|LATIN AMERICA: WHAT'S AHEAD IN 2012?|
Oranjestad, 10 January, 2012 - What does the New Year hold for Latin American region's economies, especially with Europe still under stress?
Reasons for caution
Financial risks continue to dominate the outlook, with all eyes on Europe. While deteriorating conditions there have not yet spilled over to Latin America, it will not be immune if the risks move to the foreground since Eurozone banks account for one-quarter of banking assets in the larger Latin American countries. But if the simmering crisis in Europe comes to a boil, that process could speed up, especially if euro zone banks are starved for short-term dollar funds.
On the monetary policy front, some countries are already taking preemptive steps, moving to neutral or easing, because they have inflation under control and activity is ebbing. (Easing may not be an option in countries with higher inflation or heavy dollarization.)
The good news is that many countries in the region are entering 2012 from a position of strength. These countries have managed their economies and markets skillfully since the 2008 crisis, where Latin America was taught the importance of maintaining healthy liquidity conditions to avoid a credit crunch, which is very difficult to combat with macroeconomic policies.
Moreover, for the most part, banks are sound, monetary policy frameworks are increasingly credible, international reserve coverage is adequate, and public finances are strong. The key will be to hold that position.