## wreo0517

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### Preparation and Contributors
- The April 2017 Regional Economic Outlook: Western Hemisphere was prepared by a team led by Hamid Faruqee and S. Pelin Berkmen under the overall direction and guidance of Alejandro Werner and Krishna Srinivasan.
- Team members: Steve Brito; Carlos Caceres; Yan Carrière-Swallow; Roberto García-Saltos; Carlos Gonçalves; Kotaro Ishi; Anna Ivanova; Carlos Janada; Emanuel Kopp; Genevieve Lindow; Nicolas E. Magud; Udi Rosenhand; Galen Sher; Bert van Selm; Juan Yépez.
- Chapter-specific contributors and support: Nigel Chalk; Stephan Danninger; Cheng Hoon Lim; Michal Andrle; Valentina Flamini; Benjamin Hunt; Jaume Puig; Yixi Deng; Victoria Valente; Sergi Lanau; Carolina Osorio Buitrón; Jan Kees Martijn; Kimberly Beaton; Svetlana Cerovic; Misael Galdamez; Metodij Hadzi-Vaskov; Zsoka Koczan; Franz Loyola; Bogdan Lissovolik; Yulia Ustyugova; Joyce Wong.
- Production and editorial support: Misael Galdamez; Adrean Howes; Linda Long; Lucy Morales; Sherrie Brown; The Grauel Group; Carlos Viel; Virginia Masoller; María Fraile de Manterola.
- Time coverage: reflects developments and staff projections through early March 2017.

### Executive Summary: Global and Regional Context
- Global growth projections and drivers:
  - Global growth projected to rise from 3.1 percent in 2016 to 3.4 percent in 2017 and 3.6 percent in 2018.
  - Better prospects in the United States, Europe, and Japan driven by a rebound in manufacturing and trade and prospects of likely U.S. fiscal stimulus.
  - Emerging market and developing economies projected to have stronger growth including China, owing to stronger-than-expected policy support.
- Global vulnerabilities and risks:
  - Rising economic nationalism and antipathy toward trade, immigration, and globalization.
  - Building vulnerabilities in China’s financial system.
  - Balance sheet weaknesses and currency mismatches in other emerging markets.
- Policy recommendations (global):
  - Three-pronged approach: fiscal and structural policies alongside monetary policy, tailored to country circumstances.
  - Safeguard an open, rules-based, multilateral trading system.
  - Redistributive policies and investments in skills and high-quality education; facilitate labor market adjustment.

### Regional Outlook: Latin America and the Caribbean
- Recovery and outlook:
  - Region recovering from a regional-level recession in 2016.
  - Medium-term growth projected at about 2.6 percent.
  - Regional activity expected to pick up gradually in 2017–18 but outlook weaker than projected last fall.
- Cross-country divergences:
  - Relatively robust growth in Central America; deep contractions in Argentina, Brazil, Ecuador, and Venezuela; modest growth elsewhere.
- Key policy directions:
  - Complete fiscal and external adjustments to preserve or rebuild policy buffers.
  - Strengthen structural reforms to:
    - close infrastructure gaps;
    - improve the business environment, governance, and education outcomes;
    - encourage female labor participation.

### U.S. Outlook: Growth, Inflation, and Policy Assumptions
- Recent indicators:
  - Real GDP growth: 1.9 percent (seasonally adjusted annual rate) in Q4 2016.
  - Core personal consumption expenditure inflation: 1.8 percent.
  - Average hourly earnings rise: 2.7 percent (past 12 months).
- IMF staff projections and fiscal assumptions:
  - U.S. GDP projected: 2.3 percent in 2017 and 2.5 percent in 2018.
  - U.S. current account deficit projected to widen to about 3 ½ percent of GDP by 2020.
  - Debt held by the public approaching 110 percent of GDP by 2022.
  - IMF staff assume a 1.2 percent of GDP increase in the federal primary deficit in cyclically adjusted terms from 2017–19 driven by personal and corporate income tax cuts.
  - Fiscal stimulus relative to October baseline estimated at 2 percent of GDP cumulated over 2017–19 (personal income tax cuts equivalent to 1.1 percent of GDP over three years; corporate tax cuts equivalent to 0.9 percent of GDP).
- Monetary policy assumptions:
  - Forecasts assume three policy rate hikes in 2017 and five hikes in 2018.
- Two-way risks from U.S. policy shifts:
  - Corporate tax reform (DBCFT) could boost investment but raise WTO/treaty tensions and real exchange rate appreciation risks.
  - Deregulation and financial regulatory rollback could boost near-term growth but weaken resilience.
  - Trade barriers or unilateral tariffs would reduce trade, raise production costs, and lower potential growth.
  - Immigration changes: about 1.3 million immigrants enter the United States legally each year; skills-based reform could raise potential growth; broadly restrictive approaches could depress innovation and productivity.

### Canada: Adjustment, Vulnerabilities, and Policy Priorities
- Recent performance and projections:
  - GDP growth: 1.4 percent in 2016 (up from 0.9 percent in 2015).
  - GDP projected: 1.9 percent in 2017 and 2 percent in 2018.
- Inflation and labor costs:
  - Headline inflation at 1.5 percent, below the Bank of Canada’s target midpoint of 1 to 3 percent; has risen to about 2 percent more recently due to gasoline price increases.
  - Core inflation measures below 2 percent since late 2016.
  - Business productivity about 1 to 1.5 percent over the past year; unit labor costs growth about 1 percent.
- Macro-financial vulnerabilities:
  - Household indebtedness approaching nearly 170 percent of disposable income.
  - Mortgage and consumer loans account for about one-third of bank assets.
  - Share of mortgage borrowers with loan-to-income ratios greater than 450 percent:
    - Toronto: increased from 32 percent in 2014 to 49 percent in 2016.
    - Vancouver: increased from 31 percent in 2014 to 39 percent in 2016.
- Macroprudential and fiscal policy:
  - Authorities introduced mortgage stress tests, tightened eligibility for low loan-to-value mortgages, strengthened underwriting expectations, and increased capital requirements.
  - Bank of Canada policy rate at 0.5 percent since July 2015; markets assume unchanged until mid-2018.
  - 2017 federal budget expects deficit to widen from 1.1 percent of GDP in FY2016/17 to 1.4 percent of GDP in FY2017/18 due to higher infrastructure spending.
- Policy guidance:
  - If downside risks materialize, scope exists for more fiscal and less monetary stimulus to discourage further household borrowing.
  - Monitor impact of macroprudential measures before further action; consider targeted regional measures if imbalances persist.

### Analytical Chapters — External Adjustment to Terms-of-Trade Shifts
- Main findings:
  - Exchange rate flexibility has lowered the output cost of external adjustment to terms-of-trade (TOT) shocks.
  - In flexible regimes, real depreciations boosted noncommodity exports and reduced imports more than in the past, reducing the domestic demand compression needed for adjustment (lower sacrifice ratio).
  - Cost of adjustment increased for countries with rigid exchange rate regimes given trading partners’ increased use of flexible regimes.
  - Aggregate export response to depreciations is muted; manufacturing and textiles respond more strongly than commodities.
- Quantitative highlights:
  - In response to a 10 percent fall in the terms of trade, real exports increased by about 2 percent in one year (for a 10 percent fall in relative price of exports) while real imports fell by close to 7 percent.
  - Real exchange rate explains close to 50 percent of the trade-balance response in economies with flexible regimes in the recent episode.
  - Sacrifice ratio for flexible regimes after the recent shock is about half that observed during previous episodes.

### Analytical Chapters — Drivers of Capital Flows and Investor Base
- Stylized facts and magnitudes:
  - Gross capital inflows to the LA7 rose from about zero in the early 2000s to about 9 percent of GDP at the onset of the global financial crisis; since 2000 average gross inflows in Latin America were 5 percent of GDP and net inflows 2½ percent of GDP (other emerging markets: gross 7 percent, net 3½ percent).
  - FDI in LA7 averaged 3¾ percent of GDP since 2000; portfolio inflows averaged 1¼ percent of GDP; other investment averaged ¼ percent of GDP.
- Empirical drivers (selected estimates):
  - Global commodity price (log) coefficients for gross inflows:
    - LA5: 4.182*** (standard error 0.387)
    - LA7: 4.458** (standard error 1.354)
    - OEM: 4.918*** (standard error 1.261)
  - G7 real GDP growth (year over year) positive for gross inflows:
    - LA5: 0.509** (standard error 0.171)
    - LA7: 0.368* (standard error 0.166)
  - Real GDP growth differential (lagged) for gross inflows:
    - LA5: 0.527*** (standard error 0.101)
- Structural (pull) factors:
  - Improving governance, regulatory quality, control of corruption, or rule of law from LA7 levels to advanced-economy averages could raise sustained capital inflows by about 1½–1¾ percent of GDP.
  - Improving Brazil, Colombia, and Peru to Chile’s institutional levels could raise inflows by about 1½–2 percent of GDP; for Argentina the effect could be up to 3 percent of GDP.
  - Corporate tax rate associated negatively with inflows (e.g., corporate tax rate coefficient −0.115*** for LA5 on gross inflows).
- Investor base interactions (IPVAR findings):
  - Higher foreign participation increases sensitivity to external shocks.
  - Deeper domestic financial markets, larger stock markets, and higher pension fund shares reduce sensitivity to external shocks.
  - Exchange rate regime rigidity is associated with greater sensitivity to U.S. monetary shocks.

### Analytical Chapters — Migration and Remittances (Chapter 5)
- Migration stocks and destinations:
  - About two-thirds of all LAC migrants reside in the United States.
  - Caribbean: about one-fifth of the population lives abroad.
  - CAPDR and Mexico: emigrants represent about 10 percent of the population.
  - South America average emigrant share: about 2½ percent.
- Remittances: magnitudes and channels:
  - Remittances to LAC reached 1.4 percent of regional output in 2015 (peaked at about 2 percent before the global financial crisis).
  - In El Salvador, Haiti, Honduras, and Jamaica remittances exceed 15 percent of GDP.
  - Average remittance sent by LAC immigrants who remit: about US$2,500 annually.
  - Money transfer operators account for more than 80 percent of remittance channels in LAC; regional average cost to send US$200: 6.2 percent.
  - Officially recorded remittances to LAC in 2015: US$68 billion.
- Growth and welfare effects:
  - Outward migration alone tends to reduce per capita growth; remittances mitigate but net effects vary:
    - Net effect small and ambiguous for LAC as a whole.
    - Net effect negative for the Caribbean.
    - CAPDR shows possibly small/positive net impacts.
    - Mexico: net effect about zero (caveat on sample).
  - Empirical specifications:
    - Regressions estimated 1980–2015 (unbalanced); IV and OLS used; instruments include regional averages (excluding country), rural share, unemployment in destination countries.
- Stabilizing role and financial effects:
  - Remittances countercyclical and increase after disasters; example: Grenada remittances rose from 2 percent of GDP in 2003 to 4 percent in 2004 after Hurricane Ivan.
  - For CAPDR, a 1 percentage point increase in remittances-to-GDP ratio could reduce NPL ratio by almost 0.5 percentage point.
  - Remittances helped raise fiscal revenues in CAPDR by about 1 percent of GDP since 2000.
- Risks and dependence:
  - Concentration of migrants in a single host country exposes home countries to cyclical shocks and policy changes in host country.
  - Deportations and shifts in U.S. immigration policy could materially affect remittances; 3.7 million deportations from the United States between 2006 and 2015.
  - Close to 80 percent of unauthorized immigrants in the United States are from Latin America; about half of Mexican-origin and two-thirds of CAPDR-origin immigrants estimated to be unauthorized in 2015.
- Policy recommendations on migration and remittances:
  - Reduce transaction costs and promote formal channels (improve payments systems, mobile remittances).
  - Strengthen AML/CFT frameworks while preserving correspondent banking relationships.
  - Short-term: bonding schemes for publicly funded education to curb brain drain.
  - Long-term: structural reforms to create job opportunities, recognize foreign qualifications, enable portability of social security benefits, and leverage diaspora for FDI and tourism.
  - In event of significant U.S. policy shifts: flexible exchange rates should be allowed to absorb shocks; maintain fiscal discipline and prioritize social assistance.

### Country and Subregional Notes (Selected Numbers and Projections)
- Argentina:
  - Real GDP expected to grow 2¼ percent in 2017; remain about 2½ in 2018 and 2019.
- Brazil:
  - Real GDP: − (recession prior); growth estimated at 0.2 percent in 2017 and 1.7 percent in 2018.
  - Inflation ended 2016 at 6.3 percent.
- Venezuela:
  - Real GDP expected to fall by 7.4 percent in 2017 after −18 percent in 2016 and −6.2 percent in 2015.
  - CPI inflation rose to 274 percent in 2016; projected about 1,134 percent during 2017.
  - Current account deficit projected at $8.2 billion in 2017 (3¼ percent of GDP).
  - International reserves projected to fall to $6 billion in 2017.
  - Poverty in 2016: 82 percent of households; 50 percent of those in extreme poverty.
  - Homicide rate in 2016: 92 murders per 100,000 inhabitants (up from 79 in 2013).
- Colombia:
  - Real depreciation boosted exports by 7.5 percentage points since 2012 despite an observed fall of nearly 40 percent in export value over this period.
- Mexico:
  - Real GDP growth expected: 1.7 percent in 2017 and 2 percent in 2018.
  - Policy rate increased to 6½ percent in March 2017.
  - Inflation projected to temporarily exceed 5 percent in 2017, approaching 3 percent toward end-2018.
  - Public debt reached 58 percent of GDP in 2016; government objective to lower fiscal deficit to 2.5 percent of GDP by 2018.
- CAPDR (Central America, Panama, Dominican Republic):
  - Growth about 4¼ percent in 2016; expected medium-term potential rate about 4 percent.
  - Inflation at 2 percent at end-2016.
- Caribbean:
  - Growth prospects improving; tourism-driven and commodity exporters projected growth in the 1½–3 percent range for 2017 and 2018.
  - Public sector debt remains a major vulnerability; multiyear consolidation underway in Grenada, Jamaica, and St. Kitts and Nevis.
- Fiscal aggregates (selected public sector gross debt, percent of GDP):
  - Canada: 85.4, 91.6, 92.3, 91.2, 89.8 (2014–2018 series).
  - Mexico: 49.5, 53.7, 58.1, 57.2, 56.8.
  - United States: 105.2, 105.6, 107.4, 108.3, 108.9.
  - Brazil: 62.3, 72.5, 78.3, 81.2, 82.7.
  - Chile: 14.9, 17.4, 21.2, 24.8, 27.4.
  - Venezuela: 63.5, 32.1, 28.2, 17.3, 16.6.
  - Regional aggregate — Latin America and the Caribbean: 50.9, 54.1, 57.3, 59.0, 59.6 (2014–2018 series).
- Annex table data cutoff: April 3, 2017.

### Long-Term Fiscal Gaps: Pensions and Health Care (Box 2.2)
- Pension projections:
  - Projected increase in public pension spending between 2015 and 2030: about 5 percent of GDP on average.
  - Projected pension spending could "creep up to 50 percent of GDP by 2065."
  - Noted extreme projection: Brazil "365 percent of GDP" in a figure reference.
  - Average current pension spending: 3½ percent of GDP; projected to increase to 4 percent in 2030 and 7 percent in 2065.
- Health care projections:
  - Regional average health care expenditure expected to increase to "6 and 10½ percent of GDP by 2030 and 2065, respectively."
  - PDV of health spending increases: average PDV up to 2030 "only about 10 percent of GDP"; PDV by 2065 "almost 100 percent" of GDP.
- Policy recommendations:
  - Parametric pension reforms: increase retirement age in line with life expectancy; combine contribution increases and benefit reductions while addressing informality incentives.
  - Health reforms: emphasize budget controls, efficiency, preventive and primary care; consider tax-financed universal basic health care where informality is high.

### Conclusions and Policy Priorities (Cross-Chapter)
- Macro policy:
  - Complete fiscal and external adjustment where needed; adopt credible fiscal rules with medium-term expenditure frameworks.
  - Maintain and increase exchange rate flexibility where applicable.
  - Use a policy mix including fiscal, monetary, macroprudential, and structural reforms to manage shocks and promote growth.
- Financial sector and capital flows:
  - Deepen domestic financial markets, expand domestic investor bases (pension funds), and sequence capital account opening prudently.
  - Strengthen consolidated supervision, implement Basel III transitions, and fortify bank resolution frameworks.
- Structural reforms to raise potential growth:
  - Close infrastructure gaps; improve education and health; reduce informality and red tape; tackle corruption; promote female labor force participation.
- Migration and remittances:
  - Reduce remittance transaction costs; foster formal channels; leverage remittances for financial inclusion and fiscal revenue mobilization; manage risk of dependence on a single host country.

*International Monetary Fund | April 2017*

### Preface v

### Preface v

### Preparation and Contributors
- The April 2017 Regional Economic Outlook: Western Hemisphere was prepared by a team led by Hamid Faruqee and S. Pelin Berkmen under the overall direction and guidance of Alejandro Werner and Krishna Srinivasan.
- The team included Steve Brito, Carlos Caceres, Yan Carrière-Swallow, Roberto García-Saltos, Carlos Gonçalves, Kotaro Ishi, Anna Ivanova, Carlos Janada, Emanuel Kopp, Genevieve Lindow, Nicolas E. Magud, Udi Rosenhand, Galen Sher, Bert van Selm, and Juan Yépez.
- Chapter 1 included guidance and review from Nigel Chalk, Stephan Danninger, and Cheng Hoon Lim.
- Michal Andrle, Valentina Flamini, Benjamin Hunt, and Jaume Puig contributed to Chapter 2; Yixi Deng and Victoria Valente provided research assistance for the Central America section.
- Sergi Lanau contributed analysis to Chapter 3.
- Carolina Osorio Buitrón provided data used in Chapter 4.
- Chapter 5 was produced by a team led by Jan Kees Martijn and comprised of Kimberly Beaton, Svetlana Cerovic, Misael Galdamez, Metodij Hadzi-Vaskov, Zsoka Koczan, Franz Loyola, Bogdan Lissovolik, Yulia Ustyugova, and Joyce Wong.
- Production assistance in the Western Hemisphere Department was led by Misael Galdamez, with assistance from Adrean Howes in the Special Office Support division of the Human Resources Department.
- Linda Long of the Communications Department coordinated editing and production, with editing help from Lucy Morales and Sherrie Brown.
- The Grauel Group provided layout services.
- From the Corporate Services and Facilities Department, Carlos Viel and Virginia Masoller, with the administrative support of María Fraile de Manterola, led the translation and editing team in the production of the Spanish edition.
- This report reflects developments and staff projections through early March 2017.

### Executive Summary: Global and Regional Context
- Shifts in the global landscape are taking place following disappointing growth in 2016. Momentum picked up in the second half of 2016, and the outlook for advanced economies has improved for 2017–18.
- Better growth prospects in the United States, Europe, and Japan reflect some rebound in manufacturing and trade, as well as prospects of likely U.S. fiscal stimulus in the wake of the November elections.
- With a shift in the direction of U.S. policies, market sentiment has strengthened alongside advancing equity markets, a stronger U.S. dollar, and higher U.S. interest rates.
- Growth prospects marginally worsened for emerging market and developing economies compared to last fall; however, financial conditions have improved and stronger growth is projected for these economies, including China, given its stronger-than-expected policy support.
- On balance, global growth is envisaged to rise modestly from 3.1 percent in 2016 to 3.4 percent in 2017 and 3.6 percent in 2018.
- Global vulnerabilities include a rising tide of economic nationalism in major advanced economies marked by greater antipathy toward trade, immigration, and globalization.

### Regional Outlook: Latin America and the Caribbean
- Economies of Latin America and the Caribbean are recovering from a recession at the regional level in 2016.
- Growth has been held back by weak domestic demand reflecting both the ongoing external adjustment to earlier terms-of-trade shocks and, in some cases, fiscal adjustment, in addition to other country-specific domestic factors.
- The regional recession masks divergent outcomes across countries, with relatively robust growth in Central America; deep contractions in a handful of countries such as Argentina, Brazil, Ecuador, and Venezuela; and generally modest growth elsewhere.
- Regional activity overall is expected to pick up gradually this year and next, but the outlook is weaker than projected last fall. The projection for medium-term growth remains modest at about 2.6 percent.
- The outlook is shaped by key shifts in the global economic and policy landscape, including a modest rebound in commodity prices and in partner demand and higher policy uncertainty at the global level.
- Countries should aim for completing fiscal and external adjustments to preserve or rebuild policy buffers.
- Charting a course toward higher, sustainable, and more equitable growth will require strengthening structural reforms aimed at:
  - closing infrastructure gaps;
  - improving the business environment, governance, and education outcomes; and
  - encouraging female labor participation to boost medium-term growth and foster income convergence.
- In South America, weaker domestic fundamentals combined with a large terms-of-trade shock led to sharp recessions in some major economies. Despite the improved external outlook, extending external and fiscal adjustment domestically to structurally lower commodity revenues should continue, together with efforts to reduce domestic distortions, resolve policy uncertainties, improve governance, and further structural reforms.
- The outlook and risks for Central America and Mexico are influenced by their exposure to the United States through trade, migration, and foreign direct investment linkages; maintaining macroeconomic stability and market confidence in an environment of heightened uncertainty is crucial.
- Prospects for the Caribbean are improving, but public sector debt remains a major vulnerability.

### Analytical Chapters — Key Findings and Policy Implications
- Chapter on external adjustment to terms-of-trade shifts:
  - Past external adjustment to negative terms-of-trade shocks in Latin America worked through a compression of domestic demand and imports rather than growth of supply and exports.
  - In the ongoing adjustment, real depreciations have boosted noncommodity exports and lowered imports more than in the past, and demand has shifted toward locally produced goods—reducing the domestic demand compression needed to achieve external adjustment (a lower sacrifice ratio) for countries with flexible currencies.
  - The cost of external adjustment has increased for countries with more rigid exchange rate regimes, given increasing use of flexible regimes in trading partners and competitors.
  - The sluggish response of exports to real depreciations masks differences across industries, including a stronger export performance response for manufacturing goods than for commodities.
- Chapter on drivers of capital flows:
  - Following a decade of strong capital inflows, Latin America and other emerging markets face the prospects of weaker economic growth and financial flows.
  - Overall, capital inflows are strongly influenced by global cyclical factors as well as country-specific structural factors.
  - Good governance and solid institutional and regulatory frameworks play a key role in attracting inflows over periods longer than the usual business cycle.
  - Deeper domestic financial markets with a large and stable domestic investor base, as well as more exchange rate flexibility, are effective ways to reduce the vulnerability of capital flows to external shocks.
- Chapter on migration and remittances:
  - Migration from and remittance flows to Latin America and the Caribbean have major economic and social ramifications for migrants’ home countries.
  - Outward migration in isolation may lower growth in home countries by reducing the labor supply and productivity; remittances mitigate this effect.
  - Remittances are a large and relatively stable source of external financing, notably in Central America and the Caribbean, and help cushion the impact of economic shocks.
  - The region’s dependence on remittances primarily from the United States can pose risks due to both cyclical reasons and possible changes to immigration-related policies in host countries.
  - Targeted reforms to leverage high-skilled and highly educated workers at home can help reduce outward migration and its adverse consequences.
  - Policies to reduce transaction costs and promote the use of formal channels of intermediation for remittances merit support.

*International Monetary Fund | April 2017*

### 1. Equity Indices

### 1. Equity Indices

### Policy Uncertainty and Global Vulnerabilities
- Policy uncertainty has risen appreciably at the global level, driven in part by potentially far-reaching changes in the direction of U.S. policies and unsettled outcomes such as the terms of Britain’s exit from the European Union and the single market.
- Pervasive policy uncertainty can trigger heightened risk aversion in markets and a reversal of recent market trends.
- Other key risks cited:
  - Building vulnerabilities in China’s financial system as policy stimulus is extended and continued.
  - Balance sheet weaknesses and currency mismatches in other emerging market economies that could amplify tightening financial conditions.
  - The rise of economic nationalism and higher antipathy toward trade, immigration, and globalization in Europe and the United States.
- Possible consequences of protectionist measures and retaliatory responses:
  - Lower global growth through reduced trade, migration, and cross-border investment flows.
  - Potential sharper-than-expected tightening of global financial conditions, with stress on many emerging market economies and some low-income countries.
- Policy recommendations at the global level:
  - A three-pronged policy approach that relies on fiscal and structural policies alongside monetary policy and is tailored to country circumstances to strengthen growth prospects.
  - Safeguarding an open, rules-based, multilateral trading system.
  - Redistributive policies and investments in skills and high-quality education, and facilitating labor market adjustment to ensure gains from technological progress and economic integration are shared more widely.

### U.S. Outlook: Growth, Inflation, and Labor Markets
- Recent performance and indicators:
  - Real GDP growth settled at 1.9 percent (seasonally adjusted annual rate) in the last quarter of 2016.
  - Core personal consumption expenditure inflation was 1.8 percent.
  - Average hourly earnings rose by 2.7 percent over the past 12 months.
- IMF staff projections:
  - U.S. economic activity is projected to expand by 2.3 percent in 2017 and 2.5 percent in 2018.
  - Core inflation is projected to gradually pick up and reach the Federal Reserve’s target by mid-2018.
  - The U.S. current account deficit is projected to widen to about 3 ½ percent of GDP by 2020.
  - Public finances: debt held by the public approaching 110 percent of GDP by 2022.
- Near-term inflation context:
  - Past U.S. dollar appreciation and a drag from non-oil import prices have kept inflation pressures subdued, but those effects are now waning.
  - The economy is approaching full employment; labor force participation continues to drop.

### Changes in U.S. Policy Direction and Risks
- Baseline policy mix assumption:
  - Shift toward more fiscal stimulus and a faster pace of monetary policy normalization is assumed.
  - Markets have largely priced in these anticipated policy changes (steepening yield curve, higher equity prices, appreciation of the U.S. dollar).
- Fiscal assumptions and impacts:
  - IMF staff assume a 1.2 percent GDP increase in the federal primary deficit in cyclically adjusted terms from 2017–19, driven by personal and corporate income tax cuts.
  - Relative to the October baseline, fiscal stimulus is estimated at 2 percent of GDP, cumulated over the period 2017–19, and consisting of personal income tax rate cuts equivalent to 1.1 percent of GDP over three years and corporate tax cuts equivalent to 0.9 percent of GDP.
  - The fiscal expansion would likely cause a durable increase in the budget deficit and rising public debt.
- Monetary policy assumptions:
  - IMF staff forecasts assume three policy rate hikes in 2017 and five hikes in 2018 (in line with Federal Open Market Committee guidance).
  - Futures markets expect a steeper path for the central bank’s policy rate compared with last October.
- Two-way risks from strategic policy shifts:
  - Corporate tax reform (including consideration of a destination-based cash-flow tax, DBCFT) could boost business investment and growth but may create tensions with World Trade Organization rules and provoke trade disputes.
  - Deregulation could stimulate efficiency and growth if targeted, but unintended negative side effects could harm the environment, workplace safety, or low-income protections.
  - Financial regulatory rollback could boost near-term growth but weaken system resilience and increase the likelihood of future economic dislocation.
  - Trade policy changes: cooperative renegotiation (e.g., NAFTA updates) could yield benefits; unilateral tariffs or trade barriers would be damaging through weaker trade, higher production costs, and lower potential growth.
  - Immigration policy shifts:
    - Currently about 1.3 million immigrants enter the United States legally each year.
    - Skills-based immigration reform could raise potential growth; broadly restrictive approaches could slow inflows, depress innovation and productivity, and reinforce aging demographics—raising production costs and affecting remittance-dependent countries.

### U.S. Policy Priorities (Longer Term)
- Public finances are on an unsustainable path due to future increases in health and pension outlays and slowing potential output; a credible deficit- and debt-reduction strategy is absent.
- Structural policy priorities to lift potential output and reduce poverty:
  - Infrastructure investment.
  - Education spending.
  - Stronger social safety nets (such as expanded earned income tax credits).
  - Tax and pension reform.
  - A higher minimum wage.
  - Measures to expand skilled labor: skills-based immigration reform, job training, child care assistance.
- Need to lower future health care costs, particularly for vulnerable groups, to secure public finance sustainability.

### Canada: Economic Adjustment and Outlook
- Structural shifts and recent performance:
  - Investment and employment reallocated from the resource sector to services.
  - Quarterly GDP was volatile in 2016 after Alberta wildfires and swings in oil production.
  - Economy posted modest growth of 1.4 percent for 2016, up from 0.9 percent in 2015.
  - Personal consumption remained resilient, supported by fiscal stimulus and expansion of the Canada Child Benefit program.
  - Business investment continued to be a drag on growth; exports were lackluster.
- IMF staff projections:
  - GDP growth is projected to strengthen to 1.9 percent in 2017 and 2 percent in 2018.
- Sectoral and regional notes:
  - The services sector accounts for about 70 percent of GDP and has been expanding steadily.
  - Finance and real estate activities have been boosted by the housing market boom.
  - Reorientation toward nonresource sectors has been supported by accommodative monetary and fiscal policy and flexible labor markets that facilitate interprovincial migration.
  - Resource-rich provinces have contracted but show signs of stabilizing; higher oil prices since mid-2016 are now well above operating costs for many oil sands producers though still below full-cycle breakeven costs.
- Prices:
  - Inflation pressures remain subdued; for most of last year, headline consumer price index inflation was in the range of 1 to (text cut off).

*International Monetary Fund | April 2017*

### 1.5 percent, below the midpoint of  the Bank of

### wreo0517 - 1.5 percent, below the midpoint of  the Bank of

### Inflation and Labor Costs
- Headline inflation at 1.5 percent, below the midpoint of the Bank of Canada’s target band of 1 to 3 percent; has risen to about 2 percent more recently due to gasoline price increases.
- Core inflation measures have remained below 2 percent since late 2016, attributed to:
  - diminishing effects of exchange rate pass-through;
  - lasting excess capacity in the economy;
  - weak growth in unit labor costs.
- Business productivity running about 1 to 1.5 percent over the past year.
- Growth of unit labor costs has hovered around 1 percent, posing little upward price pressure.
- Figure referenced: Canada: Inflation and Labor Costs (Year-over-year percent change).

### External Competitiveness and Exports
- Initial weakened competitiveness position in the U.S. market helps explain slow export response of nonresource goods to a more competitive exchange rate; Canadian goods exports have been stagnant in recent years.
- During the oil boom of the past decade, the Canadian dollar’s significant appreciation contributed to erosion of external competitiveness for nonresource-exporting industries ("Dutch disease").
- Canada’s share of nonresource goods exports dropped from nearly 20 percent in the mid-1990s to about 10 percent during the oil boom period.
- Policy implication: need for structural reform to enhance external competitiveness and long-term growth.

### Elevated Macro-Financial Vulnerabilities: Housing and Household Debt
- Housing sector continues to pose risks to macro-financial stability.
- High or rising house prices in key real estate markets have driven more borrowers to acquire larger mortgages with higher loan-to-income ratios.
- Concentration: highly leveraged mortgage borrowers tend to be concentrated in the most expensive metropolitan housing markets (Figure 1.8).
- Household indebtedness approaching a historic high of nearly 170 percent of disposable income.
- Households’ total debt-service ratio broadly unchanged, with lower interest payments (reflecting lower rates) offsetting higher principal repayments (reflecting larger debt) (Figure 1.9).
- Bank exposures:
  - Mortgage and consumer loans account for about one-third of bank assets.
  - Banking system is sound and profitability is high, but banks’ exposures to highly indebted households has risen.
- Tail risk scenario described:
  - Severe recession and a large and persistent rise in unemployment could trigger negative macro-financial spillovers, increasing mortgage defaults and causing a deep correction in house prices.
  - Resulting deterioration in banks’ profitability and capital positions could lead to a credit crunch, magnifying negative spillovers.
- Specific statistics on high loan-to-income borrowers:
  - Share of mortgage borrowers with loan-to-income ratios greater than 450 percent increased from 32 percent in 2014 to 49 percent in 2016 in Toronto, and from 31 percent in 2014 to 39 percent in 2016 in Vancouver (Bank of Canada 2016).

### Macroprudential Measures and Housing Market Developments
- Authorities have introduced macroprudential measures over the past year, including:
  - requiring lenders to subject all insured borrowers to mortgage rate stress tests;
  - tightening eligibility criteria of low loan-to-value ratio mortgages for portfolio insurance;
  - implementing tighter supervisory expectations for mortgage underwriting standards;
  - strengthened bank capital requirements.
- Other announced measures included closing tax loopholes pertaining to capital gains tax exemptions for principal residences and launching consultations on lender risk sharing.
- Some housing markets show signs of cooling:
  - Example: Vancouver—house prices and home sales have both fallen, likely reflecting macroprudential tightening and new tax measures at provincial and municipal level (Figure 1.10).
  - In 2016, the British Columbia government introduced a 15 percent property transfer tax for foreign buyers in the Greater Vancouver area, and Vancouver city introduced a new empty-home tax.

### Risks to the Outlook
- Key uncertainties clouding the medium-term outlook:
  - Higher uncertainty about the U.S. policy stance and its spillover impact; the United States receives about 75 percent of Canada’s goods exports.
  - If the United States moved ahead with protectionist trade measures, foreign demand would be reduced, putting a drag on Canadian exports and business investment.
  - A sharp correction in domestic housing markets could be triggered by a sharper-than-expected increase in mortgage interest rates, tighter global financial conditions, or a sudden shift in price expectations, especially in booming housing markets.
  - Financial stability risk could emerge if a housing market correction coincided with a severe recession and sharp, persistent rise in unemployment.

### Policy Priorities for Canada
- Overarching challenge: bolster near-term growth while preventing further buildup of imbalances, strengthening resilience to shocks, and pursuing structural reform to enhance external competitiveness and long-term growth.
- Macroeconomic policy stance:
  - Bank of Canada policy rate at 0.5 percent since July 2015, given persistent economic slack; markets assume the rate will be kept unchanged until mid-2018.
  - Federal government has fiscal space and is committed to expansionary policy to support the economy.
  - 2017 federal budget expects the deficit to widen slightly from 1.1 percent of GDP in FY2016/17 to 1.4 percent of GDP in FY2017/18, largely due to higher infrastructure spending.
  - Provincial fiscal balances deterioration expected to end as resource-rich provinces stabilize.
- Policy guidance:
  - If downside risks materialize, scope exists for monetary and fiscal policy to provide additional stimulus; preference for more fiscal and less monetary support to discourage households from taking on more debt.
  - Impact of recent macroprudential measures should be carefully watched before further action.
    - If housing imbalances continue to grow, additional macroprudential measures, possibly targeting regional imbalances, may be needed.
    - If housing markets correct much faster than expected and raise financial stability concerns, easing macroprudential measures may be warranted.
- Structural policy priorities:
  - Continue bold actions to improve productivity and external competitiveness.
  - Build on Advisory Council on Economic Growth recommendations: enhance innovation, upgrade labor skills, empower women in the workplace, establish a new infrastructure bank to leverage private sector expertise and capital.
  - Further efforts to diversify Canada’s trade partners (including implementing the free trade agreement with the European Union) and reduce non-tariff barriers across provinces would help boost productivity.

### Box: The Destination-Based Cash Flow Tax (DBCFT) — Key Points
- Proposal (U.S. House of Representatives): replace the corporate income tax with a cash flow tax with border adjustment and a lower tax rate for U.S. firms.
- Two basic components:
  - Cash flow tax: corporate taxes paid on revenues less expenses—including wages, investment, and intermediate inputs; elimination of depreciation allowances and net interest payment deductions; replaced by immediate expensing of capital investment.
  - Destination-based (border adjustment): exempting exports and taxing imports (or equivalently, not allowing imports to be deductible when calculating tax liability), shifting corporate taxation from a source basis to a destination basis analogous to a VAT.
- Potential macroeconomic effects (under revenue neutrality assumption):
  - Should boost U.S. investment and induce reallocation of productive capacity to the United States by removing tax distortions on investment.
- Implementation challenges and uncertainties:
  - Legal, practical, and political hurdles; need for transition rules for existing capital and debt; complications linked to taxation of the financial sector; providing refunds to sectors facing persistent tax losses.
  - Uncertain distributional effects on income depending on implementation.
  - Potential significant appreciation of the U.S. real exchange rate through a stronger dollar, affecting balance sheets of economies with unhedged and leveraged dollar positions.
  - Possible inconsistency with World Trade Organization principles and existing tax treaties could open door for retaliatory measures by trading partners.
  - Many effects remain uncertain and difficult to assess, including impact on exchange rates and prices.

*Italic: International Monetary Fund | April 2017*

### 2. LATIN AMERICA AND THE CARIBBEAN: sETTING THE COURsE FOR HIGHER GROWTH

### 2. LATIN AMERICA AND THE CARIBBEAN: sETTING THE COURsE FOR HIGHER GROWTH

### Recent external conditions and confidence
- Portfolio inflows recovered after sharp declines following the U.S. election; overall inflows to the region have proven resilient relative to other emerging markets.
- Higher global policy uncertainty—notably in the United States about tax, trade, and immigration policies—has:
  - Reduced business and consumer confidence in Mexico and is expected to weigh on Mexican firms’ and households’ investment and consumption decisions.
  - Led to a recent increase in remittances to Mexico and some countries in Central America, possibly preempting changes in U.S. immigration policy.
- Continuing corruption scandals are weighing on sentiment across many countries in the region.
- Despite sizable weakening in regional currencies, inflation has increased less than during previous episodes of similar depreciations, reflecting lower pass-through and improved credibility of monetary frameworks.
- After peaking in early 2016, inflation has been declining in many countries, reflecting still-negative output gaps and receding depreciation pressures (with exceptions such as Mexico).

### External adjustment: a tale of two adjustments (exchange rates and trade)
- Many commodity exporters allowed currencies to depreciate starting in 2013 amid weak external demand; currencies generally strengthened in 2016 due to commodity price recovery, capital inflows, and reduced domestic uncertainties.
- Countries with less flexible exchange rate frameworks have faced persistent real effective appreciations; costs of adjustment have increased as trading partners use more flexible regimes.
- Increased exchange rate flexibility has:
  - Made external adjustment less painful.
  - Reduced the demand compression (sacrifice ratio of external adjustment) needed to narrow external imbalances relative to countries with less flexible regimes.
- For many countries facing negative terms-of-trade shocks, a major portion of external adjustment has been attributable to import compression.
- Aggregate real exports do not appear to react significantly to sizable depreciations, but:
  - Exports and value added of noncommodity sectors have increased.
  - Real imports have declined in some economies as consumer spending switched from foreign-produced to domestically produced goods.

### Current account developments and country differences
- Regional current account performance:
  - Worsened from -2.1 percent of GDP (2010–12) to -3.5 percent of GDP in 2015.
  - Narrowed by 1.4 percentage points in 2016.
- Country-specific notes:
  - Metal exporters (Chile and Peru): current account balances improved by about 2 percentage points of GDP from their troughs; in the medium term balances expected to widen due to trend decline in savings from aging in Chile and recovery of private investment in Peru.
  - Oil exporters:
    - Colombia: pace of adjustment picked up in 2016 and expected to continue as public savings increase.
    - Ecuador: dollarization meant adjustment came mainly via fiscal consolidation, a fall in private investment, and balance of payments safeguards.
    - Venezuela: current account deficit narrowed due to reduction in government foreign exchange allocation for imports and lack of access to external financing.
  - Brazil: current account deficit contracted sharply, mostly reflecting contraction in investment (cyclical and permanent components such as reduced Petrobras medium-term investment); projected increase in public savings suggests most improvement will be durable.
  - Argentina: continued capital inflows and a structural increase in investment from low levels are expected to lead to higher current account deficits over the next five years; productivity gains from reversing previous microeconomic distortions and further investment in energy may support a lower long-term current account deficit.
  - Central America: lower commodity prices translated into lower external imbalances for net commodity importers; improvement in terms of trade and currency appreciation larger than previous booms in other emerging markets.
- Regional current account averages:
  - Improved, on average, from -7 percent of GDP in 2013 to -3.6 percent in 2016.
  - Expected to reach -4.4 percent in the medium term.

### Fiscal adjustment and public finances
- Latin America’s countercyclical fiscal response to the global financial crisis helped contain output losses, but many countries did not rebuild fiscal space during buoyant commodity revenue years.
- The primary fiscal deficit in the region increased from 0.2 percent in 2013 to 2.6 percent in 2016.
- In South America and commodity-exporting Caribbean countries:
  - Capital expenditures were cut by about 1–1½ percent of GDP.
  - Current expenditures continued to increase until 2015 and remain high.
  - Debt-to-GDP ratios in countries with slumping commodity revenues have continued to increase.
- Many countries have consolidation plans, but primary balances remain below historical and debt-stabilizing levels.

### Domestic developments: labor, credit, and financial sectors
- Unemployment remained relatively stable in most countries, except for a few still contracting.
- Real wages are increasing due to declining inflation and are expected to support a gradual recovery in consumption.
- Real credit growth decelerated in many countries, with exceptions such as Mexico.
- Nonperforming loans have been increasing (from a low base) and warrant close monitoring given subdued growth.
- Banking sector profitability has declined in many countries, but capital ratios of financial institutions remain above regulatory requirements.
- Corporate sector: narrowing corporate spreads and partial equity recovery have coincided with low corporate profitability and high leverage for listed companies as of the first half of 2016.

### Risks and policy implications
- A wider range of risks surrounds the baseline, driven by global uncertainty: U.S. policy mix, tighter financial conditions, and inward shifts (protectionism) in advanced economies.
- Potential U.S. policy shifts:
  - Near-term U.S. fiscal stimulus could support trading partners’ growth if U.S. imports increase.
  - Faster U.S. monetary normalization and higher public debt could raise global real interest rates, tighten financial conditions, reduce capital inflows, and increase corporate stress in the region.
- Sovereign spreads have declined over the last year but remain highly responsive to global risk aversion and regional spillovers; they can revert if conditions deteriorate.
- Corporate sector stress could spill over to banks via lower collateral values and higher nonperforming loans in a subdued growth environment.
- Central America and Mexico are vulnerable to spillovers from changes in U.S. trade and immigration policies:
  - NAFTA renegotiation implications for Mexico:
    - Well-executed cooperative updates (e.g., e-commerce, financial and other services) could generate growth dividends for signatories.
    - Renegotiation aimed at affecting bilateral trade balances or unilateral imposition of tariffs/other trade barriers would be damaging.
    - Uncertainty around negotiations has already reduced confidence and may weigh on short-term investment.
  - More restrictive U.S. immigration policy would reduce remittances—an important financing and stabilization source for the Caribbean and Central America—and could depress productivity in countries where emigration tends to be lower skilled (Mexico and Central America), put downward pressure on wages, and create challenges absorbing additional labor where unemployment is already high, investment response sluggish, or skills mismatches exist.

*International Monetary Fund | April 2017*

### Chapter 5). Furthermore, a sudden increase

### Chapter 5

### Transitional costs and reverse migration
- A sudden increase in unemployment, even a temporary one, may lead to additional social costs, including heightened security concerns.
- In the near term, the positive effects of reverse migration on growth are likely to be offset by transitional factors, particularly for Central America and Mexico.

### External environment and growth challenges
- A renewed decline in commodity prices caused by a global slowdown could add to the earlier terms-of-trade losses, reduce capital inflows, and further elevate corporate and sovereign sector risks.
- The external environment facing the region is likely to be less supportive over the medium term (Chapter 2 of the April 2017 World Economic Outlook), and global risks and uncertainties have widened despite the modest improvement in the region’s terms of trade.
- Weaker potential output growth is affecting advanced and emerging economies alike; countries in Latin America and the Caribbean are no exception.

### Policy priorities to set the course for higher growth
- Completing the external and fiscal adjustment, managing risks during the transition process, and shifting focus toward policies to raise medium-term growth (improve infrastructure and human capital, domestic governance, institutions, and the business environment).
- Priorities include:
  - Maintaining exchange rate flexibility.
  - Easing trade-offs for monetary policy where appropriate.
  - Managing corporate and financial sector risks.
  - Completing the fiscal adjustment.
  - Tackling structural bottlenecks.

### Monetary policy: inflation, credibility, and policy rates
- Many central banks in the region preemptively raised policy rates in response to rising inflation during 2015 and late 2016.
- The needed rate hikes to keep medium-term inflation expectations anchored were more muted than in the past, and the pass-through of depreciations to inflation has been limited.
- Inflation began to decline in early to mid-2016 as the pass-through of earlier depreciations faded, allowing central banks to shift to a holding or easing cycle in many countries (with exceptions such as Mexico).
- Where central banks enjoy strong credibility:
  - Policies should aim to keep inflation at the midpoint of the target range over the medium term, seeing through temporary deviations, particularly in the context of weak demand and lower global neutral rates.
  - In countries where inflation and inflation expectations are converging toward the target range and credibility is strong, continued easing would create monetary space for future inflationary shocks.
  - In countries where inflation and inflation expectations are above targets, the appropriate stance should depend on the evolution of inflation and medium-term expectations.
- Clear communication of policy goals is of utmost importance to maintain credibility and anchor inflation expectations.

### Managing corporate and financial sector risks
- Despite sizable depreciations, the region has avoided systemic stress in sovereign, corporate, and banking sectors, reflecting improved policy and supervisory frameworks, increased hedging, and reduced financial dollarization.
- With wider global risks and high corporate and public sector leverage in some countries, policies should ensure corporate balance sheets are not overstretched and that banks’ asset quality remains sound.
- Key recommendations:
  - Adequate consolidated supervision where financial and nonfinancial companies are interlinked to identify sources of risk and transmission channels.
  - In countries with high or increasing nonperforming loans: identify pockets of excessive leverage and ensure appropriate macroprudential and resolution frameworks are in place.
  - Use well-executed financial stability reports to identify potential and emerging risks and promote public debate and prudent behaviors.

### Fiscal adjustment: scope and institutional reforms
- Given structurally low commodity prices in commodity exporters, subdued potential output, and projected demographic trends, completing the fiscal adjustment is important.
- The desired size and pace of adjustment will vary across countries depending on debt dynamics, fiscal risks, the macroeconomic outlook, and market conditions.
- Primary balances remain below debt-stabilizing levels; more adjustment is needed despite some progress already under way.
- Particular attention:
  - Design growth-friendly and inclusive adjustment plans.
  - Raise the efficiency of public spending to improve the quality of public goods and maintain expenditures related to human and physical capital while containing overall spending growth.
- Institutional priorities:
  - Strengthen fiscal frameworks by moving toward credible fiscal rules with built-in features that avoid procyclicality and ensure more symmetric responses to downturns and expansions.
  - Create a rolling medium-term expenditure framework.
  - Over a longer horizon, design reforms to ensure fiscal sustainability while providing adequate levels of pensions and health care (Box 2.2).

### Tackling structural bottlenecks
- With adjustments ongoing and medium-term growth projected to remain subdued at 2.6 percent, attention should shift to structural reforms.
- Regional progress: median real income per capita increased from 16 percent of that of the United States in 2003–07 to 22 percent in 2010–14; all countries in the region remain below 60 percent of U.S. income levels.
- Policy priorities to raise potential growth:
  - Close infrastructure gaps to support productivity and competitiveness.
  - Increase female labor force participation where it is low.
  - Further invest in human capital.
  - Improve the business environment and governance and tackle corruption.
- Emphasize appropriate macroeconomic mix, careful sequencing of reforms, and building broad consensus to avoid short-term costs.

### South America: developments, outlook, and country notes
- Regional context: Growth in South America bottomed out in 2016; domestic demand has been weak while net exports have started to provide some support.
- Argentina:
  - Real GDP grew (on a sequential basis) in the second half of 2016 after three quarters of contraction.
  - Real GDP is expected to grow 2¼ percent in 2017, driven by a rebound of private consumption, stronger public capital spending, and a pickup of exports.
  - Growth is projected to remain at about 2½ in 2018 and 2019.
  - Fiscal targets for 2017–19 are expected to be met mainly through a reduction in energy subsidies and restraint in primary spending.
  - Inflation fell sharply in the second half of 2016 and is expected to decline further in 2017 and afterward, but at a somewhat slower pace than implied by official targets due to planned increases in utilities tariffs and inertia in inflation expectations.
  - Structural reforms needed: reduce tax burden on firms and households, bolster local capital markets, close the infrastructure gap, and increase domestic competition.
- Brazil:
  - After two years of recession, growth is expected to return to positive territory—estimated at 0.2 percent in 2017 and 1.7 percent in 2018.
  - Growth drivers: a bumper soybean crop, release of inactive severance accounts boosting consumption, gradual resumption of investment, and higher iron ore prices.
  - Inflation ended 2016 within the target band at 6.3 percent.
  - A constitutional amendment mandating a constant real level of federal noninterest spending was approved in December 2016; meeting or exceeding primary surplus targets is important.
  - An ambitious social security reform was submitted to Congress and is expected to be approved later this year.
  - The central bank commenced its easing cycle in October and accelerated easing since January; it should monitor fiscal reform progress closely.
  - Recommended reforms: strengthen competitiveness, reduce business costs, pursue revenue-neutral indirect tax reform, and reduce state intervention in credit allocation.
- Venezuela:
  - Real GDP is expected to fall by 7.4 percent in 2017, after falling by an estimated 18 percent in 2016 and 6.2 percent in 2015.
  - CPI inflation rose to 274 percent in 2016 and wholesale price inflation to about 470 percent.
  - CPI inflation is projected to accelerate to about 1,134 percent during 2017.
  - The current account deficit is projected to be $8.2 billion in 2017 (3¼ percent of GDP).
  - Higher oil prices in 2017 are expected to create space to increase imports by about $4 billion.
  - International reserves are projected to fall to $6 billion in 2017, about one-third the level in 2015.
  - Social conditions: poverty in 2016 rose to 82 percent of households, 50 percent of which are classified as being in extreme poverty (Encuesta Condiciones de Vida, ENCOVI).
  - Health and security: lack of medicines and collapse of the health system; homicide rate increased to 92 murders per 100,000 inhabitants in 2016, up from 79 in 2013 (Observatorio Venezolano de Violencia).
- Bolivia:
  - Real GDP growth moderated from about 6 percent annually in 2013–15 to 4.1 percent in 2016.
  - Real GDP is expected to expand by about 4 percent in 2017 and 3.5 percent over the longer term.
  - Risks: accommodative fiscal policy and rapid credit growth are supporting activity but contributing to fiscal and external imbalances and financial sector risks and draining buffers.
  - Recommended actions: contain the nonhydrocarbon fiscal deficit and overall deterioration of the headline balance, gradually increase exchange rate flexibility, and accelerate structural reforms.
- Chile:
  - Despite slightly better external conditions, the outlook remains subdued; growth in 2017 is expected to remain well below 2 percent, at 1.7 percent.

*International Monetary Fund | April 2017*

### 1.6 percent in 2016. This small increase reflects

### wreo0517 - 1.6 percent in 2016. This small increase reflects

### Regional snapshot and near-term outlook
- 1.6 percent in 2016. This small increase reflects disruptions in copper production from extended labor strikes and extensive wildfires, dampened consumption from a weakened labor market, and subdued confidence and investment, as upcoming presidential elections add uncertainty about the direction of policies.
- Recovery expected to gain traction later in the year and more strongly in 2018, helped by firmer growth in the country’s main trading partners and looser monetary conditions.
- Monetary policy described as appropriately accommodative, with scope for further easing given downward pressures on inflation expectations from weaknesses in domestic demand.
- With the subdued growth outlook, fiscal consolidation can be gradual but needs to continue given the economy’s lower growth potential.

### Country briefs — South America
Colombia
- Timely policy tightening guided an orderly economic slowdown in the prior year as domestic demand (investment, in particular) adjusted to a permanent shock to national income.
- Nationwide strike and other one-off factors led to weaker-than-anticipated growth, although a mild rebound is expected for 2017.
- Central bank has started an easing cycle given dissipating inflationary pressures, aiming to support recovery while protecting well-anchored inflation expectations and a declining current account deficit.
- Medium-term supports: infrastructure agenda, tax reform’s positive impact on public and private investment, and improved confidence stemming from peace.

Ecuador
- Outlook improving due to better access to international capital markets prompted by the moderate recovery in oil prices.
- Growth for 2017 expected to be higher than projected earlier but to remain in negative territory because of persistent real exchange rate appreciation and limited fiscal space.
- Medium-term constraints: weak competitiveness, structural labor market rigidities, and a burdensome regulatory environment.

Peru
- Economy grew at a rapid pace in 2016 (3.9 percent), supported by expanding copper production and robust private consumption.
- Investment expected to post a third consecutive annual decline.
- Domestic headwinds: a political bribery probe related to the Brazilian company Odebrecht, and the worst flooding and landslides in decades, which may drag on 2017 investment and growth.
- Authorities announced an economic stimulus plan aimed at promoting employment and keeping 2017 growth at about 4 percent.
- Policy focus: attain gradual fiscal consolidation that brings the headline deficit to 1 percent within five years (from 2.6 percent in 2016).

Uruguay
- Recession-management relative success: slowdown bottomed out in 2016, with growth picking up in the second half of the year.
- Inflation has decreased toward the upper bound of the central bank’s target range.
- Rising debt and still-elevated inflation limit room for countercyclical fiscal or monetary policy.
- Fiscal consolidation package for 2017 is crucial to put net debt on a downward trajectory; tight monetary conditions needed to support continued disinflation.

Paraguay
- Grew at about 4 percent in 2016 due to strong energy production and construction activity.
- IMF staff expect growth to moderate in 2017 as supply-side tailwinds dissipate.
- After a rare presidential veto on this year’s budget, a broadly neutral fiscal stance is expected; moderately accommodative monetary policy remains appropriate.
- Inflation evolving in line with the central bank’s recently lowered midpoint of the target range; policymakers should remain vigilant to external shocks.

### Mexico, Central America, Panama, and the Dominican Republic (CAPDR) — developments and outlook
Mexico
- Real GDP growth expected to decelerate to 1.7 percent in 2017 (down from 2.3 percent in 2016), before recovering to 2 percent in 2018.
- Uncertainty about future trade relations with the United States and higher borrowing costs expected to weigh on investment and consumption, potentially more than offsetting positive impulses from stronger U.S. growth and a sharp real effective depreciation.
- Inflation running above target mainly due to the liberalization of gasoline prices in January 2017 and pass-through of exchange rate depreciation.
- Central bank increased its policy rate to 6½ percent in March to anchor medium-term inflation expectations.
- Inflation projected to temporarily exceed 5 percent in 2017, before declining rapidly, nearing the central bank’s 3 percent target toward the end of 2018.
- Central bank introduced a foreign-exchange intervention strategy based on nondeliverable forwards to be settled in pesos.
- Public debt reached 58 percent of GDP in 2016.
- Government objective: lower the fiscal deficit to 2.5 percent of GDP by 2018.

CAPDR region (Central America, Panama, and the Dominican Republic)
- Growth remained broadly unchanged at about 4¼ percent in 2016.
- Growth supported by: recovery in the United States with a robust labor market, low oil prices, and strong remittances (especially in the Northern Triangle countries).
- Investment returned to normal levels following completion of energy projects in Honduras and nonresidential projects in Costa Rica, Guatemala, and Nicaragua.
- Country highlights:
  - Dominican Republic: growth softened from 7 percent in 2015 to 6½ percent in 2016.
  - Panama: growth remained high at 5 percent in 2016.
  - Costa Rica: robust growth at 4¼ percent in 2016.
  - Guatemala: growth decelerated from 4 percent in 2015 to 3 percent in 2016.
- Inflation at 2 percent at the end of 2016, generally below or within target ranges in inflation-targeting countries.
- External current account deficits largely financed by FDI have improved due to still-low commodity prices and strong remittances.
- Fiscal consolidation continued in 2016 but at a slower pace. Average public debt-to-GDP in CAPDR has been increasing amid relatively favorable external financing conditions.
- Financial sector: sound overall; credit growth decelerated in 2016 and remains consistent with healthy financial deepening. Banks moving toward Basel III; provisioning coverage appears adequate; nonperforming loans remain low. High degree of dollarization and increased reliance on external financing are vulnerabilities.
- Outlook: growth expected to stabilize at an estimated average potential rate of 4 percent in the medium term.
- Downside risks: weaker-than-expected global growth, higher-than-expected global interest rates, a stronger dollar while exchange rates fail to adjust, political uncertainties, and retreat from cross-border integration.
- Only modest acceleration of inflation and deterioration in external positions expected over the medium term.

### Common policy priorities and regional recommendations
- Fiscal policy
  - Put fiscal balances on a sustainable footing and strengthen fiscal frameworks, with the pace of adjustment depending on debt levels and market pressures.
  - Prioritize infrastructure spending over other current expenditures to support medium-term growth.
  - For Mexico: strengthen the fiscal framework, tighten the link between desired public debt level and public sector borrowing requirement, limit exceptional circumstances clauses in the Fiscal Responsibility Law, and establish a nonpartisan fiscal council.
  - For Central America: institutionalize fiscal discipline and strengthen fiscal policy frameworks; rebuild fiscal buffers through higher revenues and more efficient spending in Costa Rica, the Dominican Republic, and El Salvador.
  - In Guatemala, where fiscal sustainability is not in jeopardy, focus fiscal policy on supply-side and social objectives, including raising revenues to close social and infrastructure gaps.
  - Over the medium term, pension and health care system reforms are needed to counter pressures from population aging.

- Monetary policy and exchange rates
  - Central banks should continue to tailor monetary policy based on medium-term inflation expectations as disinflation continues.
  - Maintain and increase exchange rate flexibility where applicable to improve resilience to shocks.
  - Complete transition to full-fledged inflation-targeting frameworks, reduce dollarization, and improve financial market infrastructure to strengthen monetary transmission.

- Financial stability and supervision
  - Continue transition toward Basel III, step up consolidated supervision, implement risk-based supervision, integrate systemic risk into regulatory frameworks, strengthen supervision of non-banks, and fortify bank resolution frameworks.
  - Strengthen and proactively enforce AML/CFT frameworks to address risks from potential withdrawal of correspondent banks.
  - Enhance regional cooperation on AML/CFT and cross-border prudential supervision.

- Structural reforms to boost medium-term growth
  - Reduce domestic distortions, resolve policy uncertainties, tackle corruption, improve infrastructure, reduce red tape and economic informality, enhance the business climate, deepen credit markets, and reform education.

*International Monetary Fund | April 2017*

### 2. LATIN AMERICA AND THE CARIBBEAN: sETTING THE COURsE FOR HIGHER GROWTH

### 2. LATIN AMERICA AND THE CARIBBEAN: sETTING THE COURsE FOR HIGHER GROWTH

### Structural priorities for higher potential growth
- Long-term growth supported by:
  - improving the business environment, including through better security;
  - prioritizing spending on education, health, and infrastructure;
  - removing barriers to regional market integration;
  - strengthening the legal basis for financial deepening and inclusion.

### The Caribbean — Developments and outlook
- Growth prospects:
  - Prospects for the Caribbean region are improving, with growth in both tourism-dependent economies and commodity exporters projected to be in the 1½ –3 percent range for 2017 and 2018.
- Tourism:
  - Several countries registered strong growth in tourism in 2016—Belize, Grenada, Jamaica, and St. Vincent and the Grenadines—driven by higher arrivals in both stopover and cruise segments.
  - Trend expected to continue in 2017, supported by higher economic growth in the United States (the main market for most destinations).
  - Barbados is an exception due to heavy dependence on tourism from the United Kingdom.
  - The Zika epidemic appears to have had limited impact on the tourism industry in 2016 and early 2017.
- Commodity exporters:
  - Commodity exporters, including Trinidad and Tobago and Suriname, were hit hard by much lower commodity prices in 2015 and 2016, and are projected to return to modest positive growth in 2017 and 2018, benefiting from somewhat higher (though still low) commodity prices.
  - Higher commodity prices should also help improve the external position of these countries in 2017 and 2018.
- Spillover risks from U.S. policy shift:
  - Expected shift in the U.S. policy mix (more expansionary fiscal policy and tighter monetary policy, relative to earlier projections) — impact through the interest rate channel is likely to be limited, given limited capital flows and financial integration with the United States.
  - Appreciation of the U.S. dollar could negatively affect competitiveness, particularly in countries with currencies tied to the U.S. dollar.
  - Other downside risks include further loss of correspondent banking relationships.

### The Caribbean — Policy priorities
- Public debt:
  - Public sector debt remains a major vulnerability for the region.
  - In several tourism-dependent economies, the public-debt-to-GDP ratio is now declining from very high levels; Grenada, Jamaica, and St. Kitts and Nevis are engaged in multiyear fiscal consolidation efforts.
  - Continued fiscal prudence is necessary to gradually reduce debt-to-GDP ratios and build buffers against shocks.
  - In Barbados and Belize, public debt has continued to increase in recent years; fiscal consolidation combined with structural reform is needed to put public debt on a clear downward trajectory.
  - Belize: the debt restructuring agreed with external bondholders in March 2017 provides meaningful cash flow relief but will not put public debt on a sustainable path unless supported by an ambitious economic reform program.
  - Commodity exporters (Trinidad and Tobago, Suriname): the decline in commodity prices exposed fiscal weaknesses, led to large deficits and rapid increases in public debt; tighter fiscal policies in the context of medium-term macroeconomic adjustment are needed.
- Financial sector:
  - In some countries, the financial sector is burdened by poor asset quality, low profitability, and insufficient capital, limiting banks’ ability to support recovery.
  - Eastern Caribbean Currency Union (ECCU): authorities have passed key legislation and resolved problem banks; further reforms needed, including strengthening supervision of banks and nonbank financial institutions and increasing capital adequacy of indigenous banks.
  - Efforts to strengthen the financial sector are under way in other countries in the region.
- Structural reforms to improve long-term prospects:
  - Better align wage setting with productivity;
  - Reduce energy and business financing costs;
  - Improve education and mitigate skills mismatches;
  - Accelerate contract dispute resolution processes;
  - Reform insolvency regimes.

### Box 2.1 — Exposures to the United States (trade, remittances, migration, FDI) and illustrative spillovers
- Trade linkages:
  - Canada, Central America, and Mexico are highly exposed to the United States through trade.
  - The United States accounts for close to 80 percent of total goods exports from Canada and Mexico (about a quarter of their GDPs) and 40 percent of exports from Central America.
  - Central American countries’ indirect exposure to the United States through intraregional trade is about 20 percent of total exports.
  - South America has lower exposure to the United States, mostly through commodities.
  - Caribbean goods exports to the United States are modest (except commodity-based economies Guyana, Suriname, Trinidad and Tobago); main exposure for the Caribbean is tourism.
  - Region’s exports to the United States, particularly in Mexico, have a high degree of concentration in manufactured goods.
  - A unilateral imposition of tariffs or other trade barriers that reduces U.S. demand would initially worsen trade balances and reduce domestic demand and real GDP growth; over time trade balances would improve as imports decline and currencies depreciate.
  - More widespread protectionism could create additional spillovers via lower export demand and commodity prices.
- Remittances and immigration linkages:
  - Remittance flows from the United States are significant for Northern Triangle countries (El Salvador, Guatemala, Honduras).
  - The United States is the main remittance source for Mexico, but remittances’ share of domestic GDP in Mexico is much lower.
  - South America has low exposure to U.S. remittances; within South America, some Andean countries are more exposed.
  - In the Caribbean, remittance flows from the United States to Belize, Guyana, and Jamaica are sizeable.
  - In 2015, immigrants from Central America residing in the United States represented close to 10 percent of the subcontinent’s entire population (compared with less than 1 percent in South America).
  - El Salvador has by far the largest number of emigrants relative to population of origin, followed by Mexico.
  - In the Caribbean, the migrant population living in the United States is about 23 percent relative to the population of the countries of origin.
  - An intensification of deportations would likely reduce per capita GDP of countries in Central America, Panama, and the Dominican Republic, and to a lesser extent Mexico; impact magnitude depends on skill composition, labor market integration, wage differentials, and possible deterioration in confidence and country risk premia.
- Foreign Direct Investment (FDI) linkages:
  - U.S. FDI in the region is concentrated mainly in Costa Rica and NAFTA partners.
  - U.S. FDI represents 60 percent of total FDI stock in Costa Rica and 50 percent in the NAFTA partners (representing 26 percent and 18 percent of GDP, respectively).
  - El Salvador and Honduras: stock of U.S. FDI represents 9 percent and 11 percent of GDP, respectively.
  - In South America, exposure to U.S. FDI is lower, except for Brazil and Chile.
  - U.S. FDI in the Caribbean is modest.
- Illustrative model simulations of spillovers from a change in the U.S. policy mix:
  - Scenario setup: debt-financed fiscal expansion in the United States (reduced labor and corporate income taxes and increased infrastructure spending); details in Chapter 1 of the April 2017 World Economic Outlook.
  - Productive fiscal measures in the United States:
    - U.S. GDP rises notably, peaking at 1 percent above the no-policy-change case in 2021.
    - Higher U.S. demand triggers tighter U.S. monetary policy and a real appreciation of the U.S. dollar.
    - Short-term: possible positive spillovers to main trading partners; countries with currencies pegged to the U.S. dollar would suffer appreciation in effective terms.
  - Less productive fiscal measures and faster normalization of the U.S. term premium:
    - U.S. GDP rises by roughly ½ percent by 2021.
    - Spillovers to the region are mostly negative, with tighter global financial conditions offsetting higher partner demand.
  - Long-term effects:
    - Under both scenarios spillovers to the region are small, but negative, because the permanently higher level of U.S. public debt raises global real interest rates and the cost of capital, more than offsetting the increase in the return to private capital from higher U.S. demand.
    - Negative spillover effects of unproductive U.S. fiscal measures coupled with a higher U.S. term premium are larger for the most financially integrated economies in the region.
  - Modeling note: structural simulations estimated using the IMF’s Flexible System of Global Models (FSGM).

### Demographics, aging, and long-term fiscal vulnerabilities
- Demographic transition:
  - Latin America has experienced the world’s steepest decline in the total dependency ratio over the past 65 years but is approaching a turning point to rapid aging.
  - United Nations projects that by 2080 Latin America will overtake advanced economies as the region with the highest share of elderly population.
- Pension and health system features and risks:
  - Average public pension and health care spending in Latin America is lower than in high-income countries and emerging Europe, but already twice as high as in emerging Asia.
  - Most Latin American countries have defined-benefit pay-as-you-go pension systems that are relatively generous and typically underfunded.
  - Some countries have retirement ages in line with international averages, but several have replacement rates above and contributions below those in high-income countries.
  - Defined-contribution systems introduced in the 1990s are generating replacement rates that may be below socially acceptable levels and may require public noncontributory pension schemes, with fiscal costs.
  - Coverage by contributory pension and health systems is relatively limited due to high informality; many countries have increased coverage via minimum noncontributory pensions and health insurance, which can have negative fiscal implications over time.
- Projected fiscal costs of aging (stylized cross-country exercise for 18 Latin American countries):
  - Average pension spending currently at 3½ percent of GDP is projected to increase to 4 percent and 7 percent of GDP in 2030 and 2065, respectively.
  - Brazil projected high of 30 percent of GDP in pension spending in 2065.
  - Long-term fiscal gaps measured as the present discounted value (PDV) of the increase in pension and health spending are quantified using United Nations demographic projections and IMF methodologies (see referenced study).

*Source: International Monetary Fund | April 2017*

### Box 2.2. Long-Term Fiscal Gaps

### Box 2.2. Long-Term Fiscal Gaps

### Pension projections and fiscal exposure
- Projected increase in public pension spending between 2015 and 2030 (a measure of how much future government liabilities could add to public debt burdens) would on average be about 5 percent of GDP.
- Projected pension spending could "creep up to 50 percent of GDP by 2065."
- A startling high projection for Brazil: "365 percent of GDP" (Figure 2.2.6).
- Countries with a funded component generally experience a smaller increase in pension spending—and in some cases a decline—but trade-offs exist between fiscal sustainability and social sustainability because average replacement rates tend to be lower than regional and international benchmarks in countries that transitioned to defined-contribution systems.
- Table 2.2.1 presents country-level parameters (type of system, statutory pensionable age, vesting period, contribution rates, gross replacement rate) for Latin America and the Caribbean (selected entries): 
  - Brazil: DB65 (60) 35 (30) 28.0 20.0 69.5 (52.9)
  - Chile: DC65 (60) 20 11.2 1.2 32.8 (28.8)
  - Mexico: DC65 24 8.7 6.9 25.5 (23.6)
  - Venezuela: DB60 (55) 15 13.0 9.0 94.2 (89.5)
  - OECD average: N/A 64.7 (63.5) N/A 19.6 11.2 52.9
  (See Table 2.2.1 for full country list and exact parameter values as reported.)

### Health care projections and fiscal exposure
- Regional average health care expenditure is expected to increase to "6 and 10½ percent of GDP by 2030 and 2065, respectively."
- Present discounted value (PDV) of these health spending increases:
  - Average PDV up to 2030 is "only about 10 percent of GDP."
  - PDV by 2065 is "almost 100 percent" of GDP (Figure 2.2.7).
- Health care expenditure projected to rise more than pensions, driven by demographic trends and by "excess cost growth due to technological improvements."
- Based on historical trends in advanced economies, technological improvements could result in "1 percent annual excess cost growth in health care expenditure."

### Country-level PDV findings (public pension and health expenditure increases)
- Present discounted value (PDV) of public pension expenditure increases (percent of GDP) shown in Figure 2.2.6, with country-level ordering including (examples as labeled):
  - Highest pension PDV: BRA (Brazil) (365 percent of GDP noted earlier).
  - Other country labels shown in figures: CRI, VEN, NIC, ECU, PRY, DOM, ARG, SLV, MEX, PER, HND, PAN, GTM, URY, CHL, BOL, COL.
- PDV estimated assuming "an interest rate growth differential of 1 percent" (based on Escolano 2010 and Turner and Spinelli 2012) (Figures 2.2.6 and 2.2.7).
- Figure 2.2.7 lists country PDV of public health expenditure increases (percent of GDP) for periods "2015–30" and "2015–65 (right scale)" with country labels including CRI, COL, BRA, PAN, NIC, CHL, HND, SLV, ARG, URY, PRY, MEX, BOL, PER, ECU, DOM, GTM, VEN.

### Policy recommendations and reform priorities
- General principle: "Carefully designed reforms will be needed to ensure financial sustainability while providing socially acceptable levels of coverage and adequacy of pensions and health care."
- Labor-market and participation policies:
  - Promote labor participation—particularly by females and the elderly—and formality to help delay the fiscal impact of aging.
- Pension reforms (parametric reforms emphasized):
  - Increase retirement age in line with increases in life expectancy.
  - Combine increases in contributions and reductions in benefits, while carefully balancing concerns about incentives for informality.
  - Higher contribution rates will be needed to ensure pension adequacy in countries with defined-contribution systems.
- Health care reforms and cost containment:
  - Emphasize budget controls and efficiency-enhancing measures to contain spending while preserving health outcomes and ensuring equitable access to basic health care services.
  - The relative importance of reforms will vary across countries depending on coverage of current health care systems.
  - For countries aiming to expand coverage: first focus on providing essential services, with greater emphasis on preventive and primary care, infectious disease control, and better care in rural areas.
  - Expansion modalities:
    - Social-insurance-based systems could be expanded where the informal labor market is less prominent and revenue administration is of high quality.
    - Tax-financed provision of universal basic health care may be the best starting point where informality is high.
  - For countries with more extensive coverage, emphasize budget controls through a mix of instruments such as:
    1. Budget caps with central oversight.
    2. Public management and coordination of services.
    3. Local and state government involvement in key resource decisions.
    4. Better use of market mechanisms.
    5. Increasing the share of costs borne by patients.
    6. Restricting the supply of health inputs and outputs, or imposing direct price controls (Clements, Coady, and Gupta 2012).

### Implementation and trade-offs
- Reforms must balance fiscal sustainability with social acceptability and adequacy of pensions and health care.
- Changes to contributions and benefits may affect incentives for informality; policy design must consider these interactions.
- Health spending projections are subject to greater uncertainty than pensions because of a wide range of possible outcomes for future technological cost growth.

*International Monetary Fund | April 2017 — Box 2.2. Long-Term Fiscal Gaps*

### Annex Table 2.2. Western Hemisphere: Main Fiscal Indicators

### Annex Table 2.2. Western Hemisphere: Main Fiscal Indicators

### Public Sector Gross Debt — selected country series (Percent of GDP, 2014–2018)
- Canada: 85.4, 91.6, 92.3, 91.2, 89.8
- Mexico: 49.5, 53.7, 58.1, 57.2, 56.8
- United States: 105.2, 105.6, 107.4, 108.3, 108.9
- Puerto Rico: 54.7, 53.0, 51.4, 53.5, 56.3
- Argentina: 43.6, 52.0, 51.3, 49.4, 49.2
- Brazil: 62.3, 72.5, 78.3, 81.2, 82.7
- Chile: 14.9, 17.4, 21.2, 24.8, 27.4
- Colombia: 44.2, 50.7, 47.6, 45.7, 45.3
- Ecuador: 1.6, 19.7, 22.6, 29.2, 31.5
- Guyana: 51.2, 47.9, 48.3, 53.9, 57.4
- Paraguay: 0.1, 0.2, 0.6, 19.7, 24.0, 24.7, 25.9, 26.5 (table entry spans formatting irregularity)
- Peru: 20.7, 24.0, 24.8, 25.9, 26.6
- Suriname: 0.3, 29.0, 45.7, 64.6, 66.3, 59.0 (table entry spans formatting irregularity)
- Uruguay: 61.4, 64.3, 60.9, 62.9, 63.9
- Venezuela: 63.5, 32.1, 28.2, 17.3, 16.6
- Belize: 77.7, 82.6, 98.6, 89.8, 87.0
- Costa Rica: 38.3, 40.8, 43.7, 46.4, 48.8
- El Salvador: 57.1, 58.7, 59.9, 61.1, 62.2
- Guatemala: 24.3, 24.2, 25.3, 25.3, 25.9, 26.4 (table entry spans formatting irregularity)
- Honduras: 45.9, 46.2, 45.4, 45.4, 45.9, 46.7 (table entry spans formatting irregularity)
- Nicaragua: 29.3, 29.4, 31.1, 32.0, 32.7
- Panama: 0.2, 37.1, 38.8, 39.2, 38.9, 37.5 (table entry spans formatting irregularity)
- Antigua and Barbuda: 102.7, 99.1, 92.7, 90.1, 87.1
- The Bahamas: 0.7, 60.2, 64.5, 66.9, 69.3, 69.6 (table entry spans formatting irregularity)
- Barbados: 0.4, 100.0, 106.7, 107.9, 107.4, 108.7 (table entry spans formatting irregularity)
- Dominica: 1.1, 4.6, 1.6, 1.2, 82.2, 83.0, 81.0, 81.4 (table entry spans formatting irregularity)
- Dominican Republic: 33.7, 33.0, 34.4, 36.0, 37.3
- Grenada: 101.8, 91.7, 84.4, 72.6, 66.8
- Haiti: 26.3, 30.2, 33.5, 33.9, 34.6
- Jamaica: 137.6, 120.2, 115.2, 108.6, 102.7
- St. Kitts and Nevis: 81.4, 70.6, 65.8, 61.9, 57.8
- St. Lucia: 78.1, 77.8, 82.9, 85.6, 88.5
- St. Vincent and the Grenadines: 79.4, 81.3, 79.2, 77.2, 75.1
- Trinidad and Tobago: 41.7, 49.5, 61.0, 65.8, 75.7

### Regional aggregates and groupings (Public Sector Gross Debt, Percent of GDP)
- Latin America and the Caribbean: 50.9, 54.1, 57.3, 59.0, 59.6
- South America (simple average): 38.7, 40.0, 40.8, 40.7, 41.4
- CApDR (Central America and the Dominican Republic, simple average): 38.0, 38.7, 39.9, 40.9, 41.7
- Caribbean tourism-dependent (simple average): 91.5, 88.3, 86.2, 83.7, 82.0
- Commodity exporters (simple average): 49.9, 56.4, 68.1, 69.0, 69.8
- Eastern Caribbean Currency Union (ECCU) members: 83.3, 81.3, 80.4, 76.3, 72.9

### Notes and data coverage (as presented in the table footnotes)
- Definitions of public sector accounts vary by country; all indicators reported on fiscal year basis.
- Regional aggregates are purchasing-power-parity GDP-weighted averages, unless otherwise noted.
- Cutoff date for the data and projections in this table is April 3, 2017.
- Specific country footnotes define coverage differences (examples):
  - Mexico includes central government, social security funds, nonfinancial public corporations, and financial public corporations.
  - United States figures are adjusted to exclude items related to accrual accounting of government employees’ defined benefit pension plans for cross-country comparability.
  - For Brazil, nonfinancial public sector excluding petrobras and Eletrobras, consolidated with the sovereign Wealth Fund (sWF); national definition differences noted.
  - For Venezuela and Argentina see Annex 2.1 for data details.
  - ECCU members listed include Antigua and Barbuda, Dominica, Grenada, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Anguilla and Montserrat (the latter two not IMF members).

*Source: IMF, World Economic Outlook database; and IMF staff calculations and projections (table cut-off April 3, 2017).*

### 3. External Adjustment to Terms-of-Trade Shifts

### 3. External Adjustment to Terms-of-Trade Shifts

### Overview and Main Findings
- Exchange rate flexibility has, to some extent, lowered the output cost of external adjustment to terms-of-trade shocks.
- Recent real exchange rate depreciations in countries with flexible exchange rate regimes have supported external account adjustment by:
  - providing some boost to exports despite weak external demand;
  - helping shift demand from imports to domestic goods;
  - lowering the cost of adjustment in terms of the compression of domestic demand while helping boost domestic production.
- The income effect has been stronger than the expenditure-switching effect overall, but expenditure switching has become more important in recent episodes, particularly in flexible exchange rate regimes.
- The response of manufactures and textiles has been stronger than that of commodities; exchange rate flexibility can facilitate re-allocation of exports toward noncommodity products.

### Historical Perspective on Terms-of-Trade Busts and Adjustment
- Analysis based on 150 countries over the past half century shows:
  - External current accounts deteriorate on impact and then, as the real exchange rate depreciates, current accounts revert to their initial levels over a period of three to four years.
- A Markov regime-switching methodology identifies 59 episodes of terms-of-trade busts over the period 1960–2016.
- In the most recent terms-of-trade bust:
  - External adjustment in Latin American countries with flexible exchange rate regimes has proceeded in line with historical patterns.
  - Countries with more rigid exchange rate regimes have deviated, experiencing large real currency appreciations, widening current account deficits, and substantial reserve losses.

### Mechanics and Quantitative Analysis of Adjustment
- A panel vector auto-regression framework for a panel of 38 economies estimates dynamic relationships among changes in the trade balance, domestic demand, real effective exchange rate, and terms-of-trade shocks (controlling for external demand).
- The sample is analyzed in two periods, 2000–10 and 2010–16, to capture possible differences in exchange rate and demand elasticities.
- Counterfactual analysis fixes the response of the real effective exchange rate at zero to isolate the contribution of expenditure switching.
- Key empirical results:
  - In response to a 10 percent fall in the terms of trade, there were large and significant trade balance improvements after one year across exchange rate regimes.
  - In flexible regimes, real currency depreciation boosted exports and reduced imports, indicating expenditure-switching effects.
  - A 10 percent reduction in the relative price of exports increased real exports by only 2 percent in one year but lowered real imports by close to 7 percent.
  - The real exchange rate explains close to 50 percent of the response of the trade balance in economies with flexible exchange rate regimes in the recent episode; it plays a negligible role in countries with fixed exchange rate regimes.
  - Domestic demand contracted about two and a half times less in economies with more flexible exchange rates compared with more rigid regimes.
- Sacrifice ratio (domestic demand compression required for the trade balance to improve by 1 percentage point of GDP):
  - Following the recent shock, the sacrifice ratio for economies with flexible exchange rate regimes is about half the ratio observed during previous episodes.
- Exchange rate rigidity has become costlier for economies in Latin America; external adjustment to exogenous shocks now requires a larger domestic demand compression in more rigid currencies due to real appreciations against major trading partners and regional competitors.

### Export Elasticities and Product-Level Responses
- Aggregate export response is limited; granular trade data reveal wide variation in sensitivity across products.
- Export elasticity depends on export product composition:
  - Manufactures and textiles have shown stronger responses to real depreciations than commodities.
  - In Latin America, where export baskets are concentrated in commodities, exchange rate flexibility tends to spur diversification and may support structural policies aimed at diversification.

### Policy-Relevant Implications
- Exchange rate flexibility can:
  - reduce the domestic demand cost of external adjustment to terms-of-trade shocks;
  - facilitate expenditure-switching that complements the income effect in recent episodes.
- Countries with rigid exchange rate regimes face higher adjustment costs, amplified by real appreciations relative to regional competitors.
- Structural policies that promote diversification away from commodity-concentrated export baskets can enhance the effectiveness of exchange rate flexibility in supporting adjustment.

*Source: 3. External Adjustment to Terms-of-Trade Shifts, Regional Economic Outlook: Western Hemisphere, International Monetary Fund | April 2017*

### 1. Trade Balance

### 1. Trade Balance

### Overview: external adjustment to terms-of-trade (TOT) shocks
- Analysis focuses on responses to a 10 percent reduction in the terms of trade among Latin American economies with flexible exchange rate regimes, 2000–16.
- During recent TOT busts, most adjustment occurred through import compression rather than export expansion.
- Historical decompositions of real exports show external demand and terms-of-trade shocks were the main drivers of recent export performance; however, except for Mexico and Argentina, exports appear to be underperforming as suggested by an unexplained component in the model’s forecast errors (Figure 3.9).

### Exchange rate flexibility and the sacrifice ratio
- Exchange rate flexibility acts as a shock absorber: despite large negative income effects during TOT bust episodes, real depreciation enables expenditure-switching and eases the adjustment burden on domestic demand and output growth.
- Exchange rate flexibility reduces the domestic sacrifice ratio of adjustment in Latin America:
  - Panel indicators show reduction in domestic demand necessary to reduce external deficit by one percentage point of GDP, with values spanning from –2.1 to 0.0 in the charts (four quarters; percent).
  - Contribution of income and expenditure-switching effects to the sacrifice ratio is reported for recent episodes in countries with flexible exchange rate regimes; charts show counterfactual, sacrifice ratio, unconstrained scenario, and difference series with values between –2.1 and 0.0 (four quarters; percent).
- Despite real depreciations lowering the sacrifice ratio, most adjustment has come through import compression rather than export expansion.

### Export elasticities: aggregate and product-level findings
- Average country-product elasticity of export market share with respect to the real effective exchange rate is about –0.13.
  - Interpretation: a 10 percent real depreciation increases the average country-product export share by about 1.3 percent with respect to its starting point.
- The average product displays an elasticity of about –0.1; elasticities vary substantially across the 764 products in the sample:
  - For about two-thirds of products, a depreciation boosts the country’s export share of that product; for most of the remaining products the impact is statistically indistinguishable from zero.
- Regional and income-group variation in pooled real effective exchange rate elasticities (Figure 3.10):
  - Emerging market economies display less responsiveness on average than advanced economies.
  - Latin America and emerging Asia, as well as advanced economies, show statistically significant responsiveness.
  - Emerging Asia’s estimated elasticity is about twice as large as that of the LA5 (Brazil, Chile, Colombia, Mexico, Peru).
- Product-group heterogeneity (Figure 3.11):
  - Manufactures and textiles display higher market-share responsiveness than commodities, which respond little to real exchange rate movements.
  - Subcomponents of manufactures (chemicals; machinery and transport equipment; other manufactures) show broad-based responsiveness.
- Role of global value chains (GVCs):
  - Participation in GVCs can reduce manufacturing export elasticities; Ahmed, Appendino, and Ruta (2016) estimate that participation in GVCs reduces the real effective exchange rate elasticity of manufacturing exports by 22 percent on average.
  - Emerging Asia’s deeper embedding in GVCs and downstream positioning help explain larger measured responsiveness, notwithstanding that imported input cost effects may mitigate expansionary impacts of depreciations.

### Country-level effects and recent episodes
- Estimated contribution of real effective exchange rate movements during 2013–15 to export values in 2014–16 (percent of 2012 export value; constant U.S. dollars):
  - Colombia: real depreciation over this period boosted exports by 7.5 percentage points since 2012.
    - This compares with an observed fall of nearly 40 percent in export value over this period; the depreciation boost was substantial but far from fully offsetting the external shock.
  - Ecuador: real appreciation placed a drag on exports of more than 4 percentage points since 2013.
- Country case studies and stylized episodes:
  - Chile and Colombia: allowed exchange rates to absorb shocks; real effective depreciation of 10 percent in Chile and 30 percent in Colombia in a two-year window from the onset of their shocks; expenditure-switching contributed to external adjustment, lowering the burden on domestic demand and supporting growth.
  - Brazil and Ecuador: adjustment came primarily through deep contractions in domestic demand; Ecuador’s dollarization and limited external financing access forced adjustment via fiscal consolidation and tighter import restrictions.
  - Bolivia: external balances deteriorated due to accommodative fiscal policy and rapid credit growth smoothing the collapse in export prices; adjustment began via import compression while buffers were drawn down but reserves remain adequate.
- Within-country heterogeneity:
  - Even when aggregate exports appear inelastic to the real exchange rate (e.g., Brazil), depreciations lead to larger market shares of many export products, indicating substantial inter-sectoral reallocation potential (Figure 3.13).

### Policy implications
- Three main policy implications for Latin American economies facing the end of the commodity super-cycle:
  - Exchange rate flexibility reduces the sacrifice ratio of external adjustment by enabling expenditure-switching, supporting somewhat stronger exports and output growth, and redirecting consumer spending from imports to domestically produced goods.
  - The cost of exchange rate rigidity has risen: countries with currencies moving in sync with the U.S. dollar that strengthened against regional partners have experienced larger losses of competitiveness and higher sacrifice ratios, implying larger output costs from external adjustment through domestic demand compression.
  - Exchange rate flexibility can complement structural policies to shift resources to the noncommodity sector: depreciations boost exports of manufactures more than other goods, especially where manufacturing concentration and adequate infrastructure exist. Closing infrastructure gaps that support dynamic manufacturing would reduce the sacrifice ratio of external adjustment going forward.

*Source: REGIONAL ECONOMIC OUTLOOK: Western Hemisphere, International Monetary Fund | April 2017*

### Box 3.2. A Comparative Analysis of External Adjustment in South America

### Box 3.2. A Comparative Analysis of External Adjustment in South America

### Overview
- Figure 3.2.1 presents indexed (t = 100) adjustments to terms-of-trade shocks in selected South American countries: Bolivia, Brazil, Chile, Colombia, Ecuador.
- Period t denotes the year in which the terms of trade begin to fall for each country.

### Timing of Terms-of-Trade Shock
- t = 2012 for Chile
- t = 2013 for Brazil
- t = 2014 for Bolivia, Colombia, and Ecuador

### Export and Import Category Definitions (by country)
- Hydrocarbon exports are for Bolivia, Colombia, and Ecuador
- Minerals exports are for Chile
- For Brazil exports are hydrocarbon and minerals
- Non-hydrocarbon exports are for Bolivia, Colombia, and Ecuador
- Non-minerals exports are for Chile
- For Brazil exports are non-hydrocarbon and non-minerals

### Indexed Series Shown in Figure 3.2.1 (Index: t = 100)
- 1. Hydrocarbon and Mineral Export Values (t–1 t t+1 t+2)
  - 80
  - 85
  - 90
  - 100
  - 110
  - 95
  - 105
  - 115
- 2. Non-Hydrocarbon and Non-Mineral Export Values (t–1 t t+1 t+2)
  - 60
  - 70
  - 80
  - 90
  - 100
  - 110
- 3. Non-Oil Import Values (t–1 t t+1 t+2)
  - 60
  - 70
  - 80
  - 100
  - 120
  - 90
  - 110
  - 130
- 4. Real Effective Exchange Rate (t–1 t t+1 t+2)
  - 90
  - 92
  - 96
  - 100
  - 104
  - 106
  - 94
  - 98
  - 102
  - 108
- 5. Real Domestic Demand (t–1 t t+1 t+2)
  - 92
  - 94
  - 98
  - 102
  - 106
  - 108
  - 96
  - 100
  - 104
  - 110
- 6. Real Gross Domestic Product (t–1 t t+1 t+2)
  - (No explicit numeric series printed for panel 6 in the supplied content)

*This box was prepared by Yan Carrière-Swallow.*

### 3. ExTERNAL AdjUsTMENT TO TERMs-Of-TRAdE sHIfTs

### 3. ExTERNAL AdjUsTMENT TO TERMs-Of-TRAdE sHIfTs

### Context and main observations
- Following a decade of strong capital inflows, Latin America is now experiencing weaker economic growth and financial inflows accompanying the end of the commodity super-cycle.
- Global factors, notably global commodity prices, are strongly associated with cyclical movements of capital inflows in emerging markets; this holds particularly true for Latin America.
- Country-specific structural factors—good governance and strong institutional and regulatory frameworks—play a key role in attracting inflows over longer time horizons.
- Capital flows in countries with deeper financial markets and stable, large domestic investor bases exhibit lower sensitivity to external shocks; a larger presence of foreign investors and more open capital accounts increase sensitivity.
- Exchange rate flexibility can mitigate the vulnerabilities of capital flows to the region.

### Historical patterns and magnitudes
- Since the early 2000s, gross capital inflows to the LA7 (Argentina, Brazil, Chile, Colombia, Mexico, Peru, Uruguay) increased, on average, from about zero in the early 2000s to a remarkable 9 percent of GDP at the onset of the global financial crisis.
- Gross inflows to the LA7 remained robust (near their precrisis levels) until late 2014, after which inflows started to soften with the end of the commodity super-cycle.
- Compared with other emerging markets since 2000, Latin American countries received lower capital inflows on average: gross inflows averaged 5 percent of GDP and net inflows averaged 2½ percent of GDP in Latin America, versus 7 percent and 3½ percent of GDP in other emerging markets.
- Gross inflows and gross outflows exhibit a strong positive correlation over time; changes in gross inflows and outflows tend to be in the same direction.
- Gross inflows are generally significantly larger than gross outflows; hence net inflows tend to be driven by gross inflows.

### Cyclical synchronization across countries
- Capital inflows show synchronized cyclical variation across countries, particularly for the LA5 (Brazil, Chile, Colombia, Mexico, Peru).
- For the LA7, Brazil and Mexico exhibit closely aligned inflow cycles, broadly following the LA7 median.
- Chile, Colombia, and Peru broadly exhibit similar cyclical behavior, with Chile’s inflows larger on average relative to its economy.
- Argentina and Uruguay exhibit higher volatility in capital inflows relative to the other five LA7 countries; both experienced a significant fall in inflows in the early 2000s, with Uruguay rebounding strongly and Argentina remaining subdued.

### Structural cross-country heterogeneity
- There is substantial cross-country variation in average gross inflows (relative to GDP) since 2000:
  - Albania, Bulgaria, Kazakhstan, and Vietnam averaged more than 12 percent of GDP in gross inflows.
  - Argentina, Egypt, and Indonesia averaged less than 2 percent of GDP in gross inflows.
  - For the LA7, Chile received the most gross capital inflows, averaging 7½ percent of GDP since 2000.
  - Argentina’s gross capital inflows averaged ¾ percent of GDP over that period.
- The variation in capital inflows across countries is at least as large as the variation across time:
  - 43 percent of the variation in gross inflows in emerging markets is attributable to variation “within” countries (across time), whereas 36 percent is attributable to variation “between” countries (average over time).
- The relative importance of “between” country variation is driven largely by other emerging market regions in the sample, suggesting cyclical variables might play a more important role in explaining capital flows in Latin America than in other emerging markets.

### Subcomponents of capital flows
- Capital flows are decomposed into foreign direct investment (FDI), portfolio flows, and “other investment” flows (mainly bank loans and deposits for sample countries).
- FDI inflows in emerging markets are noticeably larger than portfolio and other investment inflows:
  - In LA7 countries, FDI inflows have averaged 3¾ percent of GDP since 2000.
  - Portfolio inflows averaged 1¼ percent of GDP.
  - Other investment inflows averaged ¼ percent of GDP.
- Portfolio inflows are relatively more volatile than FDI inflows; the share of variation in portfolio inflows across time is noticeably larger than its share of variation across countries.
- Total flows for the sample include foreign direct investment, portfolio, other investment, and derivative flows, although derivative flows are minute for the countries in the sample.
- Gross and net inflows and outflows—and their comovement—are mirrored across these subcomponents, though each subcomponent exhibits some singularities in behavior.

### Empirical correlation evidence (selected figures from Table 4.1)
- Gross inflows: overall cross-correlations (1990–2016) for LA5 = 0.59; LA7 = 0.71; OEM = 0.77.
- Gross outflows: overall cross-correlations (1990–2016) for LA5 = 0.59; LA7 = 0.56; OEM = 0.61.
- FDI gross inflows: 1990–2016 correlations for LA5 = 0.67; LA7 = 0.55; OEM = 0.84.
- Portfolio gross inflows: 1990–2016 correlations for LA5 = 0.51; LA7 = 0.55; OEM = 0.36.
- Other gross inflows: 1990–2016 correlations for LA5 = 0.62; LA7 = 0.72; OEM = 0.80.
- Note: LA5 = Brazil, Chile, Colombia, Mexico, Peru; LA7 = Argentina, Brazil, Chile, Colombia, Mexico, Peru, Uruguay; OEM (other emerging markets) includes Albania, Bangladesh, Bulgaria, China, Croatia, Egypt, Ghana, Hungary, India, Indonesia, Kazakhstan, Kenya, Malaysia, Morocco, Nigeria, Philippines, Poland, Romania, Russia, Saudi Arabia, South Africa, Thailand, Tunisia, Turkey, Vietnam.

### Policy implications highlighted
- In the context of weaker domestic growth, faltering external demand, higher global policy uncertainty, and faster-than-expected U.S. monetary normalization, understanding drivers of capital flows is crucial for emerging markets and Latin America.
- Policy dimensions that can mitigate vulnerabilities to capital flow volatility include:
  - Strengthening institutional and regulatory frameworks to attract more stable inflows.
  - Deepening domestic financial markets and expanding the domestic investor base to lower sensitivity to external shocks.
  - Considering exchange rate flexibility as a tool to absorb external shocks and reduce vulnerabilities associated with capital flow reversals.

*Prepared by Carlos Caceres, Carlos Gonçalves, and Galen Sher, with research assistance from Genevieve Lindow; Carolina Osorio Buitrón provided data on monetary shocks in the United States. International Monetary Fund | April 2017.*

### 2. Other Emerging Markets

### 2. Other Emerging Markets

### Variation in Capital Flows across and within Countries
- For emerging markets, 61 percent of the variation in portfolio inflows is attributable to variation “within” countries (across time), whereas 18 percent is attributable to variation “between” countries (average over time). In the case of FDI inflows to these countries, those numbers are 19 percent and 46 percent, respectively.
- Average levels of FDI, portfolio, and other investment flows vary significantly across countries. Examples reported for 2000–16:
  - Gross FDI inflows averaged more than 9 percent of GDP in Bulgaria, Hungary, and Vietnam.
  - Gross FDI inflows averaged 1½ percent of GDP for Egypt and Indonesia.
- For LA7 countries (Argentina, Brazil, Chile, Colombia, Mexico, Peru, Uruguay):
  - Chile and Uruguay were the largest recipients of both gross FDI and portfolio inflows over 2000–16.
  - Argentina recorded the lowest amount for both gross FDI and portfolio inflows over that period.
- Broad conclusion: capital flows exhibit strong cyclical and structural variation.

### Drivers of Capital Flows: Global (Push) and Country-Specific (Pull) Factors
- Core global variables included in the analysis:
  - VIX (Chicago Board Options Exchange Volatility Index, log)
  - G7 real GDP growth (year over year)
  - U.S. short-term interest rates
  - Global commodity price (log)
- Country-specific cyclical factors:
  - Real GDP growth differential (domestic growth minus global growth, lagged)
  - Short-term interest rate differential (domestic minus U.S., lagged)
- Country-specific structural factors (used to explain fixed effects m_i):
  - Governance, regulatory quality, business climate, political risk, corporate tax rate, credit rating, etc.
- Estimation period and data frequency:
  - Quarterly data over the period from 2000:Q1 to 2016:Q2.

### Empirical Model and Estimation Approach
- Cyclical model (fixed effects panel):
  - Y_{i,t} = a + b1 G_t + b2 C_{i,t} + m_i + e_{i,t}, where Y_{i,t} is the capital flow measure (percent of trend GDP), G_t global factors, C_{i,t} country cyclical factors, m_i country fixed effects.
- Structural model for fixed effects:
  - m_i = g + ρ Z_{i,t} + u_{i,t}, where Z_{i,t} is a country-specific structural factor; structural factors included one at a time due to multi-collinearity.
- To mitigate endogeneity, all country-specific variables are included with a lag.
- Model estimated using standard panel data techniques and fixed effects to minimize omitted-variable bias in βs.
- The model is applied separately for LA5, LA7, and other emerging markets (OEMs).

### Core Estimation Results (Fixed Effects, 2000–16) — Selected Findings from Table 4.3
- Sample groupings:
  - LA5 = Brazil, Chile, Colombia, Mexico, Peru
  - LA7 = Argentina, Brazil, Chile, Colombia, Mexico, Peru, Uruguay
  - OEM (other emerging markets) = China, Croatia, Egypt, Hungary, India, Indonesia, Morocco, Malaysia, Philippines, Poland, Romania, Russia, South Africa, Thailand, Turkey
- Global commodity price (log) coefficients (statistical significance indicated):
  - Net Inflows:
    - LA5: −2.174** (standard error 0.755)
    - LA7: 3.757** (standard error 1.403)
    - OEM: 2.735*** (standard error 0.545)
  - Gross Inflows:
    - LA5: 4.182*** (standard error 0.387)
    - LA7: 4.458** (standard error 1.354)
    - OEM: 4.918*** (standard error 1.261)
  - Gross Outflows:
    - LA5: −2.008** (standard error 0.660)
    - LA7: 0.701 (standard error 1.631)
    - OEM: −2.214* (standard error 1.225)
- G7 real GDP growth (year over year) coefficients:
  - Net Inflows:
    - LA5: 0.308* (standard error 0.139)
    - LA7: 0.131 (standard error 0.225)
    - OEM: 0.346* (standard error 0.182)
  - Gross Inflows:
    - LA5: 0.509** (standard error 0.171)
    - LA7: 0.368* (standard error 0.166)
    - OEM: −0.067 (standard error 0.442)
- U.S. short-term interest rates coefficients (selected):
  - Net Inflows:
    - LA5: −0.302* (standard error 0.133)
    - LA7: 0.199 (standard error 0.363)
    - OEM: 0.319 (standard error 0.293)
  - Gross Outflows:
    - OEM: 0.815* (standard error 0.435)
- Real GDP growth differential (lagged) for Gross Inflows:
  - LA5: 0.527*** (standard error 0.101)
  - LA7: 0.055 (standard error 0.096)
  - OEM: 0.073 (standard error 0.118)
- Model fit (R-squared):
  - Net Inflows: LA5 0.252; LA7 0.264; OEM 0.209
  - Gross Inflows: LA5 0.480; LA7 0.385; OEM 0.141
  - Gross Outflows: LA5 0.269; LA7 0.097; OEM 0.060
- Observations and number of countries:
  - Net Inflows observations: LA5 322; LA7 440; OEM 872
  - Gross Inflows observations: LA5 322; LA7 440; OEM 872
  - Gross Outflows observations: LA5 322; LA7 440; OEM 861
  - Number of countries: LA5 5; LA7 7; OEM 15

### Role of Commodity Prices and the Global Financial Cycle
- Global commodity prices are strongly associated with higher capital inflows to all emerging markets (robust across alternative commodity indices and individual commodity series).
- The cyclicality of capital flows tends to follow the global commodity price cycle closely (Figure 4.7).
- Interpretation:
  - Global commodity prices may proxy for the “global financial cycle” or global demand factors that influence capital flows.
  - Commodity prices might react faster to changes in global economic developments and thus reflect those changes more rapidly than global GDP measures.
- Historical context:
  - Since the early 2000s commodity prices have been the best proxy for the global financial cycle in explaining capital inflows and asset prices in emerging markets.
  - In the 1990s, the VIX was a better proxy for the global financial cycle related to capital flows in emerging markets.
- Additional findings:
  - The VIX and U.S. interest rates do not appear strongly associated with capital flows once global commodity prices are included, but the VIX is statistically significant when included individually.
  - Commodity prices may signal improved outlooks in commodity-related sectors and broader macroeconomic and financial conditions, affecting investment decisions in Latin America across commodity and noncommodity sectors.

### Country-Specific Cyclical Factors and Heterogeneity
- Differential between domestic interest rates and global interest rates does not appear to have a strong effect on capital inflows in these specifications.
- The real GDP growth differential (domestic vs. global) is strongly and positively associated with capital inflows for other emerging market economies, but not robustly for Latin American economies once commodity prices are included.
- Splitting the sample between commodity and noncommodity exporters yields results for commodity exporters similar to those for Latin America.

*Source: IMF staff calculations, Regional Economic Outlook: Western Hemisphere, April 2017.*

### 4. DRIvERs Of CApITAL fLOWs AND THE ROLE Of THE INvEsTOR BAsE IN LATIN AMERICA

### 4. DRIvERs Of CApITAL fLOWs AND THE ROLE Of THE INvEsTOR BAsE IN LATIN AMERICA

### Country-specific institutional and political drivers
- Countries with more efficient governments, better regulatory quality, and tighter control of corruption tend to attract more capital inflows relative to the size of their economies.
- Higher political stability, lower political risk, and more entrenched democratic institutions and political accountability mechanisms are associated with higher capital inflows.
- Model estimates (controlling for other factors):
  - Increasing any one of the indicators measuring government effectiveness, regulatory quality, control of corruption, or rule of law from current LA7 levels to the average among advanced economies would lead to a sustained increase in capital inflows of about 1½–1¾ percent of GDP.
  - Improving those indicators from current levels in Brazil, Colombia, and Peru to levels observed in Chile would raise capital inflow levels by about 1½–2 percent of GDP.
  - For Argentina, that figure could be up to 3 percent of GDP.
  - Actual gross capital inflows to Chile since 2000 have been, on average, 2¾ percent of GDP higher than in the other LA7 countries.
- Lower domestic corporate tax rates and higher credit ratings are also associated with higher capital inflows.
- Structural (institutional) variables explain slower-moving changes across FDI, portfolio, and other investment flows; global and cyclical factors are more strongly associated with portfolio inflows than with FDI (commodity prices positively associated with FDI in Latin America).

### Global and cyclical drivers (correlations and component results)
- Cross-correlations (principal components and global variables, 2000–16) include exact sample associations such as:
  - principal component of stock prices in EMs (log) correlated 0.86*** with principal component of capital inflows in EMs.
  - Global commodity prices (log) correlated 0.82*** with principal component of capital inflows in EMs and 0.93*** with principal component of stock prices in EMs (log).
  - U.S. nominal effective exchange rate (log) correlations listed as 20.75***, 20.86***, 20.93*** with principal component of capital inflows in EMs, principal component of stock prices in EMs (log), and Global commodity prices (log), respectively.
  - vIX (log) correlation with principal component of capital inflows in EMs is 20.38***.
  - G7 Real GDP Growth correlation with principal component of capital inflows in EMs is 0.30**.
- Impulse response magnitudes from IPVAR baseline (no interactions):
  - A sustained 20 percent increase in commodity prices would be accompanied by an average increase in capital inflows of almost 2 percent of GDP to Latin America and other emerging market economies.
  - An increase in the VIX of some 10 points would lead to a fall in capital inflows of about the same magnitude (roughly 2 percent of GDP).
  - A deceleration in the global economy by 1 percentage point or an unanticipated U.S. monetary policy tightening of about 50 basis points would lead to a fall in capital inflows in emerging markets of close to 1 percent of GDP.
- Decomposition for two periods:
  - Global financial crisis (2008:Q1 to 2009:Q2): most of the fall in capital inflows to Latin America was driven by global factors, mainly global output growth and commodity prices. For other emerging markets, the domestic growth differential accounted for more than a quarter of the explained variation.
  - End of commodity super-cycle (2013:Q1 to 2016:Q2): sharp decline in commodity prices was the largest contributor to the reduction in capital inflows for all emerging markets. Domestic growth differential accounted for 19 percent of the variation in inflows for other emerging markets and just 9 percent for Latin America.

### Robustness checks and model selection
- To mitigate model selection bias, a Sala-i-Martin (1997)-style robustness procedure was used:
  - N = 15 potential explanatory variables (listed in Table 4.5) yield (2^N − 1) fixed-effects regressions, yielding more than 32,000 possible models.
  - Histograms of estimated coefficients across all model variants indicate variables robustly associated with capital flows (concentration to right/left of zero).
- Findings from robustness analysis (examples):
  - Global commodity prices: for Latin American countries, all estimated coefficients related to global commodity prices are positive and significant across all model variants.
  - VIX: coefficients can be negative in some models and positive in others; most are not statistically significant.
  - Global output growth: most estimated coefficients are positive and significant for Latin American countries, but mainly not significant for other regions.

### Regional differences: Is Latin America different?
- Once commodity prices are accounted for, capital inflows to Latin America do not appear to be strongly linked to domestic growth, whereas they remain highly linked for other emerging market economies.
- Global factors play a predominant role in driving the cyclical behavior of capital flows to Latin American countries relative to other emerging markets.
- Going forward, with external demand and commodity prices expected to remain low, downward pressure on capital inflows to Latin America and other emerging markets is likely to persist compared with the post-global financial crisis period; nonetheless, inflows to Latin America are expected to remain relatively more resilient than in other emerging markets with weaker domestic growth prospects.
- Country-specific structural factors have strong effects on capital flows in both Latin America and other emerging market regions; all institutional and political factors included in regressions are statistically significant for both sets of countries.

### Role of the investor base and domestic market characteristics (IPVAR interaction results)
- Methodology: an interacted panel vector autoregression (IPVAR) assesses how dynamic responses of capital flows to external shocks (VIX, global commodity prices, global GDP growth, U.S. monetary shock) vary with investor base and market characteristics.
- Key interaction findings:
  - Higher foreign participation in domestic debt markets: capital flows are more sensitive to external factors.
  - Deeper domestic financial markets and more liquid stock markets (larger stock market relative to GDP): lower sensitivity of capital flows to external shocks.
  - Larger share of pension funds in domestic financial intermediation: decreases sensitivity of capital inflows to global factors (pension funds tend to allocate to long-term stable investments).
  - Exchange rate regime: capital inflows in countries with fixed exchange rate regimes tend to exhibit greater sensitivity to external shocks—particularly to U.S. monetary shocks—than in countries with more flexible exchange rate arrangements.
  - Capital account openness: higher degrees of capital account openness are associated with capital inflows that are more vulnerable to external conditions.
- Joint observations:
  - Countries with both deeper markets and higher foreign participation tend to exhibit better macroeconomic and financial fundamentals on average, including lower inflation rates and inflation volatility, higher domestic growth and lower growth volatility, lower sovereign spreads, more favorable credit ratings, and better governance indicators.
  - Policy trade-off: deeper markets reduce sensitivity to shocks, but higher foreign participation increases sensitivity; both characteristics often coexist in countries with stronger fundamentals, making a clear prescriptive answer on opening vs. restricting foreign participation ambiguous.

*Source: IMF staff calculations, Regional Economic Outlook: Western Hemisphere, April 2017.*

### Conclusions and Policy

### Conclusions and Policy

### Major findings on capital flows in emerging markets and Latin America
- High degree of variation in capital flows across time is common across emerging market economies, particularly in Latin America; this synchronicity reflects the important role of global factors in driving the cyclical component of capital inflows.
- Commodity prices are empirically found to play a predominant role in explaining capital flows; other global factors, such as global growth or global risk aversion, are also important, but a large part of their effect seems to be captured by commodity prices.
- Commodity prices appear to be a better proxy for the “global financial cycle” in capital flows and asset prices in emerging markets since the early 2000s.
- Once commodity prices and other global factors are taken into account, domestic economic growth does not seem to significantly drive the cyclical behavior of capital flows in Latin America, unlike in other emerging market regions.
- Country-specific structural “pull” factors explain a significant portion of the cross-country heterogeneity in average levels of capital flows; factors include governance, efficiency of public institutions, strength of regulatory and legal frameworks, political stability, and accountability.

### Quantitative evidence on global drivers and decomposition of commodity price effects (Box 4.1)
- Correlation patterns (1990–2000 and 2000s) indicate that in the 2000s commodity prices correlated more strongly with the principal component of gross capital inflows and stock prices in emerging markets than either the VIX or U.S. short-term interest rates.
- Decomposition of commodity prices into demand and supply components (2000–16) and fixed-effects regressions on gross inflows:
  - Sample: Observations = 1,312; Number of countries = 22; R-squared = 0.135 (column (1), Total).
  - Coefficients and robust standard errors (selected):
    - vIX (log): 20.830 (0.813) in column (1).
    - G7 real GDP growth (year over year): 20.776* (0.406) in column (1).
    - U.S. short-term interest rates: 0.341 (0.383) in column (1).
    - Real GDP growth differential (lagged): 0.435*** (0.107) in column (1).
    - Demand component of commodity price (log): 0.252*** (0.046) in column (1).
    - Supply component of commodity price (log): 2.989 (2.343) in column (1).
  - Disaggregated by flow type (selected):
    - Column (2) FDI: Demand component = 0.088** (0.041); R-squared = 0.048.
    - Column (3) Portfolio: Demand component = 0.050** (0.022); R-squared = 0.168.
    - Column (4) Other: Demand component = 0.119*** (0.020); R-squared = 0.169.
- Interpretation:
  - The demand component of commodity prices is positive and statistically significantly associated with gross capital inflows.
  - Demand-related increases in commodity prices likely expand trade-related activities raising demand for external finance and may permit foreign banks to expand credit supply.
  - Global risk aversion and U.S. monetary policy have clearer roles for portfolio flows specifically; demand-component effects are strongest for “other” flows (primarily cross-border bank lending).

### Investor base, domestic financial markets, and vulnerabilities
- Promoting deeper domestic financial markets and stable domestic financial intermediation (such as pension funds and insurance companies) can reduce vulnerabilities of capital flows to external shocks.
- Countries that open their capital accounts to foreign participation to gain market depth appear to have better macroeconomic performance than relatively closed countries with shallower domestic financial markets; however, the pace of financial opening needs to align with financial stability considerations to avoid rapid and excessive buildup of risk.
- Allowing for more exchange rate flexibility is an effective way of reducing the sensitivity of capital flows to adverse external shocks.
- Effective macroprudential policies can help monetary policy achieve its goals and could complement fiscal and structural policies to contain potential adverse side effects for financial stability.

### Firm-level evidence on commodity prices and investment (Box 4.2)
- Firm-level comovement: Investment growth for commodity-producing firms (agriculture and mining) tracks growth in export-related commodity prices; investment growth for other firms shows a similar, slightly less volatile pattern — suggesting spillover effects across sectors.
- Regression specification (equation 4.2.1) estimates the association between investment and commodity export prices, allowing differential responses for commodity-producing firms.
- Fixed-effects estimation results for firms domiciled in LA6 countries (Table 4.2.1):
  - Sample and panels:
    - Number of observations = 4,651 (column (1)); Number of firms = 763.
    - Number of observations = 4,650 (column (2)); Number of firms = 762.
  - Selected parameter estimates (coefficient (robust standard error)):
    - Q (a): 1.56*** (0.310) in column (1); 1.55*** (0.310) in column (2).
    - (p/K) (b): 0.58 (0.675) in both columns.
    - D/E (λ): 24.43*** (0.706) in column (1); 24.42*** (0.705) in column (2).
    - IE/D(-1) (ρ): 3.88 (4.724) in column (1); 3.98 (4.723) in column (2).
    - ΔD/K(-1) (ϑ): 0.16 (0.142) in column (1); 0.15 (0.141) in column (2).
    - year t (u): 20.17*** (0.060) in column (1); 20.16*** (0.059) in column (2).
    - P_x (k): 0.05*** (0.013) in column (1); 0.04*** (0.014) in column (2).
    - P_x × X (m): 0.04 (0.040) in column (2) (unrestricted m).
  - Interpretation:
    - Positive and statistically significant k indicates a positive association between commodity export prices and investment.
    - The positive association also holds for noncommodity-producing firms, indicating significant spillover effects across sectors.

### Policy implications and recommended policy mix
- Monetary policy alone may be insufficient when commodity-price-driven inflows raise growth, inflationary pressures, and exchange rate appreciation simultaneously. Specifically:
  - An increase in commodity prices tends to raise growth and inflation (calling for tighter monetary policy) while also accompanying higher inflows and likely exchange rate appreciation (which complicates monetary tightening to forestall overheating).
- Recommended policy mix to manage commodity-price-driven inflows:
  - Use fiscal policy alongside monetary policy to respond to surges in capital inflows.
  - Maintain or adopt exchange rate flexibility to help absorb inflow shocks.
  - Deploy effective macroprudential policies to contain financial-stability risks and to help monetary policy achieve its objectives.
  - Sequence capital account opening prudently: aim to gain market depth but align the pace of opening with financial stability considerations to avoid rapid risk buildup.
- Structural reforms to strengthen governance, public institutions, regulatory and legal frameworks, and political stability can attract higher average levels of capital inflows and reduce vulnerabilities.

*Source: Conclusions and Policy, Box 4.1 and Box 4.2 (IMF staff calculations and regression results) from the provided content.*

### Box 4.2 (continued)

### Box 4.2 (continued)

### Interacted Panel Vector Autoregression (IPVAR) — Model and Identification
- Purpose: explore how the impulse response of capital inflows to external shocks depends on investor base and domestic market characteristics.
- Panel VAR algebraic representation (as described in source):
  - [ y  X ]_{i,t} = A_0 + Σ_{j=1}^L A_j [ y  X ]_{i,t-j} + [ e_y  e_X ]_{i,t}
- Model variables:
  - y includes: capital flow measure (in percent of trend GDP) and the differential between domestic growth and global growth.
  - X includes: global commodity prices, the VIX, G7 real GDP growth, and the identified monetary shock to U.S. interest rates from Osorio Buitron and Vesperoni (2015).
- Exogeneity and identification:
  - Variables in X are treated as exogenous relative to y (block exogeneity ensured by restrictions in A_j).
  - Shock identification relies on Cholesky decomposition.
- IPVAR extension:
  - Coefficients in A_j are functions of country-specific characteristics F_{i,t}; specifically, a_{i,t} = c + Γ' F_{i,t}, where c and Γ are parameters estimated by IPVAR.
  - Coefficients corresponding to the effect of lags of y on X are set to zero to reflect exogeneity of X.
- Robustness note: broadly similar results obtained using alternative ordering of exogenous variables.

### Empirical Results — Core Specification Model for Gross Inflows, 2000–16 (Annex Table 4.1, selected results)
- First Stage: Cyclical Variables — Global Factors (Core Model columns shown as LA5, LA7, OEM, EMs)
  - vIX (log): 1.230 (LA5), 0.987 (LA7), 0.795 (OEM), 0.692 (EMs); standard errors (0.862), (1.077), (1.359), (0.946).
  - G7 real GDP growth (year over year): 0.509** (LA5) with (0.171); 0.368* (LA7) with (0.166); −0.067 (OEM) with (0.442); 0.070 (EMs) with (0.297).
  - U.S. short-term interest rates: −0.083 (LA5) with (0.127); 0.214 (LA7) with (0.314); 1.129 (OEM) with (0.645); 0.799* (EMs) with (0.446).
  - Global commodity price (log): 4.182*** (LA5) with (0.387); 4.458** (LA7) with (1.354); 4.918*** (OEM) with (1.261); 4.434*** (EMs) with (0.973).
- First Stage: Country-Specific Factors
  - Real GDP growth differential (lagged): 0.055 (LA5) (0.116); 0.073 (LA7) (0.096); 0.560*** (OEM) (0.118); 0.419*** (EMs) (0.116).
  - Short-term interest rate differential (lagged): −0.070 (LA5) (0.129); −0.080 (LA7) (0.079); 0.026 (OEM) (0.071); −0.018 (EMs) (0.058).
- First Stage: Constant terms
  - Constant: −18.141** (LA5) (4.352); −19.244 (LA7) (10.425); −24.244** (OEM) (9.338); −20.458*** (EMs) (7.024).
- Second Stage: Structural Variables — Country-Specific Factors (selected)
  - Government effectiveness: 1.253*** (LA5) (0.037); 1.949*** (LA7) (0.111); 3.192*** (OEM) (0.215); 2.729*** (EMs) (0.145).
  - Regulatory quality: 1.412*** (LA5) (0.031); 2.024*** (LA7) (0.068); 4.743*** (OEM) (0.164); 3.493*** (EMs) (0.109).
  - Control of corruption: 1.069*** (LA5) (0.015); 1.596*** (LA7) (0.061); 4.471*** (OEM) (0.197); 2.593*** (EMs) (0.112).
  - Corporate tax rate: −0.115*** (LA5) (0.004); −0.190*** (LA7) (0.009); −0.356*** (OEM) (0.013); −0.279*** (EMs) (0.009).
  - Credit rating: 0.494*** (LA5) (0.037); 0.752*** (LA7) (0.051); 0.571*** (OEM) (0.110); 0.628*** (EMs) (0.071).
- Goodness of fit and sample
  - Observations: 322 (LA5), 440 (LA7), 872 (OEM), 1,312 (EMs).
  - R-squared (first stage): 0.480 (LA5), 0.385 (LA7), 0.141 (OEM), 0.151 (EMs).
  - R-squared interquartile range (second stage): 0.424–0.826 (LA5), 0.162–0.520 (LA7), 0.214–0.434 (OEM), 0.193–0.374 (EMs).
  - Number of countries: 57 (LA5), 152 (LA7).

### Alternative Specifications and Fixed Effects (Annex Table 4.2, highlights)
- Various fixed-effects specifications estimated: vIX only; vIX and commodity prices; domestic growth differential; domestic growth differential and commodity prices.
- Global commodity price (log) remains frequently positive and significant across specifications:
  - Examples: 4.182*** (column 1 LA5) with (0.387); 4.918*** (column 3 OEM) with (1.261); 4.024*** (column 5 LA5) with (0.567); 2.566** (column 6 OEM) with (0.919).
- Real GDP growth differential (lagged) shows significance in some OEM and LA5 specifications:
  - 0.560*** (OEM) with (0.100); 0.333** (LA5) with (0.096); 0.633*** (OEM) with (0.070).

### FDI and Portfolio Inflows — Estimation Results, 2000–16 (Annex Table 4.3, selected results)
- Gross FDI inflows — First Stage: Global Factors (selected)
  - vIX (log): 0.102 (LA5) (0.560); 0.325 (LA7) (0.399); 1.006 (OEM) (0.980).
  - Global commodity price (log): 1.493* (LA5) (0.594); 1.508** (LA7) (0.527); 2.100 (OEM) (1.196).
- Gross portfolio inflows — First Stage: Global Factors (selected)
  - vIX (log): −0.338 (LA5) (0.401); −0.300 (LA7) (0.525); −0.938*** (OEM) (0.227).
  - G7 real GDP growth (year over year): 0.282** (LA5) (0.064); 0.264*** (LA7) (0.049); 0.343*** (OEM) (0.109).
  - Global commodity price (log): 1.206* (LA5) (0.446); 2.140** (LA7) (0.711); 1.252*** (OEM) (0.390).
- Second Stage: Structural Variables — FDI and Portfolio (selected)
  - Government effectiveness on Gross FDI Inflows: 2.214*** (LA5) (0.087); 2.351*** (LA7) (0.084); 2.184*** (OEM) (0.136).
  - Government effectiveness on Gross Portfolio Inflows: 0.400*** (LA5) (0.025); 0.812*** (LA7) (0.073); 1.304*** (OEM) (0.044).
  - Corporate tax rate on Gross FDI Inflows: −0.219*** (LA5) (0.007); −0.229*** (LA7) (0.006); −0.187*** (OEM) (0.009).
  - Corporate tax rate on Gross Portfolio Inflows: −0.047*** (LA5) (0.002); −0.097*** (LA7) (0.006); −0.010** (OEM) (0.005).
  - Credit rating: 0.904*** (LA5) (0.073) effect on FDI; 0.223*** (LA5) (0.015) effect on portfolio inflows.
- Fit and samples
  - Observations for FDI and portfolio models: 322 (LA5), 440 (LA7), 872 (OEM) for each.
  - R-squared (first stage) for FDI: 0.176 (LA5), 0.174 (LA7), 0.071 (OEM).
  - R-squared (first stage) for portfolio: 0.388 (LA5), 0.307 (LA7), 0.192 (OEM).
  - R-squared interquartile ranges (second stage) reported per model (e.g., 0.350–0.796 for FDI LA5).

### Key Analytical Insights (from continuation of Box 4.2 and adjacent chapter text on Migration and Remittances)
- Commodity prices:
  - Higher commodity prices lead to higher investment by both commodity producers and other firms in a similar fashion (interaction coefficient m not statistically significant).
  - Global commodity price (log) coefficients positive and frequently significant across gross inflows, FDI, and portfolio specifications.
- Investor base and institutions:
  - Country-specific structural measures (government effectiveness, regulatory quality, control of corruption, rule of law, voice and accountability, political stability, polity synthetic index, credit rating) are consistently positively associated with higher inflows (many coefficients significant at *** p < 0.01).
  - Corporate tax rate consistently shows negative and significant association with capital inflows across specifications.
- Distinct patterns across regions and investor types:
  - OEM (other emerging markets) often shows larger sensitivity of cyclical variables (e.g., real GDP growth differential) to inflows than LA5 or LA7.
  - Portfolio inflows appear more sensitive to global risk sentiment (vIX) and G7 growth in some specifications, while FDI shows stronger links to institutional quality.
- Broader context linking to Migration and Remittances (chapter highlights)
  - Outward migration from Central America and the Caribbean: emigrants account for about 10 percent or more of the population; remittances average about 8 percent of GDP for some countries.
  - Emigration may reduce real per capita economic growth through losses in labor and productivity; remittances can mitigate effects by serving as a large and relatively stable source of external financing and by smoothing private consumption.
  - The analysis indicates the negative impact of emigration on real per capita growth seems to outweigh growth gains from remittances, notably for the Caribbean; remittances still play an important macroeconomic stabilizing role in Central America and the Caribbean.
  - Mexico is a special case: largest source of immigrants to the United States and a hub for Central American migrants; South American countries generally show less material emigration and remittance impacts.
  - Policy implications discussed include targeted structural reforms to reduce “brain drain,” reduce remittance transaction costs, and promote formal channels of remittance intermediation.

*Source: IMF staff calculations.*

### 5. MIGRATION AND REMITTANCEs IN LAC: MACROECONOMIC sTABILIZERs AND ENGINEs OF GROWTH?

### 5. MIGRATION AND REMITTANCEs IN LAC: MACROECONOMIC sTABILIZERs AND ENGINEs OF GROWTH?

### Migration patterns and stocks
- Since the 1960s, emigration has been an important phenomenon for LAC and has also resulted from violent conflict in several countries, in particular in Central America, through the 1990s and subsequent deterioration in the security situation.
- Emigration shares of home populations:
  - Caribbean: about one-fifth of the population lives abroad.
  - CAPDR (Central America, Panama, and the Dominican Republic) and Mexico: emigrants represent about 10 percent of the population in both instances.
  - South America (average): about 2½ percent of the subregion’s population.
  - Paraguay and Uruguay: emigrant populations represent more than 10 percent of their populations.
  - Bolivia, Colombia, and Ecuador: described as having sizable emigrant populations.
- Destination patterns:
  - About two-thirds of all LAC migrants reside in the United States.
  - Almost all emigrants from Mexico and four out of five emigrants from CAPDR live in the United States.
  - Caribbean migrants are more diverse in destination, with slightly more than half residing in the United States and significant emigration to Canada and Europe.
  - Within South America, important destinations have been Argentina and historically Venezuela; since the 1980s crisis, migration to the United States and Spain has grown. Chile and Colombia have become notable destinations in recent years.

### Migrant demographics, skills, occupations, and earnings
- Age and education on entry to the United States (American Community Survey; Figure 5.3 summary):
  - Immigrants typically enter the United States in their early 20s.
  - Immigrants from Mexico and CAPDR tend to be younger and have lower levels of education compared with those from South America and the Caribbean.
  - Of South American and Caribbean migrants, 40 percent or more have attended college (or beyond).
  - Brain drain is a particular challenge for the Caribbean (Box 5.1).
- Legal status and naturalization:
  - Emigrants from Mexico and CAPDR are more likely to be undocumented, and much less likely to become U.S. citizens than those from the Caribbean and South America.
- Occupations:
  - Mexico and CAPDR emigrants: concentrated in construction, maintenance, transportation, production, and food preparation (lower-skilled occupations).
  - South America and Caribbean emigrants: more likely in office and administration, sales, management, and health-related occupations (higher-skilled).
- Wages:
  - Higher-skilled immigrants from South America and the Caribbean earn more: their hourly wages are almost 60 percent higher, on average, than those of immigrants from Mexico and CAPDR (Figure 5.4).
- Remitting behavior (United States migrants):
  - About a third of LAC immigrants send remittances to their home countries.
  - The share remitting is somewhat higher for CAPDR and falls with age.
  - The likelihood of remitting does not appear to relate to the immigrant’s income.
  - Married heads with an absent spouse are the most likely to remit.
  - On average, LAC immigrants who remit send about US$2,500 to their families on an annual basis.
  - Conditional on remitting, immigrants in the United States with lower levels of education and income tend to remit more as a share of their income, while immigrants from the Caribbean send home much less than those from Central America (Figure 5.7).

### Remittance levels, channels, and costs
- Aggregate and comparative magnitudes:
  - Remittances to LAC reached 1.4 percent of regional output in 2015 (Figure 5.5).
  - Remittances peaked at about 2 percent of regional output before the global financial crisis and fell sharply during and after the crisis.
  - As a share of GDP, remittance flows to CAPDR and Caribbean countries far exceed those received by South America and Mexico.
  - In four countries—El Salvador, Haiti, Honduras, and Jamaica—remittances exceed 15 percent of GDP (Figure 5.6).
- Channels and market shares:
  - Most remittances are deposited and received in cash through either money or value transfer service operators or banks.
  - Money transfer operators (largest: Western Union and MoneyGram) provide the dominant channel, with a market share of more than 80 percent of remittance channels in LAC.
- Fees and costs:
  - Fees for sending remittances are substantial and reduce the amount received by emigrants’ families (Box 5.2).
  - World Bank Remittance Prices Worldwide database is cited for channel information, but it does not account for amounts transacted on each channel.

### Empirical estimation: impact of migration and remittances on growth
- General findings:
  - Outward migration, taken separately, has a negative effect on per capita growth in LAC countries.
  - Remittances seem to have positive (though not always statistically significant) growth effects, largest in high-remittance-receiving subregions.
  - The net effect of emigration and remittances together is small and ambiguous for LAC as a whole, negative for the Caribbean, less clear-cut for other groupings, and possibly small/positive for CAPDR.
- Subregional detail and heterogeneity:
  - Net effect likely negative for the Caribbean and South America (the Caribbean experiencing large emigrant outflows and brain drain; South America having relatively large shares of high-skilled emigrants in some countries).
  - Net impact appears small and possibly positive for CAPDR, which receive much higher remittances as a share of GDP.
  - For Mexico, the effect is about zero (caveat: result estimated purely from time series variation and sample is particularly small).
- Methodology specifics:
  - Regressions estimated on 1980–2015 (unbalanced sample).
  - Ordinary least squares regressions include country fixed effects.
  - Controls: real GDP growth in the United States, foreign direct investment as a share of GDP, export growth, change in the terms of trade, country risk, stock of emigrants as a share of home population; robustness to investment and lagged real GDP per capita.
  - Endogenous variables instrumented: remittances and migration, government spending, and money supply (M2) as a share of GDP.
  - Instruments used: regional averages (excluding the country), share of rural population, and unemployment in destination countries.
  - Instrumental variables regressions implemented using two-stage least squares, include country fixed effects but not time fixed effects; first-stage F statistics exceed 10 for all specifications except the Caribbean.
  - Results are presented as ranges to reflect two-way causality concerns (Figure 5.8); five-year averages produce more negative net effects over the longer term (Annex Table 5.2.2).
- Interpretation:
  - Remittances provide positive effects conditional on migration (the estimation controls for migrant stocks and migration flows, so the positive effect of remittances is relative to the counterfactual of “migration without remittances”).
  - Overall, remittances (and migration) appear unlikely to act as drivers of durable growth.

### Stabilizing role of remittances: consumption smoothing, fiscal and financial effects
- Countercyclicality and disaster response:
  - Remittances tend to increase when a natural disaster hits the recipient country; the jump is stronger for LAC than for emerging market and developing economies in general and is especially important for the Caribbean (Figure 5.9).
  - Example: Grenada remittances rose from 2 percent of GDP in 2003 to 4 percent of GDP in 2004 (the year Hurricane Ivan hit), then normalized in following years.
- Income volatility:
  - For most LAC countries, overall income including remittances is less volatile than domestic income measured using international prices (Annex Figure 5.2.1).
  - Part of this stabilizing effect reflects that remittances to LAC are typically set in U.S. dollars.
- External financing and relative stability:
  - Remittances are an important and relatively reliable source of external financing for many emerging market and developing economies.
  - Remittances are larger than any other external inflow for CAPDR and the Caribbean.
  - For South America, private capital inflows (excluding FDI) have typically been larger than remittances, but remittances have been a more stable source of external financing across subregions.
- Macroeconomic stabilizing effects (Table 5.1 summary):
  - Fiscal revenues: Yes, significant for CAPDR and the Caribbean.
  - Nonperforming loans: Yes, significant for CAPDR.
  - Real exchange rate (appreciation): Results generally insignificant and not strong.
  - Inflation: Yes, significant for the Caribbean and CAPDR.
- Poverty and inequality:
  - Evidence from Mexico confirms that remittances can help lower poverty as well as inequality, especially in the wake of negative shocks (Box 5.3).

### Key statistics and exact figures extracted from the chapter
- Remittances:
  - 1.4 percent of regional output in 2015.
  - Peaked at about 2 percent of regional output before the global financial crisis.
  - In El Salvador, Haiti, Honduras, and Jamaica remittances exceed 15 percent of GDP.
  - Average remittance amount sent by LAC immigrants who remit: about US$2,500 annually.
- Migrant stocks and destinations:
  - About two-thirds of all LAC migrants reside in the United States.
  - Caribbean: about one-fifth of the population lives abroad.
  - CAPDR and Mexico: emigrants represent about 10 percent of the population.
  - South America average emigrant share: about 2½ percent.
- Wage differences:
  - Hourly wages of higher-skilled immigrants from South America and the Caribbean are almost 60 percent higher, on average, than those of immigrants from Mexico and CAPDR.
- Channels:
  - Money transfer operators account for more than 80 percent of remittance channels in LAC.
- Empirical period and methods:
  - Regressions estimated on the period 1980–2015 (unbalanced sample).
  - Figure 5.8 uses changes in migrant stocks and remittances during 2003–13 to estimate cumulative net effects.

*Source: International Monetary Fund | April 2017 — Chapter 5, “MIGRATION AND REMITTANCEs IN LAC: MACROECONOMIC sTABILIZERs AND ENGINEs OF GROWTH?”*

### 5. MIGRATION AND REMITTANCEs IN LAC: MACROECONOMIC sTABILIZERs AND ENGINEs OF GROWTH?

### 5. MIGRATION AND REMITTANCEs IN LAC: MACROECONOMIC sTABILIZERs AND ENGINEs OF GROWTH?

### Remittances as stabilizers of consumption and risk sharing
- Remittances cushion declines in domestic income expressed in international prices even if not increased in U.S. dollars.
- Remittances support consumption smoothing by:
  - being countercyclical and providing direct countercyclical income;
  - supporting financial inclusion and access to credit (allowing saving in good times and drawing on those savings when domestic income contracts; strengthening borrowers’ capacity to repay);
  - enabling households to vary the share of receipts used for consumption.
- Empirical findings:
  - Higher remittances (as a share of GDP) are associated with more consumption smoothing across countries in the face of idiosyncratic shocks to output.
  - Remittances help delink country-specific consumption growth from country-specific output growth.
  - Consumption-growth correlations are lower for countries with higher levels of remittances, with effects relatively pronounced for LAC and particularly the Caribbean (samples are quite limited and the relationships are not statistically significant).
  - For the Caribbean, most of the cushioning of consumption risk seems to be associated with remittances, due to high remittances-to-GDP ratios and susceptibility to natural disasters.
  - Remittances appear to be a relatively important channel for consumption smoothing in LAC compared with other financial linkages.

### Effects on financial sector stability and credit quality
- Theoretical ambiguity: remittances could either fuel excessive private credit growth (diminishing credit quality) or strengthen borrowers’ capacity to repay (improving credit quality).
- Empirical results (Table 5.2; controlling for reverse causality) indicate:
  - In LAC, higher remittances are associated with lower nonperforming loans (NPLs), though the effect is only significant for CAPDR.
  - A 1 percentage point increase in the remittances-to-GDP ratio for CAPDR would cause a drop in the NPL ratio by almost 0.5 percentage point.
  - The increase in the remittances-to-GDP ratio since 2000 has contributed to the fall in CAPDR’s NPL ratio by 1 percentage point.
  - Sufficient observations were not available for the Caribbean; in South America remittances are small and other determinants dominate NPL dynamics.
- Key coefficients from Table 5.2 (instrumental variable regressions; standard errors in parentheses):
  - Real exchange rate: LAC 0.027 (0.03); Caribbean 0.003 (0.016); CAPDR 0.061*** (0.02).
  - Revenue-to-GDp ratio: LAC 0.44 (0.31); Caribbean 1.16** (0.56); CAPDR 0.39** (0.16).
  - Inflation: LAC 1 21 (20.34); Caribbean 2.52** (1.27); CAPDR 3.37* (1.97).
  - Nonperforming loan ratio: 20.48 (0.46); n.a.; n.a.; 20.45** (0.22).
  - Notes: CApDR = Central America, Panama, and the Dominican Republic; n.a. = not applicable; *p < 0.1; **p < 0.05; ***p < 0.01.

### Fiscal effects and revenue mobilization
- Remittances can raise fiscal revenues indirectly because spending out of remittances is part of the base for indirect taxation, expanding fiscal space and scope for countercyclical fiscal policy.
- Empirical findings for LAC:
  - Controlling for determinants of fiscal revenue and endogeneity, remittances help mobilize fiscal revenues; the effect is particularly strong and significant for CAPDR and the Caribbean.
  - Example: the actual increase in the remittance-to-GDP ratio since 2000 in CAPDR accounted for an increase in fiscal revenues of 1 percent of GDP (the increase in the region’s revenue-to-GDP ratio since 2000 is fully concentrated in the group of five countries receiving significant remittances).
  - In the Caribbean, higher remittances have been associated with improved fiscal balances; in CAPDR they are associated with higher expenditures and no significant effect on fiscal balances, implying revenues helped create scope for additional spending.

### Competitiveness and inflation risks
- Theoretical channels: remittances boost household spending, potentially putting pressure on nontradable prices and interest rates, leading to real exchange rate appreciation.
- Empirical literature: typically finds remittances tend to appreciate the real exchange rate, though some studies find no or very small effects.
- Findings in this chapter for LAC:
  - Generally no significant impact of remittances on the real effective exchange rate, reflecting large leakages through imports due to small country size and high openness.
  - A significant (but small) effect on real exchange rate is found only for CAPDR.
  - Inflation: the lagged change in the remittances-to-GDP ratio is associated with somewhat higher inflation in the Caribbean and CAPDR; the contemporaneous effect on inflation appears significant only for the Caribbean. This may reflect prevalence of fixed or stabilized exchange rate regimes in these subregions.

### Risks of dependence and shock transmission
- Dependence on remittances is risky when migrants concentrate in a single host country: negative shocks in host economies (e.g., unemployment) can sharply reduce remittances and amplify negative spillovers to home countries.
- Historical evidence:
  - During the global financial crisis of 2007–09, a rise in Hispanic unemployment in the United States of 5½ percentage points was followed by a decline in remittances, harming incomes, external positions, and fiscal revenues in Latin America.
  - In CAPDR, remittances as a share of GDP declined by more than 1 percentage point and the ratio of fiscal revenue to GDP fell by more than 1 percentage point in 2008–10 compared with 2007; econometric estimates attribute about half of this revenue decline to the contraction in remittance flows.
  - Spain’s crisis also affected remittances for South American migrants.
- Non-economic shocks and policy changes can also matter:
  - Deportations from the United States totaled 3.7 million between 2006 and 2015; peaked at 434,000 in 2013, then declined.
  - The unauthorized immigrant population in the United States is estimated to have been stable since 2009 at about 11 million.
  - Close to 80 percent of unauthorized immigrants in the United States are from Latin America, mostly from Mexico.
  - About half of the stock of immigrants originating from Mexico and two-thirds of immigrants originating from CAPDR were estimated to be unauthorized in 2015.
  - Preempting potential shifts in U.S. immigration policy, remittances to some Latin American countries, such as El Salvador and Mexico, have recently increased.
- Potential impacts of abrupt return migration are uncertain and could range from positive to negative across subregions; estimates suggest effects could be particularly tilted to the negative side for CAPDR, with potential further negative outcomes given the disruptive nature of sudden return migration.

### Policy priorities and recommendations
- Overall aim: tilt the balance of emigration and remittances toward favorable outcomes while managing risks.
- Support remittances given their financing and stabilizing roles:
  - Reduce the cost of remittances and facilitate formal intermediation.
  - Strengthen anti–money laundering/combating the financing of terrorism frameworks to preserve correspondent banking relationships and keep formal channels open.
  - Explore regional solutions for regulatory cooperation.
  - Develop and enhance payments systems (including mobile money) and ensure remittance-service providers’ access to them to foster competition and reduce prices.
  - Improve consumer education and transparency about remittance costs (for example, via price databases).
- Manage risks from dependence on remittances:
  - Enhance financial sector resilience to volatility and potential sudden stops.
  - Short-term steps to curb brain drain to reduce negative effects from emigration that generates little remittances (examples: bonding schemes for publicly funded education).
  - Long-term structural reforms to retain potential emigrants by fostering job opportunities for the highly educated (example: development of medical tourism).
  - Promote return migration of skilled workers through recognition of foreign qualifications, portability of social security benefits, and inclusion in professional regulations and public sector hiring.
  - Improve business environment and institutions to raise productivity and limit incentives for outward migration.
  - Improve security situations in Central America and some Caribbean countries to enable more productive use of remittances, including investment.
  - Leverage diaspora ties to bolster foreign direct investment and tourism receipts.
  - Boost labor supply, particularly by raising female labor market participation, to offset emigration impacts.
  - Cushion adverse effects of real exchange rate appreciation from remittance spikes by reducing labor and product market rigidities and supporting provision of credit to firms.
- In the event of significant changes in immigration and remittance policies in the United States:
  - Countries with flexible exchange rates should allow exchange rate adjustments to act as a short-term shock absorber.
  - In the long term, maintain fiscal discipline while prioritizing social assistance expenditures to limit adverse effects on poverty and inequality.
- Other policy considerations:
  - Taxing wire transfers has been proposed in the U.S.; such measures could reduce remittances or shift them to nonwire systems or informal channels; alternative channels include Bitcoin or gift cards.

*Source: IMF staff calculations and analysis as presented in the chapter "5. MIGRATION AND REMITTANCEs IN LAC: MACROECONOMIC sTABILIZERs AND ENGINEs OF GROWTH?"*

### 5. MIGRATION AND REMITTANCEs IN LAC: MACROECONOMIC sTABILIZERs AND ENGINEs OF GROWTH?

### 5. MIGRATION AND REMITTANCES IN LAC: MACROECONOMIC STABILIZERS AND ENGINES OF GROWTH?

### Brain drain: Jamaica (Box 5.1)
- Nearly half of Caribbean emigrants residing in the United States have at least a college education, a ratio comparable to the U.S. Native-born population; only one-quarter of other Latin American and Caribbean emigrants in the United States have at least a college education.
- Among Jamaican-born women living in the United States, 50 percent have at least a college education versus one-quarter of women in Jamaica.
- Simple calculation implication: nearly one-third of all women with at least a college education in Jamaica have emigrated, compared with about 13 percent of those with high school or less.
- Sectoral composition: 65 percent of Jamaican immigrants are in nursing and health care practitioner sectors versus 7 percent in the United States–born population.
- For men: 21 percent of men in Jamaica are college educated, while 37 percent of Jamaican men in the United States have at least a college education.
- Statistical significance notes:
  - The Caribbean vs. other LAC difference is statistically significant at 99 percent.
  - The Jamaica U.S. vs Jamaica home-country women difference is statistically significant at 95 percent.

### Cost of sending remittances (Box 5.2)
- Regional average cost of sending US$200 in remittances: 6.2 percent for Latin America and the Caribbean (LAC); other regional averages include East Asia and Pacific 4; Europe and Central Asia 16; Middle East and North Africa 14; South Asia 6.4; Sub-Saharan Africa 9.5. (Source: World Bank Remittance Prices Worldwide database; figure labels preserved as in source.)
- Trend and country changes:
  - Costs have declined over past decades: about 40 percent decline for flows to El Salvador, Colombia, and Guatemala over 2001–15; about 15 percent decline to Jamaica over 2001–15 (Orozco, Porras, and Yansura 2016).
- Within-LAC patterns:
  - Largest remittance recipients and dollarized economies benefit from lower transaction costs; dollarization eliminates currency conversion cost.
  - Costs remain relatively elevated for Caribbean countries compared with Latin America.
  - Remittances from the United States are the most cost effective.
- Channel and market structure:
  - Money transfer operators (MTOs) remain the dominant channel and market is MTO-dominated.
  - Mobile remittances-service providers are the most cost effective at 3.5 percent for a US$200 transaction.
- Pressures increasing costs:
  - Global withdrawal of correspondent banking relationships (CBRs) has put upward pressure on remittance costs.
  - Withdrawal has disproportionately affected MTOs and smaller providers due to know-your-customer and anti–money laundering/combating the financing of terrorism standards; local banks in some countries face similar pressures.
  - 60 percent of members of the Asociación de Supervisores Bancarios de las Américas report remittances to LAC have been affected.
- Scale and development goal:
  - Officially recorded remittances to LAC in 2015: US$68 billion.
  - UN Sustainable Development Goal: reduce transaction costs to less than 3 percent and eliminate corridors with transaction costs higher than 5 percent by 2030.
- Policy levers noted:
  - Enhance competition among remittance-service providers.
  - Promote new payment technologies, especially online and mobile channels.

### Migration, remittances, poverty, and inequality: Mexico case study (Box 5.3)
- Mexico 2014:
  - About 5 percent of Mexican households received remittances in 2014; average remittances about US$290 per month (US$140 median).
  - Remittance-receiving households were poorer than non-remittance-receiving households even when including remittances in household income (Figures 5.3.1 and 5.3.3).
  - Remittances constituted a larger share of income for poorer households (Figure 5.3.2).
- Crisis-time dynamics:
  - During the global financial crisis the likelihood of receiving remittances increased for poorer households and fell for richer households (Figure 5.3.3), suggesting an increased insurance role and reduced investment motive.
- Macro inequality effect:
  - Comparison of actual Gini coefficients with constructed counterfactual incomes for remittance-receiving households suggests inequality would be higher in the absence of remittances even accounting for behavioral responses (Figure 5.3.4).
- Data and methodological notes:
  - Household data sources: Instituto Nacional de Estadística y Geografía (INEGI); IMF staff calculations.
  - Counterfactual income uses actual income for non-remittance-receiving households and estimated counterfactual income for remittance-receiving households based on propensity score matching.
  - Further methodological details in Koczan and Loyola (forthcoming).

### Characteristics of migrants to the United States (Annex 5.1: Annex Table 5.1.1)
- Sample: Migrants who entered the United States after age 22, 2014 (Integrated Public Use Microdata Series, American Community Survey).
- Selected metrics (Percent or units as in table; regional columns: Mexico, Central America, Caribbean, South America):
  - Proportion female: 52, 55, 59, 58
  - Proportion married: 69, 55, 54, 66
  - Proportion in one-adult household: 17, 22, 24, 19
  - Female labor force participation: 46, 58, 63, 61
  - Male labor force participation: 79, 81, 68, 81
  - Married female labor force participation: 44, 58, 67, 61
  - Married male labor force participation: 81, 82, 71, 82
  - Female hourly wage (U.S. Dollars): 9.06, 10.43, 17.56, 14.27
  - Male hourly wage (U.S. Dollars): 12.34, 13.33, 19.34, 21.05
  - Age (mean): 49, 50, 56, 51
  - Years in United States (mean): 17, 17, 22, 17
  - Entry age (mean): 20, 21.7, 24.5, 24.5
  - Proportion U.S. citizens: 28.5, 41.5, 64.4, 51.6
  - Family size: 4.1, 3.5, 3.3, 3.2
- Note: Age 22 chosen to reflect emigration after completing education; includes entire sample for some rows.

### Empirical approach: consumption smoothing and growth (Annex 5.2)
- Consumption smoothing specification (idiosyncratic country-specific deviations):
  - Δc̃_it = b0 + b1 R_it + γ1 Δỹ_it + γ2 R_it Δỹ_it + γ3 KA_it Δỹ_it + γ4 FI_it Δỹ_it + ε_it
  - Where Δc̃_it = Δc_it − Δc̄_t, Δỹ_it = Δy_it − Δȳ_t; R_it is remittances/GDP; KA_it is Chinn and Ito (2006) de jure capital account openness index; FI_it is de facto financial integration (Lane and Milesi-Ferretti 2007).
  - Degree of consumption smoothing captured by 1 − γ1 − γ2 − γ3 − γ4; γ2 measures extent remittances facilitate consumption risk-sharing by delinking consumption from output.
  - Estimation: ordinary least squares panel regressions with country-specific and time fixed effects.
- Annex Figure 5.2.2:
  - Plots slope coefficients from country-specific regressions of idiosyncratic consumption growth on idiosyncratic output growth (vertical axis) against average remittances as share of GDP (horizontal axis).
  - Interpretation: negative relationship suggests higher average remittances associated with lower deviations from perfect risk sharing.

### Empirical results: effects on short-term and long-term growth (Annex Tables 5.2.1 and 5.2.2)
- Short-term growth (Annex Table 5.2.1): selected coefficients and significance (OLS and IV columns maintained by region)
  - Change in emigrants/population:
    - Latin America and the Caribbean OLS: 2.478** (0.937)
    - South America IV: −13.97*** (4.734)
    - Caribbean IV: −33.63** (13.68)
    - Central America, Panama, and the Dominican Republic OLS: 12.85*** (2.982)
  - Remittances/GDp:
    - Latin America and the Caribbean OLS: −0.0174 (0.0863)
    - Latin America and the Caribbean IV: 0.990*** (0.305)
    - South America OLS: −0.657 (0.515)
    - Caribbean OLS: 0.129 (0.0722)
  - Change in terms of trade:
    - Latin America and the Caribbean OLS: 0.0485*** (0.0128)
    - South America OLS: 0.0392*** (0.0101)
  - Country risk:
    - Latin America and the Caribbean OLS: 0.133** (0.0468)
    - Latin America and the Caribbean IV: 0.181*** (0.0582)
  - Emigrants/population (level):
    - South America IV: 4.727*** (1.432)
  - Number of observations and fit:
    - Latin America and the Caribbean: 361 observations; Adjusted R-squared 0.157 (OLS)
    - South America: 170 observations; Adjusted R-squared 0.262 (OLS)
    - Caribbean: 152 observations; Adjusted R-squared 0.343 (OLS)
    - Central America, Panama, and the Dominican Republic: 105 observations; Adjusted R-squared not reported for IV
- Long-term growth (Annex Table 5.2.2): selected coefficients and significance (OLS and IV columns maintained by region)
  - Change in emigrants/population:
    - Latin America and the Caribbean OLS: −1.019 (1.644)
    - South America IV: −10.06** (4.756)
    - Caribbean OLS: −19.91*** (5.106)
    - Central America, Panama, and the Dominican Republic OLS: −2.483 (1.647)
  - Remittances/GDp:
    - Latin America and the Caribbean OLS: −0.339** (0.130)
    - Latin America and the Caribbean IV: −0.427* (0.219)
    - Caribbean IV: 0.356*** (0.128)
    - Central America, Panama, and the Dominican Republic IV: −0.255* (0.144)
  - M2/GDp:
    - South America OLS: −9.443** (3.285)
    - Caribbean OLS: −11.33*** (2.577)
    - Central America, Panama, and the Dominican Republic OLS: −2.788 (4.933)
  - Export growth:
    - Latin America and the Caribbean OLS: 0.00185*** (0.000410)
    - South America OLS: 0.168*** (0.0451)
    - Caribbean OLS: 0.210*** (0.0465)
  - Country risk:
    - Latin America and the Caribbean OLS: 0.150*** (0.0452)
  - Emigrants/population (level):
    - Latin America and the Caribbean OLS: 0.364** (0.145)
    - South America OLS: 1.820*** (0.385)
    - South America IV: −2.318*** (0.428)
  - Number of observations and fit:
    - Latin America and the Caribbean: 83 observations; Adjusted R-squared 0.370 (OLS)
    - South America: 39 observations; Adjusted R-squared 0.379 (OLS)
    - Caribbean: 37 observations; Adjusted R-squared 0.490 (OLS)
    - Central America, Panama, and the Dominican Republic: 23 observations; Adjusted R-squared not reported for IV

*Source: IMF staff calculations; Regional Economic Outlook: Western Hemisphere, April 2017.*

### 1. Emerging market and developing

### 1. Emerging market and developing economies

### Remittances and Income Volatility
- Annex Figure 5.2.1 plots standard deviations of income (domestic income plus remittances) on the vertical axis and GDP standard deviations on the horizontal axis.
- Interpretation rule from figure: Dots below the 45-degree line indicate that remittances lower income volatility.
- Regional panels shown (labels in source):
  - EMDEs (Emerging market and developing economies)
  - Latin America and the Caribbean
  - Caribbean
- Axis tick values displayed in the figure: 0, 0.3, 0.6, 0.9, 1.2, 1.5, 00.5, 1, 1.5 (as presented in source).

### Remittances and Risk-Sharing (Annex Table 5.2.3)
- Sample groups: EMDEs, LAC (Latin America and the Caribbean), Caribbean.
- Regression results and associated p-values (parentheses) as reported:
  - R_it: 0.000513 (0.515) for EMDEs; 20.000278 (0.806) for LAC; 20.00151 (0.536) for Caribbean.
  - ∆y~_it: 0.895*** (0) for EMDEs; 0.999*** (1.35e-09) for LAC; 1.290*** (0.000926) for Caribbean.
  - KA_it ∆y~_it: 20.0493 (0.253) for EMDEs; 20.0302 (0.648) for LAC; 0.0516 (0.733) for Caribbean.
  - R_it ∆y~_it: 20.0298** (0.0216) for EMDEs; 20.0428* (0.0565) for LAC; 20.0718* (0.0964) for Caribbean.
  - FI_it ∆y~_it (volume): 0.0989 (0.122) for EMDEs; 20.0215 (0.781) for LAC; 20.132 (0.763) for Caribbean.
  - FI_it ∆y~_it (equity): 20.371** (0.0171) for EMDEs; 20.149 (0.476) for LAC; 20.217 (0.809) for Caribbean.
  - Constant: 20.0132*** (0.000443) for EMDEs; 20.00750 (0.195) for LAC; 0.00222 (0.880) for Caribbean.
- Sample size and fit statistics:
  - Observations: 2,012 for EMDEs; 679 for LAC; 284 for Caribbean.
  - R-squared: 0.113 for EMDEs; 0.094 for LAC; 0.053 for Caribbean.
  - Number of countries: 117 for EMDEs; 29 for LAC; 12 for Caribbean.
- Note: Coefficients indicate that interactions between remittances (R_it), financial integration measures (FI_it), capital account openness (KA_it), and domestic income volatility (∆y~_it) are associated with variations in risk-sharing outcomes across regions. Specific statistical significance markers in the table: *** , ** , * (as presented).

### Country Groupings and Abbreviations (as listed)
- Country groups include: CAPDR, Caribbean Commodity Exporters, Caribbean Tourism-Dependent, Central America, Eastern Caribbean Currency Union (ECCU), LA7, LA6, South America.
- Region abbreviations provided:
  - Europe and Central Asia ECAMiddle East and North AfricaMENA
  - Emerging and Developing AsiaEDA South AsiaSAR
  - Emerging and Developing EuropeEDE Emerging Market and Middle-Income EconomiesEME
  - Emerging Market and Developing EconomiesEMDE Sub-Saharan Africa SSA
- Selected country abbreviations (as listed): Antigua and Barbuda ATG; Argentina ARG; The Bahamas BHS; Barbados BRB; Belize BLZ; Bolivia BOL; Brazil BRA; Canada CAN; Chile CHL; Colombia COL; Costa Rica CRI; Dominica DMA; Dominican Republic DOM; Ecuador ECU; El Salvador SLV; Grenada GRD; Guatemala GTM; Guyana GUY; Haiti HTI; Honduras HND; Jamaica JAM; Mexico MEX; Nicaragua NIC; Panama PAN; Paraguay PRY; Peru PER; St. Kitts and Nevis KNA; St. Lucia LCA; St. Vincent and the Grenadines VCT; Suriname SUR; Trinidad and Tobago TTO; United States USA; Uruguay URY; Venezuela VEN.

### Literature and Evidence Base (selected points from references)
- The chapter draws on a wide literature on remittances, risk-sharing, poverty and inequality, real exchange rate effects, financial development, and migration impacts (authors and works listed in the source reference section include Abdih et al. 2009; Acharya and Leon-Gonzalez 2013; Acosta et al. 2008; Adams 2006; Barajas et al. 2008; Barajas et al. 2010; Beaton et al. Forthcoming; Hadzi-Vaskov 2006; De et al. 2016; and many others).
- Topics covered in references include: fiscal sustainability in remittance-dependent economies; remittances and real exchange rates; remittances, poverty and inequality; remittances over the business cycle; withdrawal of correspondent banking relationships; determinants of risk sharing through remittances.

*Source: IMF staff calculations and chapter material from the IMF Regional Economic Outlook: Western Hemisphere, April 2017.*

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_Source: https://www.imf.org/-/media/files/publications/reo/whd/2017/may/wreo0517.pdf_