Recent Developments in Latin America's Emerging Markets1. In the LAC region, growth is slowing after reaching its highest level in 24 years in 2004. (Figure 26) Nevertheless, projected growth rates of around 4 percent in 2005 and 3¾ percent in 2006 remain well above historical averages. Recent growth performance has been supported by continued strength in global commodity and commodity prices, which have improved terms of trade and export earnings. Mexico and South American countries have particularly benefited from soaring fuel, food and metal prices and have generally been able to exploit these opportunities by increasing their volumes, in some cases very substantially. Domestic demand has also remained generally robust (with renewed strength recently in Brazil) and investment ratios are, on average, approaching a relatively high level of 20% of GDP, although some countries are starting to facing capacity constraints after their strong recovery (Argentina, Uruguay). ).2. Strengthening policies and improving confidence have been reflected in the appreciation of the exchange rate since mid-2004. For six major countries in the region (Argentina, Brazil, Chile, Colombia, Mexico and Peru), the nominal effective rate has increased on average by about 9 percent since the start of 2005 (based on data through the end of July), with a larger increase in Brazil (24 percent), without significantly affecting exports. At the same time, reserves continued to increase; for example, in Argentina they approach $26 billion, or about nine months of imports of goods and services, and in Peru, reserves represent more than 270 percent of maturing short-term external debt. Reserve buildup in the region reflects current account surpluses and renewed strength in investor sentiment toward the region, but in some cases efforts by some countries to resist rapid appreciation of their rates exchange rates, which they fear could reduce their competitiveness. However, in the future it will be very important to preserve flexibility in exchange rate management – ​​as part of a better macroeconomic policy mix – especially with regard to inflation targets.3. The growing role of domestic currency financing in the region also represents a source of resilience. (Figure 38) A number of countries, including Brazil, Chile, Colombia, Mexico and Peru, have increased their reliance on domestic debt issuance, thereby reducing their vulnerability to risk and increasing the liquidity of local currency markets. Some countries, including Brazil, Colombia and Uruguay, have also issued global bonds in local currencies. The increased use of domestic debt instruments with longer maturities, notably in Colombia, Chile, Mexico and Peru, has also contributed to improving debt profiles..