years in 5 countries (see figure II.15). In the Bolivarian Republic of Venezuela, whose effective exchange rate was 35.8% below the historical average, the exchange rate regime includes strict Foreign Exchange Administration Commission (CADIVI) control of foreign currency assigned to the private sector. Guatemala and Honduras receive substantial income from emigrant remittances, which are a major source of hard currency for these two countries. And Colombia and Brazil continue to record effective exchange rates that are, respectively, 20.7% and 23.6% below the average for 1990-2009 despite the recent nominal depreciation of their currency.

FIGURE II.15

LATIN AMERICA AND THE CARIBBEAN: TOTAL REAL EFFECTIVE EXCHANGE RATES

(Percentage variation with respect to average for 1990-2009)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures.

Chapter III

DOMESTIC PERFORMANCE

A. ECONOMIC ACTIVITY AND INVESTMENT

The GDP of Latin America and the Caribbean grew by 4.3% in 2011, resulting in a 3.2% increase in per capita GDP. This is a slower pace than in 2010, when the region’s GDP grew by 5.9% (equivalent to a 4.8% increase in per capita GDP).

Expectations are that the region’s GDP will continue to expand in 2012, albeit at a slower pace (in the area of 3.7%) because of domestic and internal factors. Domestic factors include a softening of domestic demand as job creation slackens, bank lending to the private sector cools and national income growth slows. External factors, among them the worsening economic situation in Europe and the slowdown of economic growth in the United States, on top of the deceleration of the Asian economies, will negatively impact external demand in the economies of the region (see figure III.1). The drop in international commodity prices, souring expectations on the part of economic agents and greater uncertainty as to how the worsening global economic climate will affect the region will all impact gross national disposable income in the region and, thus, domestic demand.

FIGURE III.1

LATIN AMERICA: ANNUAL CHANGE IN GROSS DOMESTIC PRODUCT, BY COUNTRY GROUPINGS, 2004-2011

(Percentages, in dollars at constant 2005 prices)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures.

a Estimate.

b Projection.

All of the countries of the region, except for Antigua and Barbuda and Trinidad and Tobago, saw economic expansion in 2011, but performance was uneven.[1] The highest growth rates were posted by Panama (10.5%), Argentina (9%), Ecuador (8%), Peru (7%) and Chile (6.3%). Haiti, Colombia, the Dominican Republic, Uruguay, Nicaragua, the Bolivarian Republic of Venezuela and the Plurinational State of Bolivia saw increases ranging from 4% to 5.5%. El Salvador, Cuba, Brazil, Guatemala, Mexico, Costa Rica, Honduras and Paraguay grew at rates of between 2% and 4%. By subregion, economic activity expanded by 4.6% in South America, by 4.1% in Central America and by 0.7% in the English- and Dutch-speaking Caribbean. As in 2010, the pace of growth in the Caribbean was highest in Guyana and Suriname, spurred by the agricultural sector in Guyana and metal and mineral production in Suriname.

1 Expressed as a simple average, GDP growth in Latin America and the Caribbean was 5%; the median increase was 4%.

Most of the economies of the region saw slower growth in 2011, although the timing was not always the same. Several countries (Argentina, Chile, Ecuador and Panama) posted brisk growth during the first half of the year, fuelled by domestic consumer and investment demand. Others (Brazil, the Dominican Republic, Mexico and Paraguay) recorded significant slowdowns compared with 2010. In Brazil, domestic demand was hit by declining primary central government expenditure, rising interest rates and slower growth in the export volume of goods and services. In Mexico, contributing factors included lower general government consumption expenditure in the second quarter of the year, and slower growth in gross fixed investment. Slower GDP growth in the Dominican Republic was due to a contraction in the power generation sector and in transport and communications; in Paraguay the reason was declining construction sector activity. With few exceptions, the deceleration of economic activity became more widespread in the second half of the year. Growth in domestic demand growth fell off amidst worsening expectations that curbed consumption and investment. Additional factors were weakening external demand, lower commodity prices (compared with the first half of the year) and increasing uncertainty as to the course of the global economic environment and its impact on the economies of the region.

As in 2010, economic activity in the region for the year as a whole was driven above all by surging domestic demand on both the consumption and the investment side and, to a lesser extent, by external demand. Private consumption in the region expanded by 5.2%, spurred by rising employment, falling unemployment, improving real wages and expanding lending to the private sector (see figure III.2). The latter was also boosted by persistently high liquidity in the international financial markets that, along with the lower risk levels of the economies of Latin America and the Caribbean, had a positive impact on capital flows towards the region.

Burgeoning private consumption was reflected particularly in the durable goods segment.[2] The gradual recovery of emigrant remittances in countries where they are a major source of financing for domestic demand (especially in Central America, Ecuador and Colombia) also helped boost private consumption. Public consumption continued to grow throughout the year, but at a more moderate rate than in 2010 (2.8%, against 4.2% in 2010). Nevertheless, it outpaced GDP growth in several countries (Argentina, the Bolivarian Republic of Venezuela, Guatemala, Paraguay and the Plurinational State of Bolivia). Public consumption was down in the Dominican Republic, however.

2 One of the best performers in this segment was the automobile market. Compared with the same period in 2010, automobile sales were up by 26.4% in Argentina, by 9% in Brazil, by 10.5% in Mexico (cumulative from January to October) and by 27% in Chile (cumulative from January to September).

FIGURE III.2

LATIN AMERICA: ANNUAL VARIATION IN GROSS DOMESTIC PRODUCT AND IN COMPONENTS OF DOMESTIC DEMAND, 2010-2011

(Percentages, in dollars at constant 2005 prices)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures.

a Estimate.

Expanding domestic demand and the continuing availability of credit drove investment up, especially in machinery and equipment. Appreciation of the national currency against the dollar helped as well, by lowering the national-currency price of imported capital goods. As a result, gross fixed capital formation jumped by 8.1% in 2011, pushing the investment rate, measured in constant dollars as a percentage of GDP, up to 22.8% (2010: 22.3%). This is the highest it has been since 1990, although it is still below the levels prior to the 1980s (see figure III.3).

But this performance for the region as a whole masks investment rates that differ from country to country. Unlike the period 2004-2008, when investment rates rose in all the subregions, recovery this time around centred on the countries of South America and Mexico. In Central America, the investment rate fell off sharply in 2009 and has yet to recover, holding at levels similar to the first half of the 1990s and well below the highs posted in 1998. In Mexico, the investment rate recovered after falling in 2009 but has still not returned to 2008 levels.

Imports of goods and services grew briskly in 2011 (by 11.3%) as domestic demand mushroomed, especially for consumer durables and capital goods. Most of the 7.0% growth in export volume of goods and services was posted during the first half of the year, and growth has been decreasing thereafter. Because imports of goods and services increased more than exports, net exports continued to make a negative contribution to growth in the region (see figure III.4).[3]

3 Indeed, although exports of goods are growing briskly in value terms, in some metal- and mineral-exporting countries growth is due principally to higher export prices instead of higher export volumes.

FIGURE III.3

LATIN AMERICA: GROSS FIXED CAPITAL FORMATION, 1990-2011

(Percentages of GDP, in dollars at constant 2005 prices)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures.

FIGURE III.4

LATIN AMERICA: ANNUAL VARIATION IN GROSS DOMESTIC PRODUCT, DOMESTIC DEMAND AND NET EXPORTS, 1991-2011

(Percentages, in dollars at constant 2005 prices)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures.

The correlate of swelling domestic demand has been a rise in domestic economic activity, especially in commerce, restaurants and hotels, business services, transportation and communications and other service sectors. Activity in the commerce, restaurants and hotels and transportation sectors also benefited from increasing tourist activity in 2011, particularly in the countries of South America. In Central America, international tourist arrivals grew at a pace similar to 2010; economic activity in the Eastern Caribbean Currency Union, Bahamas, Barbados and Belize was boosted by recovering tourist activity.[4]

4 According to data from the World Tourism Organization (UNWTO), World Tourism Barometer, November 2011, cumulative figures for January to August 2011, international tourist arrivals were up by 13% in South America, 4% in Central America and 4% in the Caribbean compared with the previous year.

The performance of goods-producing sectors has been varied across the region. The agricultural sector posted the highest gains in Chile, Colombia, the Dominican Republic and Ecuador while contracting in Argentina and Panama. Trends were also mixed in the mining sector, whose aggregate value fell in Argentina, Mexico, Trinidad and Tobago, Chile and Peru. In the first three countries the drop was due to declining oil production. Mining sector performance in Chile was impacted by falling copper production; the downturn in Peru was the result of declining metal mining and oil production despite a jump in natural gas production. Higher oil production was behind the good performance of the sector in the Bolivarian Republic of Venezuela, Ecuador and Colombia.

Industrial activity continued to climb in all of the countries of the region, but with a slowing trend throughout the year (see figure III.5). With regard to countries where automobile production is a major factor, in Argentina and Mexico production continued to rise but not as briskly as in 2010, while in Brazil it fell off from the levels posted in 2010.

FIGURE III.5

LATIN AMERICA: TWELVE-MONTH CHANGES IN INDUSTRIAL PRODUCTION INDEX, JANUARY 1995 TO SEPTEMBER 2011

(Percentages)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures.

Construction industry performance varied from country to country as well. It posted the highest growth in Argentina, Chile, Ecuador and the Plurinational State of Bolivia while declining in Colombia and Paraguay. Growth was moderate in all of the other countries.

International prices for raw materials fell during the last few months of 2011 but had risen through the third quarter, so Latin America and the Caribbean recorded improving terms-of-trade gains for the year. The region’s gross national disposable income, measured in constant prices, thus grew faster than GDP—as happened in 2010 and in the period 2003-2008. This was especially the case in metal-, mineral- and hydrocarbon-exporting countries. The countries of Central America were another matter: despite recovering emigrant remittances, growth was not enough to offset the worsening terms of trade and gross national disposable income grew more slowly than GDP. For Latin America as a whole, gross national disposable income, measured in constant prices, was up by 5.8% in 2011 compared with 2010, thanks to the 6.6% jump in the countries of South America (which are more specialized in producing and exporting commodities). In the countries of Central America, gross national disposable income grew more slowly (by 2.8%) than GDP (see figure III.6).

FIGURE III.6

LATIN AMERICA: ANNUAL CHANGE IN GROSS NATIONAL DISPOSABLE INCOME, 2003-2011

(Percentages, in dollars at constant 2005 prices)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures.

As gross national disposable income rose for the region as a whole, domestic savings (which had dropped sharply in 2009) were up again in 2011 despite an increase in domestic consumption. As a percentage of GDP, measured in current dollars, domestic savings climbed to 21.4%—higher than in 2009-2010 but lower than in the period 2004-2008. External savings climbed to 1.4% (2010: 1.2%). As a result, gross capital investment in Latin America rose to 22.8%; this is a significant recovery from 2009 and 2010 (20.5% and 21.8%, respectively) but is still below the 23.6% recorded in 2008 which was, in turn, the highest figure since 1990 (see figure III.7).

FIGURE III.7

LATIN AMERICA: FINANCING OF GROSS DOMESTIC INVESTMENT, 1990-2011

(Percentages of GDP, in current dollars)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures.

a Estimate.

.

B. DOMESTIC PRICES

Inflation in Latin America and the Caribbean rose from 6.6% in 2010 to around 7% in 2011.[5] The rate of inflation rose in all the subregions, but most sharply in Central America and some of the Dutch- and English-speaking Caribbean countries early in the year (see figure III.8).

5 Refers to the weighted average for the region. As a simple average, regional inflation was relatively stable, moving from 7.1% in 2010 to 7.5% in 2011, and 7.6% in the 12 months to October 2011.

FIGURE III.8

LATIN AMERICA AND THE CARIBBEAN: CONSUMER PRICE INDEX, 12-MONTH VARIATION, SIMPLE AVERAGE, 2007-2011

(Percentages)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures.

a Includes the Bahamas, Jamaica, Suriname and Trinidad and Tobago.

As has been the case since 2006, the region’s highest rate of inflation was recorded in the Bolivarian Republic of Venezuela, the only country together with Suriname to post a two-digit rate. The stubbornly high inflation rate in the Bolivarian Republic of Venezuela led the administration to tighten price controls and extend them to a broader range of products. The higher inflation in Suriname reflected a jump in the prices of transport services and communications in the early months of 2011, owing to a fuel-tax hike. Food prices continued to trend upwards in 2011, but below the rate of general consumer inflation.

Wholesale price indexes rose more steeply than consumer prices in 2011 in all countries which publish these data, except for the Bolivarian Republic of Venezuela. This rise was due partly to higher prices for imported raw material and, in countries where such goods account for a significant part of the index, to prices of domestically-produced goods for export.

The trends prevailing in 2010 continued throughout 2011. Inflation remained persistently high for much of the year, reflecting rising food prices driven by the cost of agricultural commodities

—especially grains and oils— in the main international markets and, in some cases (including Colombia, Guatemala and Peru), by supply shocks resulting from poor weather conditions. Fuel prices were another factor in the higher inflation in 2011, owing to steeper international prices,[6] as was the climb in core inflation (mainly in the first half of the year) resulting from the pass-through of higher food and fuel prices to the cost of services, rises in the prices of regulated services (Brazil, Costa Rica, Colombia), particularly public transport fares and, in some cases, steadily climbing domestic demand. From August onwards, however, these trends eased up somewhat. The increase in food prices started to slow, as a result of the fall of international prices for these products, while the prices of energy products and core inflation continued to rise (see figure III.9). The drop was sharpest in the Central American countries and Mexico (and also more evident since the fall began in August), while in the South American countries food prices continued to rise.

6 In the first 10 months of 2011 international prices showed rises on the year-earlier period of 44.5% for grains, 29.2% for food and 32.5% for energy products.

In the Caribbean countries, although inflation continued to climb until April 2011, it began to fall steadily thereafter, owing to a sharp slowing of food prices in Trinidad and Tobago and the slackening impact on the general index of Suriname of price rises in the transport and communications sector.

FIGURE III.9

LATIN AMERICA: CONSUMER PRICE INDEX BY COMPONENT, 12-MONTH VARIATION, SIMPLE AVERAGE, 2007-2011

(Percentages)

Figure III.9 (concluded)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures.

Local-currency appreciation in most of the countries of the region up to August 2011 softened the impact on domestic prices of the higher international prices for imported products. But exchange-rate volatility towards the end of the year took a heavier toll on countries in which exchange-rate variation act as a price determinant, especially for fuels and some housing and transport services.

Both food and energy prices and core inflation have been making a growing contribution to overall inflation, but the contribution of food prices and other categories of inflation have remained relatively constant since August and actually declined in October, while the share of core inflation has continued to rise.

C. EMPLOYMENT AND WAGES

Throughout 2011 the labour markets continued on the momentum of the rebound that had, the year before, pulled the region’s labour indicators out of the slump set off by the 2008-2009 economic and financial crisis. The improvements were more measured because the pace of economic growth was slower than in 2010, but the jump in wage employment, above all, and rising real wages during the year fuelled an expansion of private consumption that was, in turn, a key factor in economic growth. However, some indices appeared to be losing steam towards the end of the year.

Consistent with the previous link between economic growth and job creation, the employment rate is estimated to have increased by 0.5 percentage points for the year as a whole after going up by 0.7 percentage points in 2010. This would bring the employment rate to 55.4% (see table A-17).

FIGURE III.10

LATIN AMERICA AND THE CARIBBEAN: ECONOMIC GROWTH AND URBAN EMPLOYMENT RATE, 1991-2011

(Percentages and percentage points)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures.

Thus, the region posted employment rate increases of 0.4 percentage points or more in eight of the nine years between 2003 and 2011. For 2011, this means approximately 6 million additional people employed in the urban areas of the region.

After a striking increase in the labour force participation rate in 2010, the number of people entering the labour market eased off in 2011. The result is estimated to be a more moderate 0.2 percentage point increase in the participation rate in urban areas for the year as a whole (see table A-15). Thus, the positive impact that job creation had on the unemployment rate was enhanced by a smaller rise in the workforce. As a result, estimates are that the region’s urban unemployment rate for the year as a whole will fall by 0.5 percentage points, to 6.8%—a significant improvement from the 2002 peak of 11.2% (see table A-16). In absolute terms, this decrease reflects a decline of approximately 900,000 in the number of unemployed persons in the region’s urban areas, bringing the figure down to some 15.5 million.

For the region as a whole, job creation was positive in both quantity and quality. In several countries (among them, Argentina, Brazil, the Dominican Republic, Mexico, Panama and Peru) wage employment grew more than non-wage employment thanks to relatively strong labour demand. Own-account employment, which had surged during the 2008-2009 crisis and continued to climb at a more moderate pace in 2010, stopped growing in Argentina, Brazil, Mexico and a few other countries. This most likely reflects improving options for finding wage employment. Based on the data available through the third quarter, it is estimated that for a group of nine countries wage employment went up by 3.2% and own-account employment by 0.9% (see figure III.11).

FIGURE III.11

LATIN AMERICA: ECONOMIC GROWTH AND JOB CREATION, 2000-2011

(Percentages)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures.

a GDP figures are estimates. Data for wage employment are for the period January-September and are based on information for nine countries (Argentina, Bolivarian Republic of Venezuela, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Mexico and Peru).

Some countries saw a significant rise in formal wage employment (covered by social security systems). This good quality employment continued to grow briskly (by more than 5%) in Brazil, Chile, Nicaragua and Peru, and at a slower clip (between 2.5% and 5%) in Argentina, Costa Rica, Ecuador, Mexico, Panama and Uruguay.[7]

7 Data as of the second or third quarter, depending on availability.

The underemployment rate is another indicator of improving employment quality. Few countries have data on this, but in most of those that do (Argentina, Brazil, Chile, Colombia, Ecuador, Mexico, Peru and Uruguay), time-related underemployment (generally defined as involuntarily working less than the normal duration of work determined for the activity) fell, albeit in some cases only marginally.[8] The even scarcer data on wage-related underemployment (the proportion of the economically active or employed population with earnings below a predetermined threshold) suggest an improvement in most of the countries that have this information (Brazil, Colombia and Peru). The only country where this indicator worsened was Honduras.

8 Of the countries for which information is available, only Costa Rica and Honduras saw an increase in underemployment in per-hour terms.

The branches of economic activity that posted the highest growth in employment in 2010 were the manufacturing industry, the financial services sector, real estate and business services. The latter had already seen higher than average growth for many years in a row and did so again in 2011, owing both to modernization of the productive structure and to the reorganization of production processes (specialization and outsourcing). Manufacturing employment, which had surged in 2010 after contracting in 2009, did not grow as robustly in 2011, due in part perhaps to a certain loss of competitiveness associated with currency appreciation. But, on average, employment growth in this sector kept pace with that of employment overall.

Agricultural employment (which had, as is frequently the case in the region during an economic crisis,[9] jumped in 2009 and grown at a more moderate pace in 2010) resumed its long-term downward trend in 2011, both as a share of the employment structure and, in many countries, in absolute terms.

9 During a short economic crisis, migration between the countryside and cities usually slows and a larger share of rural workers turns to the small farmer economy. This drives agricultural employment up even if business demand for labour in this sector does not grow.

Within the tertiary sector, employment in the principal branches (trade, restaurants and hotels, and community, social and personal services) grew at an average rate that was slightly higher than for total employment. Because these areas account for such an important share of the employment structure, they once more made a substantial contribution to job creation.

Data on labour market evolution compiled by sex show that (disregarding significant differences between countries) female labour-force participation for the region as a whole continued its long-term upward trend (adding 0.2 percentage points) while the rate for men remained unchanged.[10] The male employment rate rose slightly more than the female employment rate (0.4 percentage points versus 0.3 percentage points), so the unemployment rate for men fell a bit more (by 0.5 percentage points) than it did for women (a drop of 0.3 percentage points).

10 Simple average for 14 countries for the first 2 or 3 quarters depending on data availability.

Despite an uptick in inflation during the year, real wages rose slightly. This was the result of larger nominal wage increases amidst generally improving labour market conditions that tended to give workers more leverage in wage negotiations. On average, then, real wages increased less than in 2009, when lower inflation boosted wage purchasing power, but more than in 2010 (see figure III.12). Rising minimum wages contributed to this improvement, although in real terms these gains were smaller than in 2010 except in a few countries (such as Peru, Uruguay and the Plurinational State of Bolivia).

FIGURE III.12

LATIN AMERICA (8 COUNTRIES): NOMINAL WAGES, INFLATION AND REAL WAGES, SIMPLE AVERAGE, 2009-2011A

(Variation in percentage points)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures.

a Growth rates for 2009 and 2010 refer to averages for the year; for 2011 they refer to cumulative averages, depending on the information available. The eight countries are the Bolivarian Republic of Venezuela, Brazil, Chile, Colombia, Costa Rica, Nicaragua, Paraguay and Uruguay.

Cumulative figures through the third quarter show that, overall, real formal sector wages posted gains that were small (less than 1% in Mexico) to moderate (between 1.5% and 3% in the Bolivarian Republic of Venezuela, Brazil, Chile, Paraguay and Uruguay) (see table A-18) and remained flat in Colombia and Nicaragua.[11]

11 There is still no information available on formal sector wage trends in Peru, but data from the permanent employment survey for metropolitan Lima indicate that median real wages rose sharply during the year. Costa Rica’s national household survey also showed rising average wages for wage earners as a whole.

Behind the lower unemployment rates are overall labour market improvements, although this is not the only relevant indicator. The context has varied from country to country, though: during the first part of the year, in one group (Argentina, Brazil, Chile, Colombia and Uruguay), job creation accounted for most of the decline in unemployment.[12] In the Bolivarian Republic of Venezuela, Ecuador, Paraguay and the Plurinational State of Bolivia, the main reason was a drop in labour participation. Unemployment was up in Barbados, Costa Rica and the Dominican Republic, despite a higher employment rate. The fact that the least favourable unemployment trends were concentrated in Central American and Caribbean countries reflects slower economic growth there (see box III.2 on unemployment in the countries of the Caribbean). Lastly, in Peru, on average for the first three quarters, the main indicators held relatively stable.

12 Data through the second or third quarter, depending on availability.

In several countries of the region, slower economic growth during the year began to take its toll on the labour market. But this did not mean that job creation came to a halt—as figure III.13 shows, the seasonally adjusted employment rate continues to rise in most of the countries.

However, in some countries formal wage employment generation started to fall off in the second quarter, as can be seen in the seasonally adjusted figures for Argentina, Brazil, Chile, Mexico and Peru (see figure III.14). Some sectors were harder hit by slower output growth. For example, in October 2011 the number of hours paid in formal manufacturing employment in Brazil fell 0.7% over the same month of the previous year.

Obviously, labour market prospects for 2012 depend on the macroeconomic context, especially investment and economic growth. As economic activity cools slightly in the region expectations are that the employment rate will once more post a small gain which would leave the unemployment rate unchanged or sustain a very small decrease of up to 0.2 percentage points. For the first quarter of 2012 Latin American employers’ hiring expectations are positive, albeit generally weaker than in the previous quarter (Manpower Employment Outlook Survey, Q1/2012).

FIGURE III.13

LATIN AMERICA (6 COUNTRIES): URBAN EMPLOYMENT, SEASONALLY ADJUSTED SERIES, JANUARY 2009-SEPTEMBER 2011

(Percentages of the working-age population)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures.

FIGURE III.14

LATIN AMERICA (6 COUNTRIES): QUARTERLY VARIATION IN EMPLOYMENT, SEASONALLY ADJUSTED SERIES, THIRD QUARTER 2008 TO THIRD QUARTER 2011

(Percentages)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures.

Chapter IV

THE EXTERNAL SECTOR

A. THE BALANCE-OF-PAYMENTS CURRENT ACCOUNT

The balance-of-payments current account for Latin America is expected to close the year with a deficit estimated at 1.4% of regional GDP, the most negative balance in relative terms since 2001. This performance continues the progressive deterioration in the external accounts that began in 2006. There are several factors behind this trend: the volume of goods exports has fallen consistently short of imports, which widens the trade deficit when the terms of trade are not sufficiently high to offset this differentiated growth; remittances have remained positive but at low rates, implying a loss in their relative weight; and the services and income balances have become increasingly negative.

Table IV.1 shows the projected current account balance by subregion. For the MERCOSUR bloc,[1] balances should remain relatively stable and this group of countries should close the year with a current account deficit of 1.8% of GDP, similar to that for 2010. The mining countries (Chile and Peru) will have seen their current account surplus disappear, and should end the year with a deficit equivalent to 1.4% of GDP, explained primarily by import growth that has significantly outpaced export growth, thereby cutting their trade surplus substantially. On the other hand, the hydrocarbon-exporting countries (Bolivarian Republic of Venezuela, Colombia, Ecuador and Plurinational State of Bolivia) will have increased their current account surplus, thanks to high prices for oil and its derivatives, which have boosted these countries’ export values considerably. As net importers of food and energy, the Central American countries were impacted by higher international prices for those goods, producing a higher import bill which, together with the lower relative weight of emigrants’ remittances, led to a greater deterioration in the current account for this subregion. Finally, Mexico should record a deficit of 1.1% of GDP with the increase in outflows for factor remuneration and a sharp increase in the services deficit caused by greater imports of services and a fall in tourism earnings.

1 Argentina, Brazil, Paraguay and Uruguay.

TABLE IV.1

LATIN AMERICA: CURRENT ACCOUNT STRUCTURE BY SUBREGION, 2010-2011 A

(Percentages of GDP)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures.

a Data for 2011 are projections.

FIGURE IV.1

LATIN AMERICA: CURRENT ACCOUNT BALANCE, 1990-2012 A

(Percentages of GDP)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures.

a Data for 2011 and 2012 are projections.

FIGURE IV.2

LATIN AMERICA: STRUCTURE OF THE CURRENT ACCOUNT, 2006-2011 A

(Percentages of GDP)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures.

a Data for 2011 are projections.

The current account is expected to continue its gradual deterioration in 2012, reaching a deficit of 1.8% of GDP, as a consequence of buoyant domestic economic activity, which is outpacing that abroad, and terms of trade that are less favorable than those prevailing in 2011. The following sections offer a more detailed review of these trends and the most notable developments in the different components of the current account.

1. Terms of trade

The bulk of the commodities that weigh heavily in the region’s export basket showed steep growth during the last months of 2010 and the early part of 2011. Not since the beginning of 2008 were the rates of change so high. Yet the possibility of contagion from the European debt crisis and doubts about the health of the United States economy have dampened the outlook for global growth and have reduced demand for those products. For the same reason, funds invested in commodity-linked securities have been shifting into lower-risk markets. These factors, together with positive developments with some products, have caused the rising trend to reverse since the second quarter of the year (and even earlier for the oils and oilseeds group).

As can be seen in figure IV.3, food prices have risen substantially, reaching historic highs in April 2011 according to the index prepared by the Food and Agriculture Organization of the United Nations (FAO).[2] This increase is attributable to rising demand in developed countries (both for human consumption and as livestock feed) as well as greater use of these goods in the production of biofuels in response to higher prices for other energy products. At the same time, various situations of climatic adversity have caused damage to wheat, maize and soybean crops, boosting prices for those commodities. Coffee prices have also risen sharply, as stocks have shrunk in the face of steadily growing world demand. Nevertheless, price escalation slowed from the middle of the year, thanks to greater output and a relative stabilization of demand.

2 See [online] www.fao.org/worldfoodsituation/wfs-home/en/.

Demand in emerging economies and developing countries, especially in Asia, has contributed as well to higher prices for metals and minerals, a group that has also exceeded the maximum price levels reached prior to the 2008 crisis. In addition to this higher demand, hydrocarbons have also been affected by the impact on production of political conflicts in North Africa and the Middle East. Nevertheless, with relative stability returning to some of those countries and the expected cooling of the global economy, this trend has changed during the second half of the year. Following those same developments, prices of manufactured goods have also risen, although at more moderate rates and with a certain lag behind commodities. This group seems to have peaked in the third quarter of 2011.

FIGURE IV.3

LATIN AMERICA: PRICE INDICES FOR COMMODITIES AND MANUFACTURED GOODS, 2007-2011 A

(Index: 2000=100, three-month moving average)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of figures from the United Nations Conference on Trade and Development (UNCTAD) and the Netherlands Bureau for Economic Analysis (CPB).

a The commodity groups are weighted by their share of Latin American exports.

Despite the recent reversal in price trends, increases during the first half of the year were sufficient to indicate that the terms of trade for Latin America will improve significantly, as can be seen in figure IV.4. The increase will be 6.2% for the region as a whole, with some differences reflecting the international trade structure of each subregion. Hydrocarbon-exporting countries will be the biggest winners, with an estimated increase of 14.2%. Mining countries will see their terms of trade improve by only 5.5%, due to the fact that, although their export prices have also increased significantly, the gains were partially offset by higher prices for the energy products they import. The member countries of MERCOSUR have also benefited from higher prices for their principal exports. On the other hand, Central American countries, as net importers of food and oil derivatives, are in the reverse situation from that of the rest of the region, and their terms of trade will fall by around 1.8%. Mexico, which is primarily an exporter and importer of manufactures, is showing more modest changes in its terms of trade (up 2.4% for 2011), with a slight push from higher oil prices.

FIGURE IV.4

LATIN AMERICA: ESTIMATED CHANGES IN THE TERMS OF TRADE, 2009-2012

(Percentages)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures.

a Data for 2011 and 2012 are projections.

Generally speaking, Caribbean countries are net importers of food and energy products, and their terms of trade have consequently suffered in 2011 with rising prices for those goods. Nevertheless, Trinidad and Tobago, with its hydrocarbons exports, and Guyana, Jamaica and Suriname, with their metals production, have been able to cushion the deterioration in their terms of trade.

The improved supply conditions for some agricultural goods and the uncertainty over global aggregate demand are expected to continue in 2012, with the consequent impact on commodity prices. In this context, the region’s terms of trade would fall by 1.4%, primarily as a result of the decreases recorded among the MERCOSUR countries and hydrocarbon exporters. The outlook for Central America is negative: although it will benefit from cheaper food and energy imports, this subregion must face lower prices for its principal exports (in particular coffee, meat, oils and steel products), meaning that its terms of trade will remain virtually unchanged. The only subgroup that will see a significant gain in its terms of trade will be the mineral-exporting countries, as the price drop observed in the second half of 2011 was accompanied by a sharp decline in inventories of those products, which should sustain demand in 2012.

2. The goods and services balance

Beyond the price trends described in the previous section, figure IV.5 provides an estimate of export volume for 2011. The mining countries and MERCOSUR members will show the lowest rate of change in the region (with a performance falling significantly short of that in 2010). On the other hand, hydrocarbon-exporting countries will see a slight increase, due to the growth of oil output in Colombia and modest production increases in the Bolivarian Republic of Venezuela and in Ecuador, reversing the declines recorded in those two countries in previous years.

FIGURE IV.5

LATIN AMERICA: EXPORT VALUE GROWTH RATES, BY VOLUME AND PRICE, 2011

(Percentages)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures.

Despite a sharp slowdown from 2010 and a decline in oil production, Mexico’s export volume is still growing, driven by higher demand for manufactured goods in the United States. For example, automotive production for export rose by 13.9% between January and November 2011 over the same period of the previous year. Central America will perform similarly in manufactured goods, and will also see a significant increase in the volume of agricultural exports.

Imports, comprising primarily manufactured goods, generally exhibit less price variability than exports. A comparison of figures IV.5 and IV.6 reveals that import volumes are growing faster than exports in all cases, because the domestic economy is more buoyant than the world economy and currencies recorded real appreciation in most Latin American countries in the first part of the year.

Although the volume of imports exceeded that of exports, the improvement in the terms of trade is expected to bring the region’s export value slightly above the value of imports (with exports growing by 23.5% and imports by 23.1%). As a result, the trade surplus in goods should rise from 1.0% of regional GDP in 2010 to around 1.2% in 2011. For the coming year, domestic demand is expected to outpace external demand, which would mean that imports would grow faster than exports. To this must be added the forecast setback in the terms of trade. It can be expected, then, that the trade balance in goods will drop to only 0.5% of regional GDP in 2012.

FIGURE IV.6

LATIN AMERICA: IMPORT VALUE GROWTH RATES BY VOLUME AND PRICE, 2010

(Percentages)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures.

As figure IV.2 shows, the services balance will have deteriorated further in 2011. One of the main causes of this decline is the increase in the cost of freight, insurance and other services related to goods imports (the volume of which, as described earlier, is rising faster than exports). The most negative outcomes will be largely confined to Brazil and Mexico, the economies with the greatest level of international trade in the region. These two countries account for 85% of the regional services account deficit. On the other hand, countries exporting mineral and hydrocarbons products, as well as the Central American economies, are showing a stable services balance in terms of GDP.

International tourism is an important source of income for the countries of the Caribbean and Central America. As figure IV.7 shows, these two subregions returned to positive rates at the end of 2009, but they have stabilized at around 5%, below the rate observed prior to the 2008 crisis. This can be laid to weak economic growth and high unemployment in the United States and Europe, the main sources of tourists to these regions. Mexico, the region’s biggest tourism recipient, has felt the same effect, which has been further compounded by growing insecurity in the country. Tourism in South America fell to a lesser extent during the crisis, and recovered more strongly thereafter. In the first eight months of 2011 the number of international tourist arrivals was up by 13.3% over the same period of the previous year. A possible explanation for this is that the sources of tourism to this subregion are more diversified and intraregional tourism accounts for a greater share; international business travel is also up sharply.

For 2012, the services balance is expected to remain relatively stable at 1.3% of regional GDP, as transport-related services imports slow (due to moderation in the volume of imported goods) and international tourism recovers slightly.

FIGURE IV.7

LATIN AMERICA AND THE CARIBBEAN: YEAR-ON-YEAR VARIATION IN INTERNATIONAL TOURIST ARRIVALS, 2009-2011

(Three-month moving averages, in percentages)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of figures from the World Tourism Organization (UNWTO).

3. The income and transfers balance

The factor income deficit is expected to continue the gradual upward trend in nominal terms recorded in recent years, which would keep it stable at around 2.5% of regional GDP. This trend is linked to higher prices for commodity exports and the good performance of Latin American economies, which should translate into positive earnings for foreign firms operating or investing in the region and, consequently, an increase in profit remittances. However, the intraregional distribution is uneven, and four countries alone account for more than 75% of the deterioration in this account: Brazil (through higher profits on direct and portfolio investment), Mexico (through higher interest payments and a sharp increase in reinvested profits), Colombia (through greater outflows associated with FDI, primarily in the oil sector) and Peru (through growth in the profits of mining companies). In 2012, with the expected drop in prices for key exports and moderating growth, the deficit on this account should decline slightly in relative terms to around 2.3% of regional GDP.

There should be a modest increase in the current transfers balance, which will not prevent it from shrinking in relative terms, from 1.2% of GDP in 2010 to 1.1% in 2011. This represents a continuation of the trend observable for several years now. Within this account, migrant workers’ remittances represent a major source of revenue for some of the region’s countries. As figure IV.8 shows, after the sharp fall in 2009 and the volatility observed in 2010, the rates in 2011 are positive for all countries indicated in the graph. Nevertheless, the rates of increase are still relatively low and (with the exception of Nicaragua) remittances remain below their peaks prior to the 2008 international crisis. This reflects the labour situation in the countries that receive the bulk of migrant workers from Latin America; in particular, the unemployment rates in the United States and Spain, although they seem to have stabilized, are still very high. In addition to workers’ remittances, another notable feature on this account during 2011 was the significant reduction in the surpluses of Chile and Haiti, as official donations related to the earthquakes suffered by those two countries tailed off from their level in 2010. It is expected that remittances to Central American countries will regain their pre-crisis level in 2012; in the case of Colombia, Ecuador and Mexico it will take until 2013 to reach this milestone. Nevertheless, the relative weight of remittances will decline despite these gradual increases.

FIGURE IV.8

LATIN AMERICA AND THE CARIBBEAN (10 COUNTRIES): YEAR-ON-YEAR GROWTH IN EMIGRANTS’ REMITTANCES, 2009-2011 A

(Percentages)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures.

a Data for 2011 are projections.

B. THE CAPITAL AND FINANCIAL ACCOUNT

The financial environment beyond the region experienced sharp swings as uncertainty mounted in world financial markets, reflecting the collapse of confidence in the sustainability of developed countries’ public debt. Among the relatively low-risk group of countries of the region, those borrowing on international capital markets during the first half of the year saw a narrowing of their sovereign risk premiums, continuing the trend observed since 2009. For the region’s relatively higher-risk countries, sovereign risk premiums remained fairly stable. In both cases, the third quarter saw a spike in sovereign risk premiums, due to the overall deterioration in growth expectations and in the outlook for resolving the public debt crisis of countries of the euro zone.[3]

3 Up to September, the following countries had issued sovereign bonds abroad during 2011: Bolivarian Republic of Venezuela, Brazil, Chile, Colombia, Dominican Republic, Mexico, Panama and Uruguay.

FIGURE IV.9

LATIN AMERICA (SELECTED COUNTRIES): SOVEREIGN RISK PREMIUMS FOR LOWER-RISK COUNTRIES, JANUARY 2007-NOVEMBER 2011

(Basis points)

Source: JP Morgan Emerging Markets Bond Index Global (EMBI Global).

FIGURE IV.10

LATIN AMERICA (SELECTED COUNTRIES): SOVEREIGN RISK PREMIUMS FOR HIGHER-RISK COUNTRIES JANUARY 2007- NOVEMBER 2011

(Basis points)

Source: JP Morgan Emerging Markets Bond Index Global (EMBI Global).

The strength exhibited by the region for several years in terms of fiscal and external solvency, as expressed in relatively low sovereign risk premiums for several countries, meant that despite external turbulence the region as a whole faced no difficulties in meeting its external financing needs. Moreover, as indicated in the section on monetary and exchange policy in the region, most countries boosted their international reserves significantly, as a result of policies designed to maintain the exchange rate in the face of heavier external capital inflows, or as a precautionary measure against future external uncertainty.

As figure IV.11 shows, while the current account deficit persists it is being kept at very modest levels as a proportion of regional GDP and it has been financed through growth in net foreign direct investment (FDI) and financial inflows in more than adequate amounts. In fact, net FDI grew by nearly 75% during 2011 compared to 2010, the result of a 25% increase in gross inflows and a 58% reduction in outflows of FDI, reflecting the region’s more attractive financial environment. The biggest recipients of FDI remained Brazil and Mexico, followed by Colombia, Chile and Peru. The region also continued to enjoy ready access to external financial markets. As a result of this set of factors, international reserves are still at record levels. Moreover, in several countries (Chile, Colombia, Peru and Plurinational State of Bolivia), high prices for commodity exports during the first part of the year, together with an improvement in the fiscal situation over the previous year or in some cases the adoption of policies to prevent spillover effects from a slowing global economy, found expression in higher deposits in sovereign funds or equivalent mechanisms. Consequently, those countries have continued to strengthen their defences against possible external shocks.

FIGURE IV.11

LATIN AMERICA (19 COUNTRIES): CURRENT ACCOUNT BALANCE AND COMPONENTS OF THE FINANCIAL ACCOUNT, 2000-2011

(Percentages of regional GDP)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures.

Looking at countries individually, table IV.2 presents some components of external financing, according to information available at the time this report was prepared. All countries included in the table show a reduction in their current surplus or an increase in the deficit for 2011, except the Bolivarian Republic of Venezuela, where the surplus rose as a result of still-high oil prices and the implementation of an exchange control system that also regulates imports, and Haiti, which has begun to recover a portion of its export capacity damaged by the January 2010 earthquake. Nearly all countries show positive financial inflows, except Argentina and the Bolivarian Republic of Venezuela. Moreover, those inflows, comprising net FDI, net portfolio investment, net movements of other liabilities (primarily cross-border banking flows) and errors and omissions, grew significantly over 2010, illustrating the region’s attractiveness as an investment destination, notwithstanding the ongoing external volatility it has faced.

TABLE IV.2

LATIN AMERICA (19 COUNTRIES): PRINCIPAL COMPONENTS OF THE FINANCIAL ACCOUNT, BY COUNTRY 2009-2011

(Millions of dollars)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures.

a Projections.

It is interesting to note that, in the wake of the 2008 global financial crisis, the region has been accessing international financial markets since mid-2009 even more intensively than before. In fact, as figure IV.12 shows, although episodes of turbulence in certain developed economies have heightened risk aversion in international financial markets, external bond issues during 2011 remained high across all components: sovereign bonds, quasi-sovereign bonds, and corporate bonds. Noteworthy among this last category, as in 2010, is the participation of Latin American banks which, taking advantage of low financing costs produced both by the global financial situation and by continuous improvements in country risk ratings, have opted to fund themselves abroad at long term, i.e. 10 years or more. Figure IV.12 shows, moreover, that toward the end of the year the country risk was rising in the region, as a result of turbulence on international markets sparked by the debt crisis in some developed countries.

FIGURE IV.12

LATIN AMERICA: BOND ISSUES ON INTERNATIONAL MARKETS AND COUNTRY RISK, 2005-2011

(Millions of dollars and basis points)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of figures from LatinFinance (bonds database), JP Morgan and Merrill Lynch.

At the same time, Latin America continued to reduce its external liabilities, so that total external debt outstanding decreased as a proportion of GDP (see figure IV.13). In South America this trend can be explained by economic growth, current account surpluses associated with higher export prices for certain countries since 2003, and significant renegotiation of debt in some cases. Central America, on the other hand, has been negatively impacted by higher international commodity prices since 2003 and this, together with other factors of external drag, resulted in slower economic growth. Thus, notwithstanding the effects of debt reduction under the Heavily Indebted Poor Countries (HIPC) Initiative, the weight of external indebtedness declined less. By contrast, in the Caribbean (excluding Trinidad and Tobago), which was also affected by deterioration in its terms of trade over the decade and in external demand for its exports, the level of indebtedness is relatively higher.

FIGURE IV.13

LATIN AMERICA AND THE CARIBBEAN: TOTAL EXTERNAL DEBT, 2000-JUNE 2011

(Percentages of GDP)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures.

a Projections.

STATISTICAL ANNEX

Table of Contents

Content

SUMMARY

Chapter I

INTRODUCTION

Chapter II

MACROECONOMIC POLICY

Chapter III

DOMESTIC PERFORMANCE

Chapter IV

THE EXTERNAL SECTOR

STATISTICAL ANNEX