Recent developments in Latin America's emerging markets1. In the LAC region, growth is moderating after reaching a 24-year high in 2004. (Figure 26) Nonetheless, projected growth rates of around 4% in 2005 and 3¾% in 2006 are still well above of historical averages. The recent growth performance has been supported by continued strength in global commodity and commodity prices which have strengthened terms of trade and export earnings. Mexico and South American countries have benefited, in particular, from the surge in fuel, food and metal prices, and have generally been able to take advantage of these opportunities by expanding volumes, in some cases very substantially. Domestic demand has also remained generally robust (recently showing renewed strength in Brazil) and investment rates are, on average, approaching a relatively high 20% of GDP, although some countries are starting to face capacity constraints after strong recovery (Argentina, Uruguay).2. Tightening policies and improving confidence have been reflected in exchange rate appreciation since mid-2004. For six large countries in the region (Argentina, Brazil, Chile, Colombia, Mexico and Peru), the nominal effective rate it has increased on average by about 9% since the beginning of 2005 (based on data through the end of July), with the largest increase in Brazil (24%), without significantly impacting exports. At the same time, reserves continued to increase; for example, in Argentina, they are approaching $26 billion, about nine months of imports of goods and services, and in Peru, reserves represent more than 270% of maturing short-term external debt. The accumulation of reserves in the region reflects current account surpluses and renewed investor sentiment towards the region, but in some cases efforts by some countries to resist a rapid appreciation of their exchange rates which they fear will reduce competitiveness . However, looking ahead, it will be very important to preserve flexibility in managing the exchange rate, as part of improving the macroeconomic policy mix, especially with regard to inflation targets.3. The growing role of domestic currency financing in the region is also a source of resilience. (Figure 38) A number of countries – notably Brazil, Chile, Colombia, Mexico and Peru – have increased their reliance on domestic debt issuance, reducing their vulnerability to exchange rate risk and increasing the liquidity of local currency markets . Some countries, including Brazil, Colombia and Uruguay, have also issued global bonds in local currency. The increased use of longer-dated domestic debt instruments, especially in Colombia, Chile, Mexico and Peru, has also contributed to improving debt profiles.