According to the REO, growth in Latin America and the Caribbean is set to pick up from 3 percent in 2012 to 3½ percent in 2013, supported by stronger external demand, favorable financing conditions, and the effects of earlier policy easing in some countries.
The report says that external risks to the near-term outlook have receded. Policy actions in the euro area and the United States have removed immediate threats to global growth and financial stability.
According to the study, medium-term risks for Latin America remain tilted to the downside. The key risk is a reversal of the favorable tailwinds of easy financing conditions and strong commodity prices that have prevailed since 2010.
The region would be particularly affected if a sharp slowdown in China or other key economies triggers a drop in commodity prices.
Another risk is that lack of progress in addressing the medium-term fiscal challenges in key advanced economies leads to a sharp increase in sovereign and corporate risk premiums, with negative impact on global growth.
Domestically, the risk of a deterioration of external and financial sector balance sheets has increased in some countries, the report said.
Current account balances have weakened in recent years, and asset prices are on the rise. Credit growth has moderated, but remains high in a number of countries.
The May 2013 Regional Economic Outlook features three analytical chapters dealing with the challenges of sustaining growth and strengthening balance sheets. Specifically, the chapters assess the region’s growth potential, the impact of changes in external conditions on public and external debt dynamics, and the use of the windfall from the recent terms-of-trade boom.
The full REO is available online.