Despite political uncertainties and a high oil price, inflation is forecast to average 5.4% in 2006 - its lowest in more than 25 years. Panama is set to see the smallest change in prices (1.8%) in Latin America, Venezuela the highest (18%).
The overall rate of price growth remains high by world standards and rates vary widely between countries (the inflation situations in Argentina and Venezuela particularly have deteriorated), but generally progress is being made despite growing political volatility.
The International Monetary Fund's forecast of 3.8% GDP growth for Latin America as a whole is higher than its forecasts for the USA (3.3%) and the European Union (2.0%), but lower than expectations for overall world growth (4.3%). Chile is expected to lead the region's growth league table (5.8%), while El Salvador is set for the lowest growth rate (2.0%).
Rising oil prices are good for oil exporters such as Ecuador and Venezuela, but bad for the more numerous oil importers, particularly in Central America. Oil costs more than doubled to $5.2 billion last year across Central America.
Chile will benefit from rising copper prices. Argentina, Brazil and Peru should continue to be successful in agricultural exports, while Colombia and Cost Rica should benefit from firmer coffee prices in coming months. In terms of export markets, China should continue to grow in importance, while exports to the US and Europe are also picking up.
The Central American and Caribbean countries which signed up to the CAFTA trade pact that comes into force this year, are expected to see increased two-way trade and foreign direct investment (FDI) flows.
FDI and portfolio investment flows should also help drive GDP growth across the region. Latin American stock markets showed strong growth last year and regional equity funds attracted about $4.5 billion in 2005, a nine-year record.
Source: Latin Economic Outlook 2006 Special Report
Latin Business Chronicle staff
Review by Steve Lodge