Latin American markets have delivered explosive growth during the past years, benefiting from strong global economic activity and booming demand for the region's commodities. Having overcome several financial, social and political roadblocks, it has emerged as a strong region with significant investment opportunities. Several factors lie behind its resurgence: the generation of additional jobs in the formal sector, innovative social policies, higher consumption, greater fiscal solvency and a positive trade balance.
While no economy is completely immune to the disruptive financial events of 2008, the Latin American region has shown substantial resilience in the face of such a difficult environment thanks to the consolidation of overseas earnings and performances obtained through its commodities-driven economies. The resulting accumulated financial reserves have served to cushion the adverse impact of the recent financial sector fall-out. This, together with fiscal and economic discipline has provided a far more stable platform for future growth. Results from ECLAC's Economic Survey of Latin America and the Caribbean estimate that the region will continue to grow despite the deterioration of the international economy.
The region's current strength makes it better poised to reduce the scale of the impact caused by the financial turmoil. In 2008 overall economic growth will continue in the region with GDP per capita over 3%. While lower than the original forecast, this prediction takes into account the effects of the current global financial situation. Depending on the magnitude and duration of the global economic slowdown, individual countries may be affected differently. However, the consecutive growth pattern and economic performance of the past forty years is expected to continue.
Trade Balance
External trade balances have improved, leading to greater macro-economic stability. Overall, economic growth in Latin America and the Caribbean will amount to 4.7% in 2008, marking the region's sixth consecutive year of growth. Also for the sixth year in a row data records a surplus in the trade balance. In 2007 exported goods show an annualized growth rate of 36% and trade in services expanded almost 18%.
Investment Growth
Foreign investors continue to find the region attractive. Net foreign direct investment increased by $37 billion in 2007, representing 2.3% of GDP, with an additional net entry of financial capital amounting to 0.7% of GDP. In 2007 the amount of equity in stock markets increased by 46.9%, a rate that exceeded other emerging markets, and highlights the region's growth pattern. With Peru and Brazil attaining investment grade status in 2008, the region continues to demonstrate strength.
The increasing demand for emerging-market assets has been boosted by the expansion of the derivatives market. These products have expanded the menu of options available for managing risk, and new sources of lending and equity investment (notably hedge funds and private equity firms).
The derivatives markets in Latin America are underdeveloped and offer an exceptional opportunity for financial growth, particularly when supported by robust regulatory environments and strong trade flows. "Derivatives markets can make an important contribution to risk management and risk diversification" said Rodrigo de Rato, former Managing Director of the International Monetary Fund at the 3rd International Derivatives and Financial Market Conference in Campos de Jordao, Brazil. "The strengthening of regulatory and legal frameworks, as well as improvements in accounting rules and disclosure requirements, can boost the confidence of investors and financial institutions in using derivatives" added Rodrigo de Rato.
Sources
- Latin America and the Caribbean in the World Economy 2008 Trends, ECLAC
- Global Development Finance, the Role of International Banking, 2008, The World Bank
- The Economist, Latin America's New Middle Class, 2008
- Economic Survey of Latin America and the Caribbean 2007-2008, ECLAC