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World Economic and Financial Surveys

Regional Economic Outlook: Western Hemisphere

Stronger Fundamentals Pay Off

May 2009

Ordering Information

The global crisis that began in advanced economies has sent severe shocks around the world, posing a test to the economies of Latin America and the Caribbean. The good news is that during this decade the region has made itself more resilient to external shocks, by strengthening policy frameworks and reducing vulnerabilities in its public finances and financial systems. These preparations, the report shows, mean that countries are now more able to respond to the external crisis, many for the first time, with active policies to boost output and employment and protect the most vulnerable groups. This will help contain the damage from the global crisis and speed up the region’s recovery.

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Contents

Executive Summary
 
I. Global, U.S., and Canadian Outlook
  Global and U.S. Outlook
  Canadian Outlook
 
II. Latin American and Caribbean Outlook
  A “Double Squeeze” on the Balance of Payments
  Ongoing Adjustment
  Policy Response Thus Far
  Economic Outlook and Risks
  Policy Challenges: Orderly Adjustment with Limited Output Losses
  Annex 2.1 Global Shocks and Sovereign Bond Yields
  Annex 2.2 Financing Conditions for Corporates
  Annex 2.3 Geographical Concentration of LAC Exports and Exposure to Shocks in the United States and Europe
  Annex 2.4 Declining Workers’ Remittances
  Annex 2.5 Caribbean Tourism: A Severe Demand Downturn and Policy Responses
 
III. The Global Crisis and Banking Systems in Latin America and the Caribbean
  Challenges from a Global Crisis
  Starting Condition of LAC Banking Systems
  Financial System Impact of Selected Macroeconomic Risks
  Implications for Prudential Regulation and Banking Supervision
  Conclusions
 
IV. Will International Banks Transmit the Global Credit Crunch to Latin American and Caribbean Countries?
  A Potential Channel of Credit Crunch Transmission
  Key Features of Foreign Banks Lending to LAC
  Sources of Stability
  What Drives Foreign Bank Lending Flows to the LAC Region?
  Is a Retrenchment Under Way? The Latest Evidence
  What Will Happen in 2009?
  Conclusions
  Technical Appendix
 
Western Hemisphere: Main Economic Indicators
 
Latin America and the Caribbean: Main Fiscal Indicators
 
References
 
Boxes
1.1 Lessons from the Crisis and the Regulatory Reform Agenda
2.1 LAC Country Groupings
2.2 Corporate Sector Exposure to Foreign Currency Derivative Contracts in Brazil and Mexico
2.3 Why Do Bad Things Still Happen to Resilient Economies?
2.4 Saving for a Rainy Day? Sensitivity of LAC Fiscal Positions to Commodity Prices
2.5 Countercyclical Fiscal Policy under Alternative Monetary Policy Frameworks
3.1 Financial Systems in Latin America and the Caribbean
3.2 Forward-Looking Provisioning Considerations