Nouriel Roubini on Latin America’s 2010 Outlook

by Dave

Americas Society:

AS/COA: What is behind this increasingly positive outlook for Latin America?

Roubini: There are two things. One is that global economic and financial conditions are improving. There is a recovery of growth even if it’s going to be anemic. Commodity prices have been rising. Financial conditions remain easy. Capital is flowing back to emerging markets. So that is the global outlook.

And two, these countries have shown their own resilience. Their economic policies have been sound and they’ve been able to conduct countercyclical policies. They’ve not experienced a financial crisis in these episodes. Their overall fundamentals are sound, so the combination of maintaining sound fundamentals and right economic policies with improvement in the global economic outlook implies a recovery.

Even with this recovery, the trend was 5.5 percent growth for the last eight or so years. Now we’re expecting only 3.8 percent. Of course, it’s much better than last year when there was a contraction, but it’s still below potential and below trend for 2010 in our view. We’re less bullish than some of those houses that suggested Latin America actually could go back to potential growth next year.

Watch video here.AS/COA: There’s a lot of talk about how the developed world affects emerging markets, but I’m wondering how do you see Latin America’s growth as having an impact on advanced economies?

Roubini: So far, the size of Latin America is too small to make a direct effect on the advanced economies.  In the case of Latin America I would say probably, one, overall its size is too small. Two, its economic success is more dependent on growth being strong in the advanced economies rather than being a major locomotive for global growth. Of course, within Latin America, given the importance and size of Brazil, if Brazil does better than expected then that can be helpful for Argentina and all the other countries that are trading with Brazil as well. So, within the region, Brazil plays a leadership role and the fact that Brazil might do better might be beneficial for the region.

AS/COA: Brazil has been a darling in the region. What do you see as some risks for the Brazilian economy?

Roubini: The risks are, one, that the global recovery supplies are on the downside. If that happens, you get a correction both of markets and of commodity prices and so on. The second risk is that there’s something of a fiscal slippage that is becoming somewhat of an issue in the case of Brazil. And the third risk is if Brazil fails to conduct some of the structural reforms that are needed to step up the growth rate to the next level and leave it much above the more anemic growth rate that they had for the last decade, which is better than previous decades but still not what Brazil should be having. Brazil to address these issues of poverty and inequality has to have a growth rate of 5 or 6 percent plus. So 4 to 4.5 percent in some sense is better, but is not sufficient.

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