Thanks to sound macroeconomic fundamentals in place before the onset of the crisis, the Latin America and Caribbean region has been able to weather
the global financial crisis much better than previous external shocks. Nevertheless, economic activity in the region decelerated sharply in the aftermath of the crisis.
For the 2009 calendar year, GDP is estimated to have fallen 2.6 percent, following an expansion of 3.9 percent in 2008 (table A5). This aggregate result masks a high degree of heterogeneity among countries in the region with respect to the timing and magnitude of the contraction in domestic output. Central American economies (including Mexico) were the worst affected, with output contracting a sharp 6.4 percent, while growth in the Caribbean economies stagnated.
In the immediate aftermath of the crisis, the region was hit by a sharp slowdown in private capital inflows, while increased uncertainty and credit tightening led to a marked contraction in private consumption and private investment. The capital outflows induced sharp depreciation of currencies in the region, a decline in equity markets, and much higher borrowing costs. Nevertheless, the region managed to avoid falling into a balance of payments and/or financial crisis.
Private consumption contracted by nearly 2.0 percent, while fixed investment declined sharply by 13.6 percent, after growing at double-digit rates in the previous years. The region was also affected by the collapse in external demand for commodity exports, falling commodity prices, lower remittance inflows, and declining tourism activity. The decline in domestic demand translated into a sharp 15.8 percent contraction in import volumes.
As a result, and despite an 11.2 percent contraction in export volumes, net trade contributed 1.6 percent to growth. Reflecting these developments industrial activity fell rapidly, plunging at an 18 percent saar rate in the lastquarter of 2008 and the first quarter of 2009 (figure A12).
Countries that rely heavily on trade with the United States were especially hard hit by the crisis.
LATIN AMERICA AND CARIBBEAN REPORT
The acute phase of the financial crisis has passed and a global economic recovery is under way. Moreover, the recovery is fragile and expected to slow in the second half of 2010 as the growth impact of fiscal and monetary measures wane and the current inventory cycle runs its course. Indeed, industrial production growth is already slowing (albeit from very high rates). As a result, employment growth will remain weak and unemployment is expected to remain high for many years. The overall strength of the recovery and its durability will depend on the extent to which household- and business-sector demand strengthens over the next few quarters. While the baseline scenario projects that global growth will firm to 2.7 percent in 2010 and 3.2 percent in 2011 after a 2.2 percent decline in 2009, neither a double-dip scenario, where growth slows appreciably in 2011, or a strengthening recovery can be ruled out.
Financial markets have stabilized and are recovering, but remain weak. Interbank liquidity as measured by the difference between the interest rates commercial banks charge one another and what they have to pay to central bankers have declined from an .unprecedented peak of 366 basis points in dollar markets to less than 15 basis points—a level close to its "normal" pre-crisis range. Currencies, which fell worldwide against the U.S. dollar in the immediate aftermath of the crisis, have largely recovered their pre-crisis levels. And international capital flows to developing countries have recovered—with a rapid run-up during the last months of 2009. Also, borrowing costs for emerging market borrowers have stabilized over the last few quarters, but remain elevated.
However,
private sector firms remain shut out from international banking.
markets. Moreover, the Dubai World event and ripple effects to credit
downgrades for Greece and Mexico can be expected to raise concerns
about sovereign debt sustamability and. will impact risk assessments,
capital flows, and financial markets in 2010.