The firming of the recovery is attributable in no small measure to markedly expansionary macroeconomic policies which, in many countries, have resulted in significant increases in public and private debt levels. Against a background of very generous monetary policies and ample global liquidity, the financial markets saw asset price rises and very low interest rates, which also helped anchor the pick-up in demand. Risk premia diminished on both private-sector bonds and on the sovereign debt of emerging markets, which received greater capital flows. As a result, the economic recovery and the soundness of financial markets fuelled one another, in a virtuous circle that has broadly been maintained in the opening months of 2004, although recently a rise has been seen in long-term interest rates and in emerging markets’ sovereign risk premia. Latin America was the emerging region which encountered most difficulty in joining the upturn in the world economy in 2003. Crises in certain countries and bouts of financial instability in others have prompted heavy exchange rate depreciations and upward price pressures in recent years. Against this, the authorities reacted with more restrictive demand-side policies that set back any take-off in their economies. As these policies have eased, and as external financing conditions have improved and the increase in commodity prices firmed, the Latin American economies have attained progressively higher growth rates, particularly as from the closing months of 2003. However, certain factors of vulnerability remain in the area.

As pointed out in the Annual Report, it is particularly important to push ahead with labour market reform (in the areas of wage negotiation and hiring), improve the workings of the housing market (and of the related land market) and continue with the liberalisation of the network industries. Measures are similarly required to foster the incorporation of technological innovation in productive processes and to improve the stock of infrastructure and of public capital. The current house price situation means that urgent action is needed to overcome the restrictions on the supply of land via more flexible town planning to make building land more readily available and to improve the workings of the rental market. Finally, although the improvement of the services sector depends on many structural considerations, the importance of more flexible retail trade regulation for price formation and the economic system’s overall efficiency should not be overlooked. In short, without making any attempt to cover the entire scope of the economic policy requirements in the present situation, I do feel it is important to emphasise that fiscal stability and structural reforms can provide an appropriate means of addressing risks arising in relation to competitiveness and to the growing indebtedness of the non-financial private sector, which are the ones that could jeopardise the continuity of real convergence. Financial system 2003 brought an improvement in the situation of the international financial markets and, in this favourable setting, the financial institutions of a good number of countries reported better results and higher profitability.