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World Economic and Financial Surveys

Regional Economic Outlook: Western Hemisphere

Grappling with the Global Financial Crisis

October 2008

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The ongoing global turmoil represents a confluence of negative shocks for Latin America and the Caribbean: a freeze in global credit markets, weaker external demand, and lower commodity prices. But the region is expected to deal with these global shocks better than in previous crises, reflecting progress made in improving macroeconomic fundamentals over the past decade. Still, there are a number of downside risks going forward. Against this uncertain background, the report discusses the implications of the global financial crisis for the regional outlook and the corresponding challenges facing policymakers.

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Contents

Executive Summary
 
I. Global, U.S., and Canadian Outlook
  Global Outlook
  U.S. Outlook: Major Downturn with Protracted Recovery
  Canadian Outlook: Feeling Effects of U.S. Slowdown
 
II. Latin American and Caribbean Outlook
  Context
  A Varying Policy Mix
  Economic Outlook and Risks
  Policies: Maintaining Confidence and Stability
 
III. Keeping Inflation Under Control
  Rising Inflation
  Monetary Policy Has Been Tightened
  Conclusions
  Appendix 3.1
 
IV. Elevated Food Prices and Vulnerable Households: Fiscal Policy Options
  Elevated Food Prices Trigger Policy Debate
  Food Price Inflation Can Have Strong Welfare Effects
  Fiscal Policy Can Help Ease Burden on the Poor
  Conclusions
  Appendix 4.1
 
V. Corporate Vulnerability: Have Firms Reduced Their Exposure to Currency Risk?
  Firms Facing More Currency Volatility
  Stronger Balance Sheets
  Beyond Balance Sheets: A Market-Based Approach
  More Active Use of Foreign Currency Derivatives
  Conclusions
  Appendix 5.1
 
VI. Boosting Private Investment in the Long Term
  Investment Still Lagging
  Importance of Macro Stability
  Beyond Macro Stability
  Rule of Financing Constraints
  Conclusions
  Appendix 6.1. Estimation Methods
 
Western Hemisphere: Main Economic Indicators
 
Latin America and the Caribbean: Main Fiscal Indicators
 
References
 
Boxes
1.1 United States: Quantifying Macrofinancial Linkages
2.1 Determinants of Sovereign Bond Spreads in Latin America
2.2 Financial System Stability Developments
2.3 Differential Impact of Commodity Boom
2.4 Inflation and Poverty
2.5 The Caribbean: Weathering the Global Storm
2.6 Do Migrant Remittances to the LAC Region Fall During U.S. Slowdowns?
2.7 Spillovers from the United States to Latin America
2.8 Absorbing the Oil Shock in Central America and the Caribbean: The Role of Petrocaribe
4.1 Impact of Rising Food Prices on Poverty
4.2 Policy Responses to Ease Effects of Higher Food Prices
4.3 Can Import Tariff Reductions Help Reduce Food Prices in the Region?
6.1 Literature on Financing Constraints and Investment