The World Bank said the Caribbean and Latin American economies have been holding steady, despite tighter external conditions.
On Wednesday, the Washington-based financial institution said while international investors shift their focus back to advanced economies, particularly the U.S., as a result of monetary policy normalisation, emerging economies face much tighter financial conditions.
But it said that the impact of this reversal in capital flows is less significant for Latin America and the Caribbean “thanks to its new reliance on more stable international flows”.
According to the latest semi-annual report by the World Bank’s Office of the Chief Economist for the region, during the past decade, Foreign Direct Investment (FDI) and remittances have come to represent a “far larger share of net flows into the region than the more volatile non-FDI flows”.
The report, “International Flows to Latin America: Rocking the Boat?” finds that these more stable flows, combined with the region’s improved macroeconomic and financial policy frameworks, give much of the region a “much better capacity to absorb external shocks”.
“In another clear break with history, the region has rebalanced its sources of financing away from portfolio and bank credit flows and towards FDI and remittances,” said World Bank’s Chief Economist for the region, Augusto de la Torre.
“This is part of a deeper restructuring away from debt and towards equity of the region’s asset-liability position, vis-à-vis the rest or the world,” he added.
“Partly because of this, we believe that international financial turbulence won’t cause the type of domestic crises it used to cause in the past.”
This good news does not allay concerns, however, over the region’s current slow growth pattern, the World Bank said. According to the report, external factors, particularly lower prices of industrial metals, and increased uncertainty over China’s growth are taking a toll on the region’s growth, which is expected to be at 2.3 per cent for 2014.
The report also warned that countries in the region that rely heavily on remittances face even more daunting challenges. To start with, the report urged that they focus on innovative policies to encourage households to use at least part of their remittance income toward asset building – particularly through investments in health, education, and housing.
It has been recommended that those countries put a premium on the “hard task of continuously improving their domestic enabling environments to attract both their own workers and FDI, and then harness the productivity benefits of the efficient interaction between the two”.
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