## WESTERN HEMISPHERE DEPARTMENT REO UPDATE, OCTOBER 2017 ## Source details **Canonical URL:** [WESTERN HEMISPHERE DEPARTMENT REO UPDATE, OCTOBER 2017](https://www.imf.org/-/media/files/publications/reo/whd/2017/october/whd-reo-update-2017-eng.pdf) ## Other formats - [Markdown version](/-/media/files/publications/reo/whd/2017/october/whd-reo-update-2017-eng.pdf.md) - [Structured JSON version](/-/media/files/publications/reo/whd/2017/october/whd-reo-update-2017-eng.pdf.json) --- ### Global and medium-term outlook - World growth subdued in many countries; stubbornly weak price and wage inflation in many advanced economies suggests continued slack. - Medium-term prospects for growth in GDP per capita are weak for many advanced and emerging market economies. - Exporters of commodities, especially fuel, particularly hard hit as adjustment to loss in commodity revenues continues. - Short-term risks broadly balanced; medium-term risks skewed to the downside. - Downside medium-term risks highlighted: - An inward turn of policies in advanced economies and increased protectionism. - A sharp slowdown in China. - Greater fallout from geopolitical conflicts. - High policy uncertainty could tighten global financial conditions if market confidence and asset valuations deteriorate. ### United States: growth, inflation, and policy assumptions - Growth projections: - 2017: 2.2 percent - 2018: 2.3 percent - Revisions: 0.1 and 0.2 percentage point lower than projected in April, respectively. - Revisions reflect downward revisions for early 2017 and changes in fiscal assumptions (April forecast embedded a fiscal impulse of 1 percent of GDP between 2017 and 2019). - Fiscal stance: broadly neutral in 2017 and tighter in 2018. - Hurricanes Harvey, Irma, and Maria increase near-term uncertainties, including size and timing of rebuilding efforts. - Inflation projections: - Consumer price inflation: 1.8 percent in 2017 (compared with 2.7 percent in the April WEO), down from 2.2 percent in 2016. - Core personal consumer expenditure inflation: rise more slowly, slightly exceeding 2 percent in 2019 before returning to 2 percent over the medium term. - Monetary policy assumption: somewhat more gradual normalization of the policy interest rate than projected in April 2017 WEO, given weaker projected demand and diminished inflation pressures. - Market developments: - Nominal yields on 10-year US Treasury bonds declined since March 2017 (as of mid-September). - US dollar weakened in real effective terms by over 7 percent from March to mid-September 2017. - Fiscal policy developments: - Agreement in September to raise the debt limit and continue funding the government until December (as part of hurricane relief legislation). - Administration outlined broad tax reform goals; proposed tax reform not incorporated into IMF staff forecast due to uncertainties about details. ### Canada - 2017 growth forecast revised upward from 2.5 to 3 percent owing to stronger-than-expected first half outcomes and supportive cyclical policies. - Second quarter annualized expansion: 4.5 percent (strongest quarterly growth rate since 2011). - Q2 contributors: household spending (gains in employment and earnings) and energy exports; business investment and non-energy exports recovering. - Housing: investment in residential structures declined by 4.7 percent in the second quarter due to policy measures to cool the housing market. - Bank of Canada raised the policy rate twice in 2017 to 1 percent as output gap narrowed sharply. ### Latin America and the Caribbean: cyclical recovery and projections - Regional recovery underway; domestic demand recovering gradually while net exports’ contribution declines as real imports increase. - Venezuela: full-blown economic, humanitarian, and political crisis; real GDP projected to fall by 35 percent in the period 2014–17; economy headed toward hyperinflation. - Regional growth projections: - LAC: 2017 = 1.2 percent (0.1 percentage point higher than in the April WEO) - LAC: 2018 = 1.9 percent (0.1 percentage point lower than in April) - Upward revision in 2017 mainly reflects better-than-expected first half outcomes for some large economies. - Output gaps remain sizable for both years, closing only gradually. - Inflation: - Regional inflation expected to decline to 4.2 percent in 2017 (from its peak of 6.2 percent in 2015) and to remain at about 3½ percent thereafter. - Regional heterogeneity (selected projections): - LAC: 2015 = 0.1; 2016 = –0.9; 2017 = 1.2; 2018 = 1.9 - South America: 2015 = –1.2; 2016 = –2.6; 2017 = 0.6; 2018 = 1.6 - CAPDR: 2015 = 5.1; 2016 = 4.6; 2017 = 4.1; 2018 = 4.4 - Caribbean tourism-dependent: 2015 = 0.9; 2016 = 1.4; 2017 = 1.8; 2018 = 2.3 - Commodity exporters: 2015 = –0.4; 2016 = –4.9; 2017 = –1.9; 2018 = 2.0 - Memorandum LA6: 2015 = –0.3; 2016 = –0.3; 2017 = 1.5; 2018 = 2.0 - Brazil: 2015 = –3.8; 2016 = –3.6; 2017 = 0.7; 2018 = 1.5 - Mexico: 2015 = 2.6; 2016 = 2.3; 2017 = 2.1; 2018 = 1.9 ### Adjustment to the terms-of-trade shock and labor/fiscal effects - Terms-of-trade shock partially reversed with moderate recovery in commodity prices, but large income losses remain for net commodity exporters (mainly South America); gains for tourism-dependent Caribbean and Central America. - Current account deficits narrowed substantially from peak in 2015. - Increased exchange rate flexibility facilitated adjustment; countries allowing exchange rate adjustment experienced milder domestic demand declines and drew less on buffers. - Decline in real wages smoothed labor market impact; unemployment increased mainly in countries with substantial slack. - Declining commodity revenues worsened fiscal balances in commodity exporters. - Fiscal stance: - Regional structural deficit corrected partially in 2016–17; fiscal impulse expected to turn positive in 2018 and remain broadly neutral thereafter. - Wide variation across countries: - Brazil’s structural balance expected to deteriorate throughout projection horizon. - Mexico and Argentina expected to continue to adjust during 2018–19. - Chile and Peru adjustments expected to be more back-loaded, starting in 2018–19. ### Subdued convergence and long-term trends - Medium-term Latin America per capita growth projected at 1.7 percent. - Comparison benchmarks: - Emerging market and developing economies: 3¼ percent - China: 9 percent - Region’s GDP per capita relative to the United States has started to slide after a mid-2000s pickup (from about 20 percent historically to about 28 percent). - Investment remains substantially below precrisis levels, contributing to lower capital stock and productivity (Adler and others 2017). - Labor contribution to growth expected to decline due to demographic transition; share of population older than 65 is growing steadily. ### Risks - Domestic risks: - Political risks and uncertainty with elections in several countries over next 12–18 months; risk of populist agendas and reversal of reforms. - Spillovers from Venezuela crisis minimal via trade and financing channels, but humanitarian crisis and migration to neighboring countries pose major risks. - External risks: - Capital flow reversals and tighter financial conditions: - If the Chicago Board Options Exchange Volatility Index increased by about 10 points (similar to mid-2011), capital inflows to LA7 countries would decline by about 2 percent of GDP from current level of about 4 percent of GDP. - An unanticipated US monetary policy tightening of about 50 basis points would lead to a drop in capital inflows of about 1 percent of GDP. - Corporate bond spreads highly sensitive to global volatility shocks; leverage remains high. - Financial stability risks in China: baseline embeds slower rebalancing, higher debt trajectory, diminished fiscal space—heightening probability of sharp slowdown with adverse regional spillovers. - Retreat from cross-border integration could reduce demand for the region’s products and raise costs of tradable consumer goods; curbing immigration or deportation policies could reduce remittances. - Natural disasters and climate change: - Baseline forecasts use data prior to recent hurricanes in the Caribbean and earthquakes in Mexico; near-term growth forecasts, especially for Caribbean, are subject to downside risks. - Recovery costs could add pressure on balance of payments and fiscal positions. - Recurrent climate-related catastrophes expected to increase in frequency and impact. ### Financial sector and corporate balance sheets - Corporate sector: - Corporate profitability rising. - Corporate leverage declining, though remains high in some cases. - Banking sector: - Nonperforming loans remain higher than in the past. - Bank profitability improving. - Credit to GDP broadly stable except for a few countries. - Vulnerabilities: worsening sovereign and corporate balance sheets could spill over to banking sector, especially where NPLs are elevated and profitability and credit to private sector are low. ### Policy priorities (regional) - Cyclical support: limited fiscal but improved monetary policy space. - Fiscal outcomes and pressures: - Primary fiscal deficit in LAC increased from 0.1 percent in 2013 to 2.7 percent in 2016. - Public debt increased from about 49 percent of GDP to 58 percent of GDP over same horizon and projected to increase further in many large economies. - Primary balances remain below debt-stabilizing levels; many countries need continued adjustment to sustainable footing. - Pace of adjustment depends on debt dynamics, market conditions, and likely impact on economic activity given already-weak growth. ### Fiscal multipliers and implications for adjustment - Recent studies for the region suggest an average fiscal multiplier of only 0.3. - Comparative multipliers: other emerging market economies average 0.6; advanced economies average 0.9. - Because multipliers in the region might turn out larger than 0.3, fiscal adjustment design should minimize impact on growth and protect priority spending, including spending for the most vulnerable. ### Patterns of fiscal adjustment (2013–16) and monetary policy - Some countries relied on expenditure cuts; cutting capital expenditure common and contributed to decline in potential output. - Governments used one-offs to raise revenues. - Several countries (Argentina, Chile, Colombia, Mexico) made tax system changes; associated revenue gains nonnegligible though full impacts still to be assessed. - Monetary policy: - Central banks reduced policy rates where inflation declined (Brazil, Chile, Colombia, Peru). - Where inflation remains above target (such as Argentina), monetary policy needs to remain tight. - Increased exchange rate flexibility acted as effective shock absorber; pass-through to inflation limited relative to past episodes. - Effective communication and increased transparency essential to anchoring expectations. ### Structural policy priorities - Close infrastructure gaps to support productivity and competitiveness. - Enhance female labor force participation: region raised female participation "to about 54 percent", but sizable gaps persist. - Reduce labor market informality. - Invest in human capital: learning outcomes remain below advanced economies despite improvements in educational attainment. - Improve governance and curb corruption: anticorruption strategies typically entail strong political leadership, legal and judicial reforms, enhanced transparency and accountability, stronger monitoring and enforcement. - Further regional trade and financial integration: - Regional trade about 15 percent of total exports (compared with 55 percent in Asia). - Estimated growth benefit: for every 10 percentage point increase in intraregional trade, per capita growth can increase by 32 basis points. - Support financial integration via nondiscriminatory frameworks for cross-border financial institutions, harmonization of regulatory and accounting frameworks, stable and transparent tax regimes for domestic and cross-border financial activities, and modification of regulatory limits on pension funds to allow regional investment. - Financial integration needs stronger regulatory, supervisory, and resolution frameworks and increased cooperation among supervisory entities. ### Regional developments and selected country outlooks - South America: growth gradually picking up after bottoming out in 2016; domestic demand strengthening and imports accelerating. - Argentina: - Recovery from recession; expected to grow by about 2½ percent in 2017. - Policy priorities: reduce inflation and the fiscal deficit; achieve announced targets of cutting the primary federal fiscal deficit by 2 percentage points of GDP over 2018–19. - Brazil: - Growth expected: 2017 = 0.7 percent; 2018 = 1.5 percent. - Upward revision of 0.5 percent in 2017 relative to April WEO; downward revision of 0.2 percent for 2018. - Gradual restoration of confidence and fiscal-sustainability reforms could raise growth to 2 percent in the medium term. - Ecuador: 2017 growth expected slightly positive, reflecting larger public spending financed via better access to international capital markets. - Venezuela: - After a contraction of 16.5 percent in 2016, projected to fall another 12 percent in 2017 and an additional 6 percent in 2018. - Inflation projected to exceed 1,000 percent in 2017 and on the path to hyperinflation. - Ongoing political instability and a humanitarian crisis. - Chile: weak H1 2017 due to copper disruptions and subdued business confidence; pickup expected in H2 2017 and 2018. - Colombia: orderly slowdown from permanent commodity income shock and structural tax reform; inflation moderated and returned to target. - Peru: slowed in H1 2017 with 2.3 percent growth year over year; risks from El Niño-related flooding and Odebrecht spillovers. - Bolivia: real GDP growth projected to be 4.2 percent in 2017; large fiscal and external current account deficits since 2014. - Paraguay: expected to grow close to potential, with stronger domestic demand bolstered by public investment. - Uruguay: growth projected to recover to 3.5 percent in 2017; inflation within central bank target range (3 to 7 percent). ### Country-specific policy priorities (selected) - Argentina: reduce inflation and fiscal deficit; fiscal rebalancing via reductions in energy subsidies and rationalization of spending; lower excessive tax burden; structural reforms to increase labor market flexibility and reduce informality. - Brazil: tackle unsustainable expenditure mandates, including pension reform; consider more front-loaded fiscal adjustment if recovery faster; make infrastructure concessions more attractive while strengthening governance. - Bolivia: adjust fiscal and credit policies to restore equilibrium; structural reforms to enhance private sector activity. - Chile: monetary policy appropriately accommodative; fiscal consolidation should be gradual. - Colombia: central bank easing to support recovery while protecting inflation expectations; infrastructure, peace agreement, and tax reform to support medium-term growth. - Ecuador: stronger-than-envisaged fiscal adjustment may be necessary; medium-term focus on competitiveness and labor market flexibility. - Peru: countercyclical policy stance for reconstruction; government invoked escape clause to increase deficit to 3 percent of GDP in 2017 (from 2.5 percent), and further to 3.5 percent of GDP in 2018. ### Mexico, Central America, Panama, and the Dominican Republic — developments and outlook - Mexico: - Growth projected: 2017 = 2.1 percent; 2018 = 1.9 percent. - 2018 slowdown driven by NAFTA uncertainty, domestic political uncertainty, and tighter financial conditions outweighing net export contribution. - Inflation projected to reach 5.9 percent on average in 2017 before gradually converging to 3 percent by early 2019. - Central America (aggregate CAPDR): - H1 2017 growth underpinned by oil price dynamics, US migration policy uncertainty, and higher external demand; remained close to potential and close to April 2017 projections. - Inflation accelerated in Q1 2017 in most countries, softened in Q2 2017. - Potential migration policy changes and Temporary Protected Status extensions remain major risks but have boosted remittances so far. - Exports benefited from higher US demand; tourism demand expanded in Costa Rica, Dominican Republic, and Panama; Panama’s services balance benefited from Panama Canal expansion. - Current account deficits narrowed, financed largely by FDI. - Financial systems stable; sovereign spreads contracted for all except El Salvador. - Honduras-Guatemala customs union signed June 2017; expectation that El Salvador and Nicaragua will join in mid-2018. - Domestic concerns: persistent public sector deficits and rising public debt in Costa Rica, El Salvador, and Dominican Republic; dollarization remains a major financial risk in Costa Rica, Honduras, Nicaragua. - Political uncertainties and corruption scandals weigh on growth. - Uruguay: - Steadfast fiscal consolidation key to gradual deficit reduction and stabilization of net public sector debt. - Monetary policy needs to remain tight to keep inflation close to center of target range. - Continued strong growth depends on planned infrastructure upgrades and structural reforms, particularly in education. ### Mexico and Central America — policy priorities - Mexico: maintain macro stability and market confidence; ongoing fiscal consolidation to stabilize public debt; strengthen fiscal framework; central bank stand ready to ease as inflation declines and expectations remain anchored. - Central America: reduce corruption; reinvigorate structural reform and social development (invest in human capital, encourage female labor force participation); prioritize education and health spending; maintain sustainable public finances; create room for security expenditures; enhance transparency and reduce business transaction costs; boost fiscal revenues and improve tax administration; contain current spending where possible. - Cross-cutting: prioritize education investment to boost labor productivity and potential growth. ### The Caribbean — developments and outlook - Baseline projections do not reflect impact of Hurricanes Harvey, Irma, and Maria. - Growth: - Tourism-dependent economies: 2017–18 = 2 .4 percent (up from 2. 1 percent in 2016). - Commodity exporters: 2017–18 = 1.3 percent (from –3.3 percent in 2016). - Substantial country variation; reconstruction could boost growth in subsequent years beyond baseline. - Guyana’s growth stronger supported by two new large gold mines and positive sentiment ahead of oil production in 2020. - External and fiscal: - Current accounts started to improve in commodity exporters. - Fiscal balances improving but deficits still large in commodity exporters. - Debt: some countries (Antigua and Barbuda, Grenada, Jamaica, St. Kitts and Nevis) have declining government debt-to-GDP ratios from very high levels; most other countries need additional fiscal consolidation. - Financial sector: - Numerous banks have high NPLs, constraining credit and increasing vulnerability. - Eastern Caribbean Currency Union progressing on reforms to strengthen bank resilience. - Further steps needed: develop distressed loan markets, address insolvency and debt-enforcement deficiencies, strengthen nonbank oversight, enhance capital adequacy of indigenous banks. - Secure correspondent banking relationships via AML/CFT improvements, bank consolidation, and improved communication with correspondent banks. - Natural disasters and climate change: - Additional steps needed for preparation, mitigation, response, and inclusion of disaster/climate risks into policy frameworks and budgets. - Use insurance and financial hedging tools; regional coordination could facilitate pooling of insurance coverage. ### Caribbean — policy priorities - Continue fiscal consolidation where needed to reduce high sovereign debt and build buffers. - Strengthen financial sector resilience (address NPLs, insolvency frameworks, nonbank oversight, bank capital adequacy). - Improve AML/CFT implementation to secure correspondent banking relationships. - Advance structural reforms to reduce electricity costs, deepen financial systems, tackle violent crime, reduce unemployment and brain drain. - Build disaster resilience through preparation, mitigation, insurance, and regional coordination. ### Box 1 — Long-Term Productivity in Latin America and the Caribbean: key findings - After disappointing growth outcomes, LAC activity recovering but medium-term growth expected to remain subdued. - Productivity (efficiency of capital and labor) drives long-term growth; LAC TFP worsened or changed little since the 1980s. - Decomposition results: - Long-term growth in LAC driven in equal parts by accumulation of capital and labor; TFP either negligible or a drag. - Brazil and Colombia: long-term growth relied more on a growing and more educated labor force. - Chile, Mexico, Peru: long-term growth relied more on investment in physical capital. - Growth in number of educated workers supported LAC more than EMDE; EMDE benefited from stronger physical capital accumulation. - Methodology: decomposition Δ(푌푌/퐿퐿)=αΔ(퐾퐾/퐿퐿) +Δ푇푇푇푇푇푇; data from Penn World Tables (PWT) 9.0; IMF staff calculations. - Sample LAC countries listed based on data availability. ### Productivity, investment, and growth (additional findings) - Ten-year rolling average measures used; real investment in LAC fell by 3.6 percent per year between 2013 and 2016. - If about a quarter of investment passes through to TFP growth (Adler and others 2017), this drop in investment would imply a drop in TFP growth of 0.9 percent per year during this period. - Weak productivity growth important in explaining subdued growth outcomes. - Policy implications: address bottlenecks to physical and human capital accumulation; improve governance and business environment; make room for R&D; encourage regional trade and financial integration. ### Market views on Latin American prospects and risks (September discussions) - Markets generally upbeat on Latin America in September. - Markets see progress in adjustment to lower commodity prices, including currency depreciation. - Observations: local currencies recovering; inflation pressures receding (except in Mexico); markets anticipate further rate cuts by several central banks. - External risks: compressed risk spreads and “stretch for yield” may reflect complacency or mispricing; a “risk off” episode could cause turbulence. - China slowdown or financial crisis seen as potential threat through commodity channels. - Domestic risks: political risks with upcoming elections and Venezuela crisis; threat of antiestablishment candidates and populist agendas. ### Fiscal adjustment and tax reforms: evidence from Latin America - Several countries (Chile, Colombia, Mexico, Peru) implemented tax reforms expected to raise revenues. - Expected revenue gains from recent reforms in Chile, Colombia, and Mexico ranged between 2 and 3 percent of GDP in cumulative terms. - Country-specific reform notes: - Chile (2014): corporate income tax rate for most large corporations increased from 20 percent to 27 percent; top marginal individual rate reduced from 40 percent to 35 percent; shareholder tax credit limited to 65 percent. - Colombia: revenue-neutral reform in 2012; revenue-increasing reforms in 2014 and 2016; 2014 included temporary corporate tax increase; 2016 increases VAT by 3 percentage points starting in 2017 and unifies multiple income taxes. - Mexico (2013): comprehensive reform covering income taxes, VAT on “sin” products, customs regulation tightening; included limits on deductions and exemptions and new taxes. - Observed revenue outcomes: - Tax revenues increased significantly following reforms; part of increases attributable to one-offs, but overall sizable. - Mexico’s adjusted tax revenue increase during 2013–15 ~2½ percentage points of GDP (≈1 percentage point due to fuel excises) places it at the 79th percentile (≈72nd percentile excluding fuel excises). - Chile’s adjusted tax revenue increase after reform (1¾–2 percentage points) ranks above the 72nd percentile vs. historical EM episodes. - Colombia experienced revenue gains of ¾ percentage point since 2014 reform; 2016 reform expected to advance gains further. - Methodology: panel regressions with common elasticities linking output gap and commodity price swings to tax revenues. ### Central bank communication: use of board minutes in Latin America - Central banks use press releases, inflation reports, parliamentary hearings, and minutes to improve transparency and accountability. - Minutes play a crucial role for committees that vote; provide comprehensive explanations of decisions and risks. - Typical features: - Minutes split between economic conditions and committee discussion. - Publication lag: generally two weeks after meeting (Paraguay one week; Guatemala four weeks). - Only Brazil and Chile identify individual committee votes. - Peru does not release minutes. - Evolution: - Except Chile and Mexico, minutes have become more succinct. - Text length increases when inflation deviates from target or policy rate changes. - Frequency of “hawkish” vs “dovish” words in minutes tends to predict policy rate changes and can affect market rates on publication day. ### Annex 1 — disclaimer (selected data issues) - Argentina: consumer price indices and labor market data - CPI series changes: pre-December 2013 CPI-GBA; December 2013–October 2015 IPCNu; new CPI for Greater Buenos Aires Area released June 15, 2016; new national CPI disseminated starting June 2016. - IMF Executive Board on November 9, 2016 considered new CPI series in line with international standards and lifted the declaration of censure issued in 2013. - Given differences across series, average CPI inflation for 2014–2016 and end-of-period inflation for 2015 and 2016 are not reported in October 2017 WEO aggregates. - Argentina’s authorities discontinued publication of labor market data in December 2015 and released new series starting Q2 2016. - Venezuela: data limitations and fiscal accounting conventions - Projections complicated by lack of discussions with authorities (last Article IV consultation 2004), long intervals and gaps in data, incomplete information, and interpretation difficulties. - Fiscal accounts include central government and PDVSA; fiscal accounts data for 2016–22 are IMF staff estimates. - Revenue includes IMF staff’s estimated foreign exchange profits transferred from central bank; excludes staff’s estimated revenue from PDVSA’s sale of PetroCaribe assets to central bank. - Fiscal accounts for 2010–22 correspond to central government and PDVSA; before 2010 correspond to central government, public enterprises (including PDVSA), IVSS, and FOGADE. - Treatment in WEO aggregates: Argentina’s and Venezuela’s consumer prices are excluded from all World Economic Outlook group aggregates. *Source: WESTERN HEMISPHERE DEPARTMENT REO UPDATE, OCTOBER 2017* ### 0.1 percentage point higher than in April ### WESTERN HEMISPHERE DEPARTMENT REO UPDATE, OCTOBER 2017 ### Global and medium-term outlook - World growth is described as subdued in many countries; stubbornly weak price and wage inflation in many advanced economies suggests continued slack. - Medium-term prospects for growth in GDP per capita are weak for many advanced and emerging market economies. - Exporters of commodities, especially fuel, are particularly hard hit as adjustment to loss in commodity revenues continues. - Short-term risks are broadly balanced; medium-term risks are skewed to the downside. - Downside medium-term risks include: an inward turn of policies in advanced economies and increased protectionism, a sharp slowdown in China, and greater fallout from geopolitical conflicts. - With high policy uncertainty, risks to currently favorable market confidence and asset valuations could materialize, tightening global financial conditions. ### United States: growth, inflation, and policy assumptions - Growth projections: - 2017: 2.2 percent - 2018: 2.3 percent - These are 0.1 and 0.2 percentage point lower than projected in April, respectively. - Revisions reflect downward revisions for early 2017 and changes in fiscal assumptions (April forecast embedded a fiscal impulse of 1 percent of GDP between 2017 and 2019). - Fiscal stance is projected broadly neutral in 2017 and tighter in 2018. - Hurricanes Harvey, Irma, and Maria increase near-term uncertainties, including size and timing of rebuilding efforts. - Inflation projections: - Consumer price inflation projected to reach 1.8 percent in 2017 (compared with 2.7 percent in the April WEO), down from 2.2 percent in 2016. - Core personal consumer expenditure inflation projected to rise more slowly, slightly exceeding 2 percent in 2019 before returning to 2 percent over the medium term. - Monetary policy assumption: somewhat more gradual normalization of the policy interest rate in the United States than projected in April 2017 WEO, given weaker projected demand and diminished inflation pressures. - Market reactions noted: - Nominal yields on 10-year US Treasury bonds have declined since March 2017 (as of mid-September). - US dollar weakened in real effective terms by over 7 percent from March to mid-September 2017. - Fiscal policy developments: - Agreement reached in September to raise the debt limit and continue funding the government until December (as part of hurricane relief legislation). - Administration outlined broad tax reform goals (simplifying personal income tax, increasing standard deduction and child tax credit, eliminating AMT and estate tax, lowering pass-through and corporate tax rates, moving to territorial system, immediate write-off of new investments, one-time low tax on accumulated overseas profits); proposed tax reform not incorporated into IMF staff forecast due to uncertainties about details. ### Canada - Growth forecast for 2017 revised upward from 2.5 to 3 percent owing to stronger-than-expected first half outcomes and supportive cyclical policies. - Second quarter annualized expansion: 4.5 percent (strongest quarterly growth rate since 2011). - Contributors to Q2 growth: household spending (gains in employment and earnings) and energy exports; business investment and non-energy exports recovering. - Housing activity: investment in residential structures declined by 4.7 percent in the second quarter due to policy measures to cool the housing market. - Bank of Canada raised the policy rate twice in 2017 to 1 percent as output gap narrowed sharply. ### Latin America and the Caribbean: cyclical recovery and projections - Regional recovery underway after prior disappointments; domestic demand recovering gradually while net exports’ contribution declines as real imports increase. - Venezuela: full-blown economic, humanitarian, and political crisis; real GDP projected to fall by 35 percent in the period 2014–17; economy headed toward hyperinflation. - Regional growth projections: - LAC expected to grow 1.2 percent in 2017 (0.1 percentage point higher than in the April WEO). - LAC expected to grow 1.9 percent in 2018 (0.1 percentage point lower than in April). - Upward revision in 2017 mainly reflects better-than-expected first half outcomes for some large economies. - Output gaps remain sizable for both years, closing only gradually. - Inflation: - Regional inflation expected to decline to 4.2 percent in 2017 (from its peak of 6.2 percent in 2015) and to remain at about 3½ percent thereafter. - Regional heterogeneity illustrated in table (projections): - LAC: 2015 = 0.1; 2016 = –0.9; 2017 = 1.2; 2018 = 1.9 - South America: 2015 = –1.2; 2016 = –2.6; 2017 = 0.6; 2018 = 1.6 - CAPDR: 2015 = 5.1; 2016 = 4.6; 2017 = 4.1; 2018 = 4.4 - Caribbean tourism-dependent: 2015 = 0.9; 2016 = 1.4; 2017 = 1.8; 2018 = 2.3 - Commodity exporters: 2015 = –0.4; 2016 = –4.9; 2017 = –1.9; 2018 = 2.0 - Memorandum LA6: 2015 = –0.3; 2016 = –0.3; 2017 = 1.5; 2018 = 2.0 - Brazil: 2015 = –3.8; 2016 = –3.6; 2017 = 0.7; 2018 = 1.5 - Mexico: 2015 = 2.6; 2016 = 2.3; 2017 = 2.1; 2018 = 1.9 ### Adjustment to the terms-of-trade shock and labor/ fiscal effects - Terms-of-trade shock has partially reversed with moderate recovery in commodity prices, but large income losses remain for net commodity exporters (mainly South America) and gains for tourism-dependent Caribbean and Central America. - Current account deficits narrowed substantially from peak in 2015. - Increased exchange rate flexibility facilitated adjustment; countries allowing exchange rate adjust experienced milder domestic demand declines and drew less on buffers. - Decline in real wages smoothed labor market impact; unemployment increased only in countries with substantial slack. - Declining commodity revenues worsened fiscal balances in commodity exporters. - Regional structural deficit corrected partially in 2016–17; fiscal impulse expected to turn positive in 2018 and remain broadly neutral thereafter, but wide variation across countries. - Country-specific fiscal path expectations: - Brazil’s structural balance expected to deteriorate throughout projection horizon. - Mexico and Argentina expected to continue to adjust during 2018–19. - Chile and Peru adjustments expected to be more back-loaded, starting in 2018–19. ### Subdued convergence and long-term trends - Medium-term Latin America per capita growth projected at 1.7 percent. - This is almost identical to the region’s performance over the past quarter century and well below: - Emerging market and developing economies: 3¼ percent - China: 9 percent - Region’s GDP per capita relative to the United States has started to slide after a mid-2000s pickup (from about 20 percent historically to about 28 percent). - Investment remains substantially below precrisis levels, contributing to lower capital stock and productivity (Adler and others 2017). - Labor contribution to growth expected to decline due to demographic transition; share of population older than 65 is growing steadily. ### Risks - Domestic risks: - Political risks and uncertainty with elections in several countries over next 12–18 months; risk of populist agendas and reversal of ongoing reform and adjustment efforts. - Spillovers from Venezuela crisis expected to be minimal via trade and financing channels, but humanitarian crisis and migration to neighboring countries pose major risks. - External risks: - Capital flow reversals and tighter financial conditions: a sudden increase in global risk aversion, market volatility, or faster-than-expected monetary policy normalization in advanced economies could reverse capital flows. - If the Chicago Board Options Exchange Volatility Index increased by about 10 points (similar magnitude seen in mid-2011), capital inflows to LA7 countries would decline by about 2 percent of GDP from current level of about 4 percent of GDP. - An unanticipated US monetary policy tightening of about 50 basis points would lead to a drop in capital inflows of about 1 percent of GDP. - Such reversals could tighten financial conditions and pressure highly leveraged sovereigns and corporations; corporate bond spreads are highly sensitive to global volatility shocks and leverage remains high. - Financial stability risks in China: baseline embeds slower rebalancing toward services and consumption, a higher debt trajectory, and diminished fiscal space—heightening probability of a sharp slowdown with adverse regional spillovers. - Retreat from cross-border integration: increased protectionism could reduce demand for the region’s products and raise costs of tradable consumer goods; curbing immigration or more aggressive deportation policies could reduce remittances. - Natural disasters and climate change: - Forecasts are based on data available before recent hurricanes in the Caribbean and earthquakes in Mexico; near-term growth forecasts, especially for Caribbean, are subject to downside risks. - Recovery costs could add pressure on balance of payments and fiscal positions. - Recurrent climate-related catastrophes expected to increase in frequency and impact as part of climate change. ### Financial sector and corporate balance sheets - Corporate sector trends: - Corporate profitability is rising. - Corporate leverage is declining, but leverage remains high in some cases. - Banking sector: - Nonperforming loans remain higher than in the past. - Bank profitability has started to improve. - Credit to GDP remains broadly stable except for a few countries. - Vulnerabilities: worsening sovereign and corporate balance sheets could spill over to banking sector, especially where nonperforming loans are elevated and profitability and credit to private sector are low. ### Policy priorities - Cyclical support: limited fiscal but improved monetary policy space. - Fiscal outcomes and pressures: - Primary fiscal deficit in Latin America and the Caribbean increased from 0.1 percent in 2013 to 2.7 percent in 2016 due to declines in commodity-related government revenues and lower income from slowed activity. - Public debt increased from about 49 percent of GDP to 58 percent of GDP over same horizon (higher than average for emerging markets) and is projected to increase further in many large economies. - Primary balances remain below debt-stabilizing levels; many countries need to continue adjusting public finances to sustainable footing. - Pace of adjustment depends on debt dynamics, market conditions, and likely impact on economic activity given already-weak growth. *Prepared by an IMF staff team led by S. Pelin Berkmen under the overall direction and guidance of Alejandro Werner, Krishna Srinivasan, and Hamid Faruqee; team included Jorge Restrepo, Carlos Caceres, Carlos Gonçalves, Etibar Jafarov, Galen Sher, Juan Yépez, and country teams. Daniel Leigh coordinated the Caribbean section, and Dmitry Plotnikov and Roberto García-Saltos coordinated the Central America section. Research support by Genevieve Lindow; production assistance by Andrea Herrera and Ravi Sundararajan.* ### 1. General Government Gross Debt ### 1. General Government Gross Debt ### Fiscal multipliers and implications for adjustment - Recent studies for the region suggest an average fiscal multiplier of only 0.3. - This is compared with an average of fiscal multiplier estimates for other emerging market economies of 0.6 and advanced economies of 0.9. - Because multipliers in the region might turn out larger than 0.3, the necessary fiscal adjustment needs to be designed to minimize the impact on growth and protect priority spending, including spending for the most vulnerable. ### Patterns of fiscal adjustment (2013–16) - Some countries relied on expenditure cuts; cutting capital expenditure has been common and has contributed to a decline in potential output. - Governments used one-offs to raise revenues (examples listed in Figure 7 notes). - Several countries (Argentina, Chile, Colombia, Mexico) made changes to their tax systems; associated revenue gains are nonnegligible though full impacts are still to be assessed. - Recommendation: a balanced fiscal strategy should involve raising the efficiency of public spending to improve quality of public goods and maintain expenditures related to human and physical capital. ### Monetary policy, inflation, and exchange rates - With rapidly declining inflation in several countries, many central banks have been reducing policy rates (Brazil, Chile, Colombia, Peru). - Declining inflation and inflation expectations at or below target ranges increase room for monetary policy to be more supportive given limited fiscal space and continued economic slack. - Where inflation remains above target (such as Argentina), monetary policy will need to remain tight. - Increased exchange rate flexibility has acted as an effective shock absorber, and pass-through to inflation has been limited relative to past episodes, reflecting improved monetary frameworks. - Effective communication and increased transparency have been essential to anchoring expectations and increasing the effectiveness of monetary policy. ### Structural policy priorities - Closing infrastructure gaps to support productivity and competitiveness; infrastructure quality still lags relative to advanced economies. - Enhancing female labor force participation: the region has raised female participation "to about 54 percent", but sizable gaps persist in some countries. - Reducing labor market informality to increase efficiency, productivity, and reduce negative externalities on public infrastructure. - Investing in human capital: learning outcomes remain below advanced economies despite improvements in educational attainment. - Improving governance and curbing corruption: successful anticorruption strategies typically entail strong political leadership, legal and judicial reforms, enhanced transparency and accountability, stronger monitoring and enforcement, and management of potential transitory costs. - Furthering regional trade and financial integration: - Regional trade is about 15 percent of total exports (as compared with 55 percent in Asia). - Estimated growth benefit: for every 10 percentage point increase in intraregional trade, per capita growth can increase by 32 basis points. - Measures to support financial integration include nondiscriminatory frameworks for cross-border financial institutions, harmonization of regulatory and accounting frameworks, stable and transparent tax regimes for domestic and cross-border financial activities, and modification of regulatory limits on pension funds to allow regional investment. - Financial integration needs to be accompanied by stronger regulatory, supervisory, and resolution frameworks and increased cooperation among supervisory entities. ### Regional developments and country outlook (selected highlights) - South America: growth gradually picking up after bottoming out in 2016; domestic demand strengthening and imports accelerating. - Argentina: - Recovery from recession; expected to grow by about 2½ percent in 2017. - Policy priorities include reducing inflation and the fiscal deficit; achieving announced targets of cutting the primary federal fiscal deficit by 2 percentage points of GDP over 2018–19 is critical. - Brazil: - Growth expected to reach 0.7 percent for 2017 and 1.5 percent in 2018. - Upward revision of 0.5 percent in 2017 relative to the April WEO; downward revision of 0.2 percent for 2018. - Gradual restoration of confidence and fiscal-sustainability reforms could raise growth to 2 percent in the medium term. - Ecuador: growth in 2017 expected to be slightly positive, reflecting larger public spending financed via better access to international capital markets. - Venezuela: - After a contraction of 16.5 percent in 2016, projected to fall another 12 percent in 2017 and an additional 6 percent in 2018. - Inflation projected to exceed 1,000 percent in 2017 and on the path to hyperinflation. - Ongoing political instability and a humanitarian crisis. - Chile: weak growth in H1 2017 due to copper production disruptions and subdued business confidence; expected pickup in H2 2017 and 2018 supported by household spending, partner demand, higher copper prices, and looser monetary conditions. - Colombia: orderly slowdown continues due to permanent shock to commodity income and structural tax reform; inflation moderated and returned to target range. - Peru: slowed in H1 2017 with 2.3 percent growth year over year; risks from El Niño-related flooding and spillovers from the Odebrecht corruption scandal. - Bolivia: real GDP growth projected to be 4.2 percent in 2017; large fiscal and external current account deficits since 2014. - Paraguay: expected to grow close to potential, with stronger domestic demand bolstered by public investment. - Uruguay: growth projected to recover to 3.5 percent in 2017; inflation within central bank target range (3 to 7 percent). ### Country-specific policy priorities (selected) - Argentina: - Reduce inflation and the fiscal deficit. - Fiscal rebalancing based on reductions in energy subsidies and rationalization of spending (wages, goods and services, discretionary transfers). - Lowering excessive tax burden to support private domestic demand recovery. - Structural reforms: more labor market flexibility, reduce informality, open trade, improve domestic competition. - Brazil: - Tackle unsustainable expenditure mandates, including pension reform. - If recovery is faster, consider a more front-loaded fiscal adjustment. - Make infrastructure concessions more attractive while strengthening governance and program design. - Enhance governance and rule of law to reduce corruption and boost confidence and investment. - Bolivia: - Adjust fiscal and credit policies to restore internal and external equilibrium and slow reserve decline. - Structural reforms to enhance private sector activity: reduce subsidies with offsetting social safety nets, improve investment climate, phase out export quotas, align wage growth with productivity. - Chile: - Monetary policy is appropriately accommodative; there may be scope for further easing. - Fiscal consolidation should be gradual to signal fiscal prudence amid subdued growth. - Colombia: - With inflation pressures dissipating, central bank easing to support recovery while protecting inflation expectations. - Infrastructure agenda, peace agreement, and tax reform will support medium-term growth. - Ecuador: - Stronger-than-envisaged fiscal adjustment may be necessary given increasing debt trend. - Medium-term focus on competitiveness, labor market flexibility, and regulatory environment. - Peru: - Countercyclical policy stance in response to reconstruction needs and negative output gap. - Government invoked the escape clause to increase the deficit to 3 percent of GDP in 2017 (from 2.5 percent), and further to 3.5 percent of GDP in 2018. *Source: https://www.imf.org/-/media/files/publications/reo/whd/2017/october/whd-reo-update-2017-eng.pdf* ### 2.3 percent). The central bank has also reduced ### Mexico, Central America, Panama, and the Dominican Republic ### Developments and Outlook - Mexico: - Economic activity remained solid in the first half of the year despite uncertainty about future trade relations with the United States, a decline in oil production, and relatively tight monetary and fiscal policies. - Growth is projected to reach 2.1 percent in 2017. - Growth is projected to slow to 1.9 percent in 2018 due to uncertainty surrounding NAFTA negotiations, domestic political uncertainty, and tighter financial conditions weighing on consumption and investment, more than offsetting the positive contribution from net exports. - Inflation is temporarily running above the central bank’s target and is projected to reach 5.9 percent, on average, in 2017 before gradually converging to 3 percent by early 2019. - Central America (aggregate CAPDR): - Growth performance in the first half of 2017 was underpinned by oil price dynamics, uncertainty about future US migration policies, and higher external demand, remaining close to potential and close to the April 2017 projections. - Inflation accelerated in Q1 2017 in most countries due to recovering oil and food prices and, partially, domestic and external demand; inflation pressures softened in Q2 2017 as the oil price recovery slowed given small output gaps. - Potential changes in US migration policy (significant scaling up of deportations or imposition of restrictions in remittances) and extension of temporary protection status for El Salvador, Honduras, and Nicaragua remain a major risk but so far have benefited the region through higher remittances inflows that supported private consumption. - Exports of agricultural and manufacturing goods benefited from higher external demand from the United States and better terms of trade; tourism demand expanded in Costa Rica, the Dominican Republic, and Panama; Panama’s services balance benefited from expansion of the Panama Canal. These factors helped narrow current account deficits, largely financed by foreign direct investment. - Financial systems are stable and sovereign spreads have contracted for all countries except El Salvador. - Going forward, the downward revision of 2017 US GDP growth implies lower external demand for Central American exports, partly offset by an extended period of easy financial conditions. Retreat from cross-border integration by the United States remains a lingering, albeit moderate, risk. - A Honduras-Guatemala customs union agreement signed in June 2017, with the expectation that El Salvador and Nicaragua will join in mid-2018, should enhance trade and growth in the region. - Domestic concerns: persistent public sector deficits and rising public debt in Costa Rica, El Salvador, and to a lesser extent in the Dominican Republic; dollarization remains a major financial risk in Costa Rica, Honduras, Nicaragua; limited risk so far of losing correspondent banking relationships. - Political uncertainties (upcoming elections in Costa Rica, El Salvador, Honduras) and corruption scandals in Guatemala weigh on growth. - Uruguay: - Steadfast implementation of the fiscal consolidation package is key to gradual reduction in the budget deficit and stabilization of net public sector debt in the medium term. - To keep inflation close to the center of the target range, monetary policy needs to remain tight. - Continued strong growth depends on realization of planned infrastructure upgrades and structural reforms, in particular in education. ### Policy Priorities - Mexico: - Maintain macroeconomic stability and market confidence. - Ongoing fiscal consolidation to help stabilize public debt as a share of GDP. - Strengthen the fiscal framework to enhance long-term credibility and countercyclicality of fiscal policy. - As inflation declines early next year, contingent on inflation expectations remaining in check, the central bank should stand ready to ease monetary policy to support economic activity; clear communication is crucial to guide market expectations. - Central America: - Reduce corruption and improve the rule of law. - Reinvigorate structural reform and social development agenda (for example by investing more in human capital and encouraging female labor force participation) to boost potential growth and make it more inclusive. - Prioritize investment in education and health, especially given the high share of young population in El Salvador, Guatemala, Honduras, Nicaragua. - Maintain or bring public finances to sustainable levels to lower cost of capital, support private investment, and free resources for infrastructure investment. - Create room for security expenditures to help reduce crime where expenditures remain significantly below the world average (particularly El Salvador, Guatemala, Honduras). - Enhance transparency (wider use of online portals and the single-window system) and reduce business transaction costs to reduce corruption and red tape. - To create fiscal space, Costa Rica, the Dominican Republic, El Salvador, Guatemala, Nicaragua, and Panama need to boost fiscal revenues through additional taxes or by expanding the tax base; most countries will benefit from improved tax administration and a reduction of untargeted tax exemptions (specifically untargeted energy and value-added-tax exemptions). - There is room for containing current spending in Costa Rica, El Salvador, and Honduras; cross-country experience shows existing quality of education and health spending can be significantly improved. - Cross-cutting: - Prioritize investment in education to boost labor productivity and potential growth; since the global financial crisis, economic growth in all CAPDR countries except Panama slowed by 1 percentage point, on average, with the decline almost entirely due to a decline in productivity. ### The Caribbean ### Developments and Outlook - Baseline projections reflect data available before the impact of Hurricanes Harvey, Irma, and Maria and therefore do not reflect the devastating impact of these hurricanes on a number of countries and the risk they pose to the growth outlook in the short term. - Growth: - Growth in tourism-dependent economies in 2017–18 is projected to be 2 .4 percent, up from 2. 1 percent in 2016. - For commodity exporters, growth is projected to rise in 2017–18 to 1.3 percent, from –3.3 percent in 2016. - Substantial variation across countries: tourism-dependent economies generally expanded in H1 2017, with exceptions such as Barbados (growth in 2017 estimated to have slowed due to fiscal consolidation); Antigua and Barbuda, Dominica, St. Kitts and Nevis, and Haiti expected to take a toll from weather swings and hurricanes. - Reconstruction activity following the hurricanes could have a positive impact on growth in subsequent years beyond the baseline projections. - Commodity exporters: downturn in Trinidad and Tobago and Suriname extended into 2017; positive growth projected for 2018. Guyana’s growth stronger supported by two new large gold mines and positive sentiment ahead of the beginning of oil production in 2020. - External and fiscal: - Current accounts started to improve in commodity exporters. - Fiscal balances are improving but fiscal deficits are still large in commodity exporters. - Debt: some countries (Antigua and Barbuda, Grenada, Jamaica, St. Kitts and Nevis) have declining government debt-to-GDP ratios from very high levels, reflecting fiscal discipline, debt restructuring, and growth recovery; in most other countries additional fiscal consolidation is necessary to put government finances on a sustainable path and build buffers. - Financial sector: - Numerous banks in the region have high levels of nonperforming loans, constraining credit availability and increasing vulnerability to shocks. - Eastern Caribbean Currency Union authorities have progressed on reforms to strengthen bank resilience (regulatory enforcement of capital requirements, efforts to clean up balance sheets). - Further steps required: develop markets for distressed loans, address deficiencies in insolvency and debt-enforcement frameworks, strengthen oversight of nonbank financial institutions, enhance capital adequacy of indigenous banks. - Secure correspondent banking relationships by more effective implementation of anti–money laundering/combating the financing of terrorism frameworks, bank consolidation, and improved communication and information exchange with correspondent banks. - Natural disasters and climate change: - Additional steps needed to mitigate costs of recurrent natural disasters and climate change: better preparation, mitigation, and response; include disaster and climate risks into policy frameworks, budgets, fiscal rules, and public investment plans. - Use insurance and financial hedging tools to protect governments and increase capacity to respond. - Regional coordination could facilitate pooling of insurance coverage at the Caribbean level; international community support needed for capacity building, risk management tools, and financing. ### Policy Priorities - Continue fiscal consolidation where needed to reduce high sovereign debt levels and build buffers. - Strengthen financial sector resilience (address NPLs, insolvency frameworks, nonbank oversight, bank capital adequacy). - Improve implementation of anti–money laundering/combating the financing of terrorism frameworks to secure correspondent banking relationships. - Advance structural reforms to reduce high electricity costs, deepen financial systems, enhance access to credit, tackle violent crime, reduce unemployment and brain drain by improving the business climate and institutions. - Build disaster resilience through preparation, mitigation, insurance, and regional coordination. ### Box 1 — Long-Term Productivity in Latin America and the Caribbean ### Key findings - After disappointing growth outcomes in recent years, economic activity in Latin America and the Caribbean (LAC) is recovering, but medium-term growth is expected to remain subdued. - The box explores the role of productivity—the efficiency with which capital and labor inputs are converted into produced goods and services—in driving long-term growth rates, and compares LAC with emerging market and developing economies (EMDE). - Living standards, as measured by output per worker, deteriorated steadily until the 1990s and, despite some recovery, have remained weak since then. By contrast, EMDE improved living standards in every decade since 1960, accelerating during the early 2000s. - Using a traditional neoclassical growth decomposition, growth in living standards is decomposed into capital deepening and total factor productivity (TFP) components. Both in LAC and EMDE, TFP appears to drive long-term growth rates in living standards. - Total factor productivity in LAC has worsened, or changed very little, since the 1980s. - Decompositions show that long-term economic growth in LAC has been driven in equal parts by the accumulation of capital and labor, while TFP has been either negligible or a drag on growth. - Within LAC: - Brazil and Colombia: long-term growth has relied more on a growing and more educated labor force. - Chile, Mexico, and Peru: long-term growth has relied more on investment in physical capital. - Growth in the number of educated workers has supported growth in LAC more than in EMDE, while EMDE benefited from stronger physical capital accumulation. ### Methodology and scope notes - LAC countries included (based on data availability): Argentina, Barbados, Bolivia, Brazil, Chile, Colombia, Dominican Republic, Ecuador, Guatemala, Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, Trinidad and Tobago, Uruguay, and Venezuela. - The decomposition used is: Δ(푌푌/퐿퐿)=αΔ(퐾퐾/퐿퐿) +Δ푇푇푇푇푇푇, where Δ(푌푌/퐿퐿) is growth rate of output per worker, Δ(퐾퐾/퐿퐿) is growth rate of capital per employed person, and Δ푇푇푇푇푇푇 is growth rate of total factor productivity. - Data sources: Penn World Tables (PWT) 9.0; IMF staff calculations. *Source: WESTERN HEMISPHERE DEPARTMENT REO UPDATE, OCTOBER 2017* ### 1. Latin America and the Caribbean (LAC) ### 1. Latin America and the Caribbean (LAC) ### Productivity, investment, and growth - Ten-year rolling average of purchasing-power-parity GDP-weighted average across countries; growth rates in constant price national currency units (sources: Penn World Tables (PWT) 9.0; and IMF staff calculations). - Total factor productivity (TFP) is calculated based on the translog production function, time-varying labor shares. Labor includes number employed, years of schooling, and returns to education, as published in the PWT 9.0. - Real investment in LAC fell by 3.6 percent per year between 2013 and 2016. - If about a quarter of investment passes through to total factor productivity growth, as estimated in Adler and others (2017), this drop in investment would imply a drop in total factor productivity growth of 0.9 percent per year during this period. - Overall, weak productivity growth appears to play an important role in explaining subdued growth outcomes in the region. - Policy implications and structural reforms suggested: - Address bottlenecks to physical and human capital accumulation to support productivity growth. - Improve governance and the business environment to allocate resources to their most productive uses. - Make room for investment in research and development. - Encourage regional trade and financial integration. - Note on measurement: the labor stock in decomposition reflects number employed, years of schooling, and estimates of the wage return to education; hence the TFP residual should not reflect the behavior of these measured labor factors. ### Market views on Latin American prospects and risks (September market discussions) - Market participants were generally upbeat on the economic outlook for Latin America in September. - Markets see the region as making progress in adjustment to lower commodity prices—more externally than fiscally—including by allowing currency depreciation. - Observations and expectations: - Local currencies recovering and inflation pressures receding (except in Mexico). - Markets anticipate further rate cuts by several central banks, which are expected to provide support to a nascent recovery. - External risks: - External risks are seen as consequential for possible financial disruption in Latin America, though not necessarily likely shocks. - Financial conditions remain favorable, but compressed risk spreads and “stretch for yield” might reflect market complacency or mispricing in fixed-income assets—many trading with negative yields in real terms. - This market attitude is viewed as a worldwide feature not specific to emerging markets. - A “risk off” episode could cause turbulence in asset markets in Latin America; an inflation scare or major policy misstep by the Federal Reserve (or European Central Bank) is not considered to be a likely trigger for sharp increases in yields and risk spreads. - In balance sheet normalization, sophisticated investors are assumed to respond to expected stocks (not flows) of central bank holdings that are likely to remain largely in place for a long time. - Geopolitical risks could trigger a rise in global risk aversion with more ramifications for equities than bonds, given a perceived shortage of safe-haven assets worldwide. - A financial crisis or sharp growth slowdown in China is seen as a potential threat for Latin America with regional impact through commodity markets, although some believe sufficient domestic countermeasures are available to prevent instability. - Vulnerability across countries: - If external risks generated a sharp financial tightening and market turmoil, effects would be felt similarly across the region at the outset. - Differentiation would occur later depending on market perceptions of underlying vulnerabilities (larger financing needs, shorter maturity structure, and so on) and on available policy space across economies. - Domestic risks: - Main domestic risks center around political risks with upcoming national elections throughout the region and the ongoing crisis in Venezuela. - The possibility of antiestablishment candidates and populist agendas is particularly worrisome in economies that could ill afford policy mistakes given present conditions. ### Fiscal adjustment and tax reforms: evidence from Latin America - Many countries—including Argentina, Chile, Colombia, and Mexico—are implementing changes to their tax systems to help adjust to low commodity prices, sluggish medium-term growth prospects, and weaker fiscal balances since the global financial crisis. - Coverage, purpose, and revenue effects of reforms have varied significantly. - Recent reforms in Chile (2014), Colombia (2014 and 2016), Mexico (2013), and Peru (2011) were expected to raise revenues. - The expected revenue gains from recent reforms in Chile, Colombia, and Mexico have ranged between 2 and 3 percent of GDP in cumulative terms. - Country highlights: - Chile (2014): comprehensive tax reform to finance structural agenda; corporate income tax rate for most large corporations gradually increased from 20 percent to 27 percent; top marginal individual rate reduced from 40 percent to 35 percent; shareholder tax credit limited to 65 percent (previously 100 percent) leading to higher effective taxation of capital income. - Colombia: revenue-neutral reform in 2012; revenue-increasing reforms in 2014 and 2016. The 2014 reform included a temporary corporate tax increase to replace lost oil revenue. The 2016 reform increases VAT by 3 percentage points starting in 2017, gradually reduces corporate tax rates, and unifies multiple income taxes. - Mexico (2013): comprehensive reform covering income taxes, value added on “sin” products, and customs regulation tightening; included limits on deductions and exemptions, new tax brackets, new taxes on certain dividends and gains, elimination of tax consolidation regime, elimination of tax on cash deposits and business cash flow tax, elimination of a reduced VAT rate for border states; new “sin” taxes on sugary beverages and high-calorie food, pesticides, and carbon-producing products. - Observed revenue outcomes: - Tax revenues increased significantly in the years following these reforms; part of the increases is attributable to one-off measures, but overall revenue increases are sizable. - Adjusted for cycle and commodity price shifts, countries in Latin America fare well relative to historical changes in all emerging market economies over a two-year window. - Mexico’s adjusted tax revenue increase during 2013–15 (about 2½ percentage points of GDP, of which approximately 1 percentage point is due to increases in fuel excises) places it at the 79th percentile (about the 72nd percentile excluding fuel excises). - Chile’s adjusted tax revenue increase after the reform period (1¾–2 percentage points) ranks above the 72nd percentile compared with historical episodes in emerging markets. - Colombia has experienced revenue gains since its 2014 reform (¾ percentage point); the 2016 reform is expected to advance these gains further. - Methodological note: - Econometric results obtained using panel regressions of annual data; elasticities linking output gap and commodity price swings to tax revenues are the same for all countries. ### Central bank communication: use of board minutes in Latin America - Central banks in the region use a wide range of communication channels (press releases, inflation reports, parliamentary hearings, and release of minutes) to improve transparency and accountability. - Transparency about monetary policy objectives, outlook, and strategies reduces uncertainty, enhances policy-makers' ability to manage expectations, and amplifies the effect of monetary policy on longer-term interest rates. - Minutes play a crucial role for central banks that make policy decisions by voting in a monetary policy committee. - Minutes provide a more comprehensive explanation of committee decisions and views of risks to the outlook, offering additional information beyond other communication tools. - Central banks that publish minutes tend to be more transparent overall; this has been associated with better-anchored inflation expectations and some evidence of larger pass-through from policy to lending rates in economies that publish minutes. - Typical features of minutes in the region: - Minutes are typically split between a section describing economic conditions and a section describing the committee’s policy discussion and decisions. - Time to publication: generally two weeks after the policy meeting, except Paraguay (one week) and Guatemala (four weeks). - Only the central banks of Brazil and Chile identify how individual committee members voted. - The central bank of Peru does not release minutes. - Evolution and characteristics: - With the exception of Chile and Mexico, minutes published by central banks have become more succinct and concise. - Text length of minutes tends to increase when inflation deviates from its target range or when the policy rate is changed. - Content of discussions appears to predict future policy actions: indices comparing the frequency of “hawkish” and “dovish” words tend to predict policy rate changes in subsequent meetings. - Minutes can affect market rates on the day of publication (minutes containing a higher frequency of “hawkish” terms tend to increase market rates on the day of publication), enhancing the overall effectiveness of monetary policy. *Prepared from "1. Latin America and the Caribbean (LAC)" in WHD REO Update, October 2017.* ### Annex 1. Disclaimer ### Annex 1. Disclaimer ### Argentina: consumer price indices and reporting implications - Consumer price data for Argentina before December 2013 reflect the consumer price index (CPI) for the Greater Buenos Aires Area (CPI-GBA). - From December 2013 to October 2015 the data reflect the national CPI (IPCNu). - The new government that took office in December 2015 discontinued the IPCNu, stating that it was flawed, and released a new CPI for the Greater Buenos Aires Area on June 15, 2016 (a new national CPI index has been disseminated starting June 2016). - At its November 9, 2016, meeting, the IMF Executive Board considered the new CPI series to be in line with international standards and lifted the declaration of censure issued in 2013. - Given the differences in geographical coverage, weights, sampling, and methodology of these series, the average CPI inflation for 2014, 2015, and 2016 and end-of-period inflation for 2015 and 2016 are not reported in the October 2017 World Economic Outlook. ### Argentina: labor market data - Argentina’s authorities discontinued the publication of labor market data in December 2015 and released new series starting in the second quarter of 2016. ### Venezuela: data limitations and fiscal accounting conventions - Projecting the economic outlook in Venezuela is complicated by: - lack of discussions with the authorities (the last Article IV consultation took place in 2004), - long intervals in receiving data with information gaps, - incomplete provision of information, and - difficulties in interpreting certain reported economic indicators in line with economic developments. - Fiscal accounts scope and estimation: - The fiscal accounts include the central government and Petróleos de Venezuela, S.A. (PDVSA). - The fiscal accounts data for 2016–22 are IMF staff estimates. - Revenue includes the IMF staff's estimated foreign exchange profits transferred from the central bank to the government (buying US dollars at the most appreciated rate and selling at more depreciated rates in a multitier exchange rate system). - Revenue excludes the staff's estimated revenue from PDVSA’s sale of PetroCaribe assets to the central bank. - Fiscal accounts for 2010–22 correspond to the central government and PDVSA. - Fiscal accounts before 2010 correspond to the central government, public enterprises (including PDVSA), Instituto Venezolano de los Seguros Sociales (IVSS—social security), and Fondo de Garantía de Depósitos y Protección Bancaria (FOGADE—deposit insurance). ### Treatment in World Economic Outlook aggregates - Argentina’s and Venezuela’s consumer prices are excluded from all World Economic Outlook group aggregates. *Source: Annex 1. Disclaimer, WESTERN HEMISPHERE DEPARTMENT REO UPDATE, OCTOBER 2017* --- _Source: https://www.imf.org/-/media/files/publications/reo/whd/2017/october/whd-reo-update-2017-eng.pdf_