MEXICO CITY (Dow Jones)--The World Bank sees the economies of Latin America and the Caribbean expanding further in 2011, but at a slower pace than the previous year given expectations of a deceleration in advanced economies and China.
In its report on global economic prospects, the World Bank estimated that the region as a whole will increase output by around 4% this year, following an estimated 5.7% growth in 2010.
For the region's largest economy, Brazil, the bank expects gross domestic product to expand 4.4% in 2011 on top of an estimated 7.6% growth in 2010. An increasing workforce, real wage growth and credit expansion should support output, the bank said. Renewed global capital market volatility presents some difficulties for policy makers as they grapple with inflation pressures at the same time that yield-chasing capital inflows prompt the real to appreciate, threatening export competitiveness.
Mexico, which suffered the most from the U.S. recession given its close trade and investment ties, and has yet to fully recover, is likely to see growth slow to 3.6% from an estimated 5.2% in 2010, according to the World Bank.
The bank also sees economic slowdowns for Argentina and Peru, with growth estimates of 4.7% and 5.5%, respectively, for 2011, while gross domestic product is seen accelerating modestly in Chile and Colombia to 5.8% and 4.4%.
The World Bank expects Venezuela's economy to grow a modest 0.9% this year, describing that country's outlook as "extremely dissatisfactory" considering the recovery in commodities prices and regional activity. The Venezuelan central bank reported a 1.9% contraction for 2010.
The World Bank was critical of the government of President Hugo Chavez, which has been nationalizing key industries, tightening control on the financial sector, and spending heavily.
Government policy in Venezuela is "creating severe economic distortions," the bank said. "Despite devaluation and higher oil prices which have boosted the government's revenues, current levels of spending are not sustainable and will only aggravate economic dislocations, hence failing to produce a sustainable recovery."
Risks in the region overall include robust capital inflows and their impact on exchange rates, export competitiveness and domestic asset prices. A sharper-than-expected slowdown in global growth could rapidly unwind gains in commodity export revenue and domestic income.
Mexico, with its close links to the U.S., and the Caribbean countries, which depend heavily on remittances and tourism, would be particularly vulnerable to a worse-than-expected U.S. economic performance, the World Bank said.
Fallout in the region from Europe's sovereign-debt troubles could include an impact on foreign direct investment if the situation in Spain and Portugal deteriorated, given their close ties to Latin America.
Although so far, banks in those countries have increased their business in Latin America, if they were required to restructure or deleverage they could call on assets of healthy regional subsidiaries, the World Bank said. On the other hand, under a less-severe scenario, "Latin America could benefit if it is seen as a more secure location for investing," it added.
"Capital shortages are unlikely to materialize in the case of Latin America and its linkages to the Spanish banking system, in part because most of these banks operate as subsidiaries and are subject to independent capital and regulatory requirements in the host country," the World Bank said. "Indeed, the main Spanish banks are increasingly reliant on earnings from their Latin American operations, and several have expanded their developing-world holdings in 2010."
Source: http://online.wsj.com
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