## 2. Outlook for Latin America and the Caribbean: The Right Policy Mix for Sustaining the Recovery ## Source details **Canonical URL:** [2. Outlook for Latin America and the Caribbean: The Right Policy Mix for Sustaining the Recovery](https://www.imf.org/-/media/files/publications/reo/whd/2018/may/wreo0518-chp2.pdf) ## Other formats - [Markdown version](/-/media/files/publications/reo/whd/2018/may/wreo0518-chp2.pdf.md) - [Structured JSON version](/-/media/files/publications/reo/whd/2018/may/wreo0518-chp2.pdf.json) --- ### External conditions and financial markets - Global financial conditions remain accommodative: global equity prices near all-time highs and long-term interest rates subdued, providing easy financing to the region. - Sovereign and corporate spreads remain low; capital inflows stabilized and started to increase moderately in 2017 after falling sharply in the previous two years. - Freely floating currencies have broadly stabilized; over the past 24 months some have partially regained previously lost ground. - Market volatility in early February 2018 was generally limited and short-lived; asset prices across most countries returned to preshock levels by the end of the month. - Market views: upbeat about near-term momentum but worried about medium-term growth prospects, political risks, rising populism, and external risks for countries with higher dollar financing needs. - Most financially integrated economies (Brazil, Chile, Colombia, Mexico, Peru) remain at risk from adverse global financial developments; financial asset prices in these countries show high synchronicity and capital flows are highly responsive to global shocks. - Countries reliant on large external financing (for example, Argentina) are vulnerable to changes in foreign investor sentiment. ### Commodity prices and terms of trade - Commodity prices worldwide fell sharply after the commodity super-cycle: energy and metal prices essentially halved between their peak in 2011–12 and early 2016. - Commodity prices have partly rebounded since early 2016; in some cases net commodity terms of trade have essentially reverted to boom levels—notably metal commodity exporters that are net oil importers (Chile, Peru). - The likelihood that commodity terms of trade will return to—or stay above—their boom levels both in 2018 and over the medium term has increased for most countries in the region. ### Growth, investment, and labor markets - Broad-based acceleration expected: relative to 2016 (when seven economies representing roughly half of the region’s total GDP experienced contraction), real GDP growth in 2019 is projected to be positive in all but one country (Venezuela). - Excluding Venezuela, the average growth estimate for the region in 2017 is 1.9 percent. - Venezuela’s economy is estimated to have contracted by a further 14 percent in 2017. - Private investment, having contracted for three years in a row, is estimated to have stopped being a major drag in 2017 and is expected to move solidly into positive territory in 2018–19; private investment is expected to be the main driver of the projected acceleration in 2018 and 2019. - Despite the recovery, investment levels are expected to remain below levels observed in other regions. - Unemployment rates have already peaked in most countries, and labor markets are showing signs of improvement. ### Inflation and financial sector soundness - Consumer price inflation has come down sharply regionally; across most inflation-targeting countries inflation is back within the official target range. - Where inflation still exceeds targets, it is expected to moderate in 2018–19 as transitory supply-side factors recede. - Financial sectors remain stable with strong bank capital ratios and high rates of return; bank profits are largely driven by high interest margins due to bank concentration and high operating costs. - Private credit doubled (credit-to-GDP ratio) between 2005 and 2015 during the commodity boom, and has since broadly stabilized in several countries. - Nonperforming loans increased during the slowdown but are well provisioned and remain manageable in most countries. - Nonfinancial corporate balance sheets have strengthened as profitability increases and indebtedness has fallen relative to recent peaks. ### Current accounts, fiscal positions, and public finances - Current account deficits narrowed from recent peaks; external adjustment to lower commodity prices is in many cases almost complete. - Much of the adjustment was led by private sector savings-investment improvements and import compression; Mexico was a notable exception where public sector savings reduction played a role. - Going forward, current account deficits are expected to widen again as growth accelerates in domestic consumption and investment; expansion in private investment is expected to offset the impact of fiscal consolidation on the current account. - Post-super-cycle fiscal revenues fell noticeably in commodity-exporting countries; loss was particularly strong among hydrocarbon exporters (Bolivia, Ecuador, Mexico, Trinidad and Tobago, Venezuela). - An upward trend in current spending that began during the boom continued in some countries after the bust, contributing to deteriorating fiscal balances and debt ratios. - Responses by some countries: raising noncommodity revenues (Argentina, Chile, Mexico, Trinidad and Tobago) or cutting public investment. ### Long-term growth prospects and structural issues - Over the longer term, growth prospects remain weak; current potential growth estimates are similar to modest long-term averages. - GDP per capita growth is substantially below most other emerging market regions and just slightly above advanced economies, hampering income convergence. - Considerable heterogeneity across countries; some (notably Venezuela) have lost significant ground. - Low investment and low productivity, and misallocation of capital and labor, are important elements of the region’s long-term growth conundrum. ### Risks to the outlook and transmission channels - Correction in global financial markets: a sudden tightening—stemming from higher-than-expected US inflation, faster-than-expected US monetary tightening, or a rise in term premium—could materially affect long-term interest rates, capital flows, and financing conditions. - Spillovers from US interest rates can significantly affect short-term rates (Mexico, Peru) and long-term rates (Brazil, Colombia). - Waning support for global economic integration and a shift toward protectionist policies could derail world trade and negatively affect the recovery; NAFTA negotiations and proposed US import restrictions increased uncertainty. - Mexico, Central America, and the Caribbean are particularly vulnerable to US macro and policy developments through trade and migration channels. - Domestic political risks—elections, rising populism, corruption scandals—could adversely affect economic prospects. - Trade and remittance channels, and links with China (external demand for South America; risks from China’s rebalancing and rising nonfinancial sector debt), are key spillover channels. - Noneconomic risks: geopolitical tensions, climate change, extreme weather events, and natural disasters (notably for the Caribbean). - Regional spillovers from Venezuela include sharp social deterioration, humanitarian-induced emigration to neighboring countries, trade and PetroCaribe spillovers, and Venezuelan debt viewed as a distressed asset without contagion to other emerging market assets. ### Policy priorities: overall framework - In a gathering recovery with moderating inflation and widening risks, the right policy mix is crucial: - Where fiscal consolidation is warranted, improve the quality of adjustment. - Monetary policy can support growth provided inflation expectations remain well anchored. - Implement comprehensive structural policies to foster investment and private sector participation to boost potential growth inclusively and sustainably. ### Improving the quality of fiscal adjustment - End of the commodity super-cycle led to sharp revenue falls and deteriorating fiscal balances; deterioration in debt dynamics, low expected commodity prices, and reduced fiscal buffers call for fiscal adjustment. - Status and design: - For several countries, the required fiscal adjustment (changes in the primary fiscal balance to reach debt-stabilizing level) is relatively small. - For most countries, primary balances remain noticeably below debt-stabilizing levels, most notably in Argentina, Bolivia, Brazil, and Trinidad and Tobago. - Countries with larger increases in debt ratios after the super-cycle have more ambitious consolidation plans; some plans are front-loaded (Chile, Trinidad and Tobago), others gradual/back-loaded (Brazil, Peru). - Design principles: place debt ratios on a sustainable path; tune pace and composition to support and protect growth and productivity-enhancing spending. - Fiscal multipliers evidence: consolidation episodes have an impact on growth somewhat larger than previously thought (Chapter 4); multipliers for public investment are larger than for public consumption—packages should aim to preserve public investment where possible. - Where sustainability or credibility is at risk, front-load adjustment. - Well-designed, transparent fiscal plans enhance credibility and investor confidence and can improve funding conditions, particularly where spreads are high. - Broader fiscal reform: entitlement reform (public pension and health expenditures) would improve long-term sustainability with relatively small short-term growth effects. ### Enhancing monetary policy effectiveness while supporting growth - Declines in inflation provided space for easing monetary policy; with inflation within or close to targets and expectations anchored, most inflation-targeting central banks have cut policy rates. - With fiscal consolidation in many countries, monetary policy could support recovery while keeping inflation expectations anchored. - Strengthen institutional and operational frameworks to enhance credibility and effectiveness: - Improve central bank communication and transparency (press releases, minutes) to increase predictability and traction. - Greater transparency expands room to maneuver for transitory supply shocks and helps maintain credibility. - Exchange rate considerations: - Lower exchange rate pass-through into domestic inflation observed across several countries. - Central banks remain challenged by exchange rate volatility and large depreciations, which have led to procyclical monetary stances even when inflation expectations were anchored. - Exchange rate flexibility has facilitated external adjustment; degree of flexibility varies across countries. - Maintaining flexible exchange rates enhances resilience to external shocks and minimizes disruptive capital flow reversals. ### Subdued growth prospects and need for deep structural reforms - Cyclical recovery is strengthening, but raising potential growth requires deep, comprehensive reforms in multiple areas: - Human capital development: more efficient education spending to boost productivity and inclusive growth; educational attainment and learning outcomes remain low relative to other emerging markets. - Infrastructure: tackle bottlenecks to boost investment; investment levels remain lower than other emerging market regions, including sub-Saharan Africa. - Governance and business climate: reduce corruption to improve confidence, private investment, and development; corruption perceptions vary significantly across countries. - Trade and financial liberalization: trade openness in LAC is low compared to other regions, particularly Argentina and Brazil; regional integration can promote openness and global integration. - The Comprehensive and Progressive Agreement for a Trans-Pacific Partnership, signed in early March by 11 countries in the region including Chile, Mexico, and Peru, would boost trade with Asia. ### South America: developments and outlook and selected country highlights - South America resumed growth in 2017, averaging 0.7 percent (PPP terms); growth expected to accelerate in 2018 and 2019, driven by recoveries in larger economies (Argentina, Brazil). - Argentina: - Continued expansion in Q4 2017; severe drought will negatively affect agricultural production and exports. - Forecasts: Real GDP growth of 2.0 percent in 2018 (below the January WEO Update forecast); 3.2 percent in 2019 as drought impact reverses and investment rebounds. - Fiscal outlook: primary fiscal deficit expected to decline in line with federal targets; overall deficit will fall more slowly due to larger interest bill. - Recommendation: more front-loaded reductions in primary current spending to help anchor inflation expectations, reduce vulnerability from high gross fiscal financing needs, and place public debt on a more sustainable path. - Structural reforms remain necessary for stronger, inclusive growth. - Bolivia: - Real GDP grew by 4.2 percent in 2017; projected to grow by 4 percent in 2018. - Since the 2014 terms-of-trade shock, policy has been expansionary fiscally and monetarily, financed by drawdown of savings and increased borrowing. - The sizable fiscal and current account deficits that emerged in 2014 are expected to persist absent material policy changes, albeit at lower levels. ### Distribution within Latin America and the Caribbean — regional overview and country assessments - South America: external and fiscal positions deteriorated after the commodity super-cycle; debt ratios increased sharply in several countries. - Higher commodity revenues create some policy space to adjust pace and composition of consolidation and advance reforms (including pensions). - Monetary policy should support the recovery and may provide accommodation if inflation converges toward targets and expectations remain anchored; exchange rate flexibility should be first line of defense. Selected country assessments (key projections and policy notes): - Brazil: - Real GDP expected to grow at 2.3 percent in 2018. - Inflation expected to accelerate gradually from 3 percent toward the midpoint of the inflation target in 2019. - Current budget implies expansionary fiscal stance in 2018 and consolidation starting in 2019, with yearly federal government expenditure reductions of 0.5 percent of GDP over the next 10 years. - Social security reform postponed; reform of other mandatory outlays important to meet expenditure rule and ensure sustainability. - Key risk: policy changes after the October presidential election could increase market volatility and uncertainty. - Chile: - Growth revised up to 3.4 percent for 2018 (from 1.5 percent in 2017). - Recovery led by mining and nonmining exports and business investment; monetary policy appropriately accommodative. - Fiscal policy should stay on gradual consolidation while balancing social and development objectives. - Colombia: - Growth to reach 2.7 percent in 2018 due to policy easing and favorable global environment. - Investment expected to increase due to infrastructure and oil projects and the 2016 tax reform. - Inflation to return to and remain within target band, allowing possible further rate cuts. - Ecuador: - Recovery supported by partial oil-price rebound and public spending; vulnerabilities include weak fiscal position, real exchange rate overvaluation, low reserves, and political uncertainty. - Recommendation: clear, front-loaded, balanced, and well-communicated fiscal reform and structural reforms to restore competitiveness. - Paraguay: - Economy expected to expand by 4½ percent in 2018; credit recovery and monetary easing noted. - Rising inflationary pressures suggest need to gradually remove monetary accommodation. - Fiscal anchor operating well; additional restraint on current primary spending growth recommended in 2018. - Peru: - Grew 2.5 percent in 2017 (El Niño and Odebrecht spillovers); inflation closed 2017 at 1.4 percent. - Central bank reduced policy rate six times since May and lowered reserve requirements. - Government increased 2017–19 deficit targets to finance reconstruction; consolidation planned thereafter to meet the fiscal rule. - Growth expected to rebound to around 3¾ percent in 2018; downside risks from Odebrecht investigation persist. - Uruguay: - Growth expected to exceed 3 percent in 2018; inflation brought within target range (3 to 7 percent) in 2017. - Some monetary tightening appropriate as inflation edged up and large investment projects materialize. - Recommendation: save growth-related revenue windfalls in 2018 to safeguard the 2019 fiscal deficit target of 2.5 percent of GDP and reorient spending toward investment. - Venezuela: - Crisis worsening; expected to contract by 15 percent in 2018 following a cumulative 35 percent contraction over 2014–17. - Hyperinflation since November due to large fiscal deficits financed by monetary creation and currency confidence loss. - Consumer price inflation estimated at about 2,800 percent in 2017 and projected to rise to about 13,000 percent in 2018. - International reserves dropped to about $9.3 billion by the end of January 2018; liquid net international reserves appear exhausted. - Bonds for the Republic and for PDVSA are in selected default since the last quarter of 2017. - Government unified and depreciated the official exchange rate in early February 2018, but underlying imbalances remain unaddressed. - Mexico: - Output growth expected to accelerate from 2 percent in 2017 to 2.3 percent in 2018, supported by net exports, remittances, and higher US growth. - Inflation projected to continue falling in 2018 and converge toward the 3 percent target around mid-2019 as administered fuel price effects fade. - Downside risks: NAFTA renegotiation outcome, implications of US tax reform, and Mexico’s July presidential election; a disorderly NAFTA breakup would severely disrupt regional supply chains. - CAPDR (Central America, Panama, Dominican Republic): - Growth robust at about 4 percent in 2017, supported by domestic demand and upswing in global trade; consumption main driver and remittances supportive. - Recovering agricultural commodity production and remittances reduced current account deficits despite rising oil bills. - Reserve buffers strengthened in some countries (Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua). - Inflation accelerated in 2017 but remains within target ranges where applicable. - After three years of reductions, fiscal deficits widened in 2017 in most countries; average public-debt-to-GDP ratio in CAPDR continued to increase. - Risks: tighter US immigration policy reducing remittances, tighter global financial conditions, weaker global growth, retreat from cross-border integration, and political dissonance at home (El Salvador, Honduras). ### Policy priorities (regional and country-specific) - Aim to place debt-ratio paths on a sustainable footing while minimizing adverse impacts on short- and medium-term growth. - Use favorable commodity revenues to adjust pace and composition of fiscal consolidation and advance fiscal reforms (including pensions). - Monetary policy should support recovery and may provide accommodation if inflation converges toward targets and expectations remain anchored. - Maintain exchange rate flexibility as first defense against external shocks. - Country-specific priorities summarized: - Brazil: front-load fiscal adjustment; implement structural reforms to improve credit allocation, open the economy, boost infrastructure quality, simplify tax system, reduce red tape. - Chile: gradual consolidation while balancing social and development goals. - Colombia: allow room for monetary easing if inflation stays within target; support investment via infrastructure and reforms. - Ecuador: implement clear, front-loaded, balanced, well-communicated fiscal reform and structural reforms to restore competitiveness. - Paraguay: restrain current primary spending growth relative to budget plans. - Peru: consolidate after countercyclical measures and pursue structural reforms to improve tax efficiency and inclusion. - Uruguay: save revenue windfalls to meet 2019 fiscal deficit target of 2.5 percent of GDP; reorient spending toward investment. - Venezuela: address severe fiscal and monetary imbalances; exchange rate unification and depreciation do not resolve underlying problems. - Mexico: preserve macro stability, continue prudent fiscal policy to reduce public-debt-to-GDP ratio, increase efficiency of public expenditure and tax collection, and implement structural and anti-corruption reforms. - CAPDR: pursue fiscal consolidation where needed through revenue mobilization (broadening bases, strengthening administration, aligning rates), contain current spending, protect vulnerable via improved education and health spending and targeted social spending, and strengthen fiscal frameworks and credible medium-term anchors. - In countries with flexible exchange rates: maintain flexibility, increase transparency on FX intervention, and improve central bank communication and monetary frameworks to reinforce inflation-targeting credibility. ### CAPDR: Real GDP Growth, financial sector, and macro priorities - CAPDR region charts: Real GDP Growth (y/y percent change), Inflation (end of period y/y percent change), Overall Fiscal Balance (percent of fiscal year GDP), Government Gross Debt (percent of fiscal year GDP). - Caribbean: - Prospects generally improving; tourism-dependent economies and commodity exporters projected growth in the 1–2 percent range for 2018 and 2019. - Several Caribbean countries (Barbados, Belize, Jamaica, St. Lucia) registered strong tourism growth in 2017; tourism support expected to continue in 2018 with exceptions (Barbados heavily dependent on the United Kingdom). - Countries hit by 2017 hurricanes face protracted recoveries; Dominica GDP projection: decline by 16.3 percent in 2018, before rebounding in 2019 as reconstruction gathers pace. - Commodity exporters Trinidad and Tobago and Suriname experienced recessions (Trinidad and Tobago 2015–17; Suriname 2015–16); modest return to growth expected in 2018 and 2019 as commodity prices improve. - Guyana: stronger growth supported by two new large gold mines and positive sentiment ahead of oil production in 2020. - Long-term growth: Latin America and the Caribbean projected at 1.8 percent in per capita terms. Financial sector and correspondent banking priorities: - Integrate systemic risk into supervisory and regulatory frameworks, including macroprudential frameworks, to manage macro-financial and FX-related risks in highly dollarized economies (Costa Rica, Dominican Republic, Honduras, Nicaragua). - Continue transition toward Basel III and strengthen consolidated and risk-based supervision via enhanced supervisory cooperation and cross-border coordination. - Strengthen tax transparency and financial integrity. - Secure correspondent banking relationships through effective AML/CFT implementation, bank consolidation, and improved communication and information exchange. - Address financial sector weaknesses: high nonperforming loans in numerous banks, need to strengthen oversight of nonbank financial institutions and enhance capital adequacy of indigenous banks. Fiscal positions and debt vulnerabilities in the Caribbean: - Public sector debt remains a major vulnerability. - In several tourism-dependent economies (Grenada, Jamaica, St. Kitts and Nevis) debt ratios are retreating after multiyear consolidation; continued fiscal prudence needed. - Antigua and Barbuda, Barbados, Belize: need to tighten fiscal stance combined with structural reforms to bolster growth and reduce public debt. - Commodity exporters (Trinidad and Tobago, Suriname): sudden commodity price declines in 2014–15 led to large fiscal deficits and rapid public debt increases; tighter fiscal policies in a medium-term adjustment needed. - A well-designed fiscal rule can guide consolidation and broaden support. Structural and governance priorities: - Corruption, law enforcement, and security are critical constraints (El Salvador, Guatemala, Honduras) for attracting FDI and raising investment and potential growth; tackling violent crime is imperative. - Broader reforms: reduce high electricity costs, deepen financial systems and credit access, improve business climate and institutions, and sector-specific support to boost tourism. Disaster risk, insurance, and IMF support: - Caribbean highly vulnerable to natural disasters; Hurricane Maria preliminary assessment estimated recovery costs for Dominica at more than 200 percent of GDP. - IMF policy tools: - Increased annual access limits under RCF and RFI to 60 percent of quota for countries with large disasters (exceeding 20 percent of GDP in damages) as of May 2017. - Interest rate on RCF loans set at zero percent. - Risk management and financing options: - Build disaster and climate risks into budgets, fiscal rules, and public investment plans; establish buffers or contingency funds sized to assessed disaster risks. - Use insurance and financial hedging; regional pooling can reduce costs. - CCRIF provides parametric insurance with quick settlement (usually within 14 days); CCRIF made payments totaling $55 million following Hurricanes Irma and Maria in 2017. Parametric insurance can leave gaps where triggers are not reached. - Improved sovereign debt design (state-contingent clauses) can smooth post-disaster cash flow (example: Grenada’s 2015 debt restructuring). ### Resource allocation and productivity in manufacturing (box findings) - Misallocation of capital and labor identified as an important drag on productivity in Latin America. - Spread of revenue productivity (ratio of 75th percentile to 25th percentile of relative TFPR) across firms within manufacturing sectors (data apply to 2015): - United Kingdom: 6.8 - Mexico: 11.3 - Brazil: 12.4 - Colombia: 15.7 - Estimated gains in manufacturing total factor productivity (TFP) from equalizing revenue productivity across firms within each sector: - Brazil: 51 - Colombia: 61 - Mexico: 48 - Drivers and policy implications: - Tax incentives for small enterprises may allow unproductive firms to survive at the expense of productive entrants. - Distortions (for example, higher tax rates on machinery than on buildings in Brazil) reduce allocative efficiency and investment incentives. - State subsidies, lack of competition, regulatory burdens, limited access to early-stage financing, and informality perpetuate misallocation. - Policies to reduce informality and improve competition, product and labor market regulation, and access to finance can improve resource allocation and productivity. - These TFP gain estimates are indicative and may be upper bounds; advanced economies also show some misallocation. ### Box 2.3 — Crime, economic effects, and policy implications (CAPDR and Caribbean) - Crime is a central challenge: CAPDR and Caribbean account for 0.5 percent of world population but 5 percent of nonwar homicides. - Selected statistics: - El Salvador and Jamaica have the top two homicide rates worldwide. - Honduras peaked at 87 per 100,000 in 2011 and fell to 43 per 100,000 by 2017. - Conviction rates for homicides over 2007–15 in CAPDR and the Caribbean averaged about 20 percent (versus 40 percent globally). - Over a quarter of the population in CAPDR and the Caribbean cites crime as the biggest problem (regional LAC average: 11 percent). - Crime’s economic impact: - If CAPDR and Caribbean countries reduced crime rates to the world average, GDP growth could be higher by around 0.4 percentage point a year in El Salvador, Jamaica, and Honduras. - Cumulative GDP losses during 1999–2015 due to high crime: - El Salvador: about 9½ percentage points of GDP. - Honduras: about 7½ percentage points of GDP. - Jamaica: about 7 percentage points of GDP. - IDB (2017) estimate: cost of crime can add up to about 4 to 5 percent of GDP a year for CAPDR and the Caribbean. - Channels: cost of goods lost; public and private prevention/detention costs; lost productivity from prison populations and victims; nonmonetary effects include discouraging investment in human and physical capital and fostering brain drain. - Policy implications: - Tackle crime via a mix of growth-promoting policies, improved deterrence and prevention, and strengthening the criminal justice system. - Interventions should be targeted and evidence based, prioritize at-risk youth programs, data collection and monitoring, and combine security budgets with skills development and social programs. - Strengthen criminal justice credibility and efficiency, provide basic skills training to convicts, reduce prison overcrowding, and improve prison quality. ### Annex summaries — Fiscal Indicators and Selected Economic and Social Indicators (cutoff April 2, 2018) - Annex Table 2.2 (regional aggregates, fiscal year basis; values exact as presented): - Latin America and the Caribbean (US dollar nominal GDP-weighted averages, fiscal year): - Public Sector Primary Expenditure: 28.9 (2015), 28.7 (2016), 28.2 (2017), 27.7 (2018 est.), 27.1 (2019 proj.). - Public Sector Primary Balance: 22.7 (2015), 22.6 (2016), 22.1 (2017), 21.7 (2018 est.), 21.3 (2019 proj.). - Public Sector Gross Debt: 54.5 (2015), 57.8 (2016), 60.5 (2017), 64.7 (2018 est.), 65.7 (2019 proj.). - Selected country entries (percent of GDP; 2015–2019 where shown) include exact series for Canada, Mexico, United States, Brazil, Argentina, Venezuela as presented in source. - Subregional aggregates (selected): - South America: Primary Expenditure 31.3 (2015), 30.4 (2016), 30.8 (2017), 30.4 (2018 est.), 29.5 (2019 proj.); Primary Balance 23.7, 24.0, 25.1, 24.0, 23.3; Gross Debt 41.4, 43.5, 45.8, 59.6, 60.9. - CAPDR: Primary Expenditure 18.6, 18.8, 19.1, 18.9, 19.0; Primary Balance 20.4, 20.4, 20.4, 20.3, 20.3; Gross Debt 37.4, 39.0, 40.9, 41.2, 41.8. - Caribbean (Tourism dependent): Primary Expenditure 24.5, 25.1, 25.5, 25.1, 24.6; Primary Balance 2.5, 4.3, 3.5, 2.3, 2.1; Gross Debt 87.9, 85.0, 83.8, 82.8, 80.7. - Country-specific methodological notes and Venezuela data caveats included in source. - Annex Table 2.3 — Selected Economic and Social Indicators, 2008–17 (cutoff April 2, 2018): - Regional totals and averages (exact figures): - Latin America and the Caribbean: GDP 5,492.9 (billions of US dollars, 2017); Population 619.8 (million); GDP per Capita (PPP US dollars) 15,785; Share of LAC Region 100.0 (percent); Real GDP Growth 2.1 (percent); CPI Inflation 4.9 (percent); Current Account 2 (percent of GDP); Domestic Saving 2.0 (percent of GDP); Trade Openness 19.3 (percent of GDP); Gross Reserves 42.5 (percent of GDP); Unemployment Rate 15.7 (percent); Gini Coefficient 49.5. - Selected country-level indicators provided exactly as presented for the United States, Mexico, Brazil, Argentina, Chile, Peru, Venezuela, among others (GDP, population, GDP per Capita (PPP), Real GDP Growth, CPI Inflation, Current Account, Domestic Saving, Trade Openness, Gross Reserves, Unemployment, Poverty Rate, Gini, Sovereign Credit Rating). - Notes: Poverty defined as share earning less than US$2.5 a day (LAC uses US$3.1 a day from the IDB); CPI series exclude Argentina and Venezuela; data sources listed in source. *International Monetary Fund | April 2018* ### 2. Outlook for Latin America and the Caribbean: ### 2. Outlook for Latin America and the Caribbean: The Right Policy Mix for Sustaining the Recovery ### External conditions and financial markets - Global financial conditions remain accommodative, with global equity prices near all-time highs and long-term interest rates subdued, providing easy financing to the region. - Sovereign and corporate spreads remain low, and equity prices are elevated; capital inflows to the region stabilized and started to increase moderately in 2017 after falling sharply in the previous two years. - Freely floating currencies have broadly stabilized; over the past 24 months some have partially regained previously lost ground. - Market volatility in early February 2018 was generally limited and short-lived, with asset prices across most countries returning to preshock levels by the end of the month. - Market views on Latin America were mixed—upbeat about near-term economic momentum but worried about medium-term growth prospects, including political risks, rising populism, and external risks for countries with higher dollar financing needs. - The most financially integrated economies in the region—Brazil, Chile, Colombia, Mexico, and Peru—remain at risk from adverse developments in global financial markets; financial asset prices in these countries exhibit a high degree of synchronicity and capital flows are highly responsive to global shocks. - Countries reliant on large external financing (for example, Argentina) are highlighted as vulnerable to changes in foreign investor sentiment. ### Commodity prices and terms of trade - Commodity prices worldwide fell sharply following the end of the commodity super-cycle: energy and metal prices essentially halved between their peak in 2011–12 and early 2016. - Commodity prices have partly rebounded since early 2016; in some cases net commodity terms of trade have essentially reverted to their boom levels—notably in metal commodity exporters that are net oil importers (Chile, Peru). - The likelihood that commodity terms of trade will return to—or stay above—their boom levels both in 2018 and over the medium term has increased for most countries in the region. ### Growth, investment, and labor markets - A broad-based acceleration in economic activity is expected going forward; relative to 2016 (when seven economies representing roughly half of the region’s total GDP experienced contraction), real GDP growth in 2019 is projected to be positive in all but one country (Venezuela). - Excluding Venezuela, the average growth estimate for the region in 2017 is 1.9 percent. - Venezuela’s economy is estimated to have contracted by a further 14 percent in 2017. - Private investment, having contracted for three years in a row, is estimated to have stopped being a major drag in 2017 and is expected to move solidly into positive territory in 2018–19; private investment is expected to be the main driver of the projected economic acceleration in 2018 and 2019. - Despite the recovery, investment levels are expected to remain below the levels observed in other regions. - Unemployment rates have already peaked in most countries, and labor markets are showing signs of improvement. ### Inflation and financial sector soundness - Consumer price inflation has come down sharply at the regional level; across most inflation-targeting countries in the region, inflation is back within the official target range. - In countries where inflation still exceeds the target range, it is expected to moderate in 2018–19 as transitory supply-side factors recede. - Financial sectors remain stable with strong bank capital ratios and high rates of return; bank profits are largely driven by high interest margins due to bank concentration and high operating costs. - Private credit increased sharply during the commodity boom, with a doubling of the region’s credit-to-GDP ratio between 2005 and 2015, but has since broadly stabilized in several countries. - Nonperforming loans increased during the slowdown but are well provisioned and remain manageable in most countries. - Nonfinancial corporate balance sheets have strengthened as corporate profitability increases and indebtedness levels have fallen relative to recent peaks. ### Current accounts, fiscal positions, and public finances - Current account deficits in most countries narrowed from recent peaks; in many cases external adjustment to lower commodity prices is now almost complete. - Most current account adjustment to date was led by improvements in the private sector savings-investment balance, reflected in import compression due to income effects; Mexico was a notable exception where reduction was led by improvements in public sector savings. - Going forward, current account deficits are expected to widen again as growth accelerates in domestic consumption and investment; the expansion in private sector investment is expected to offset the impact of fiscal consolidation on the current account. - Following the end of the commodity super-cycle, fiscal revenues in most commodity-exporting countries fell noticeably relative to boom years; the loss in commodity revenue was particularly strong among hydrocarbon-exporting countries (Bolivia, Ecuador, Mexico, Trinidad and Tobago, Venezuela). - An upward trend in current spending that began during the commodity boom continued in several countries even after the bust, contributing to deterioration in fiscal balances and debt ratios. - Some countries have responded by raising noncommodity revenues (Argentina, Chile, Mexico, Trinidad and Tobago) or by cutting public investment. ### Long-term growth prospects and structural issues - Over the longer term, growth prospects remain weak; current potential growth estimates are similar to modest long-term averages. - The region’s GDP per capita growth is substantially below most other emerging market regions and just slightly above advanced economies, hampering income convergence toward advanced economy levels. - There is considerable heterogeneity within the region, with some countries losing significant ground in development prospects (notably Venezuela). - Low levels of investment and low productivity continue to be drags on overall growth; misallocation of capital and labor resources appears to be an important element in the region’s long-term growth conundrum. ### Risks to the outlook - Correction in global financial markets: a sudden tightening of global financial market conditions—stemming from higher-than-expected US inflation, faster-than-expected tightening of US monetary policy, and a rise in term premium—could materially affect long-term interest rates, capital flows, and financing conditions for the region. - Potential spillovers from US interest rates can be significant for many countries in the region, affecting both short-term rates (Mexico, Peru) and long-term rates (Brazil, Colombia). - Waning support for global economic integration and a shift toward protectionist policies (tariff and nontariff barriers) could derail world trade and negatively affect regional recovery; negotiations on NAFTA and proposed US import restrictions have increased uncertainty. - Mexico, Central America, and the Caribbean remain particularly vulnerable to macroeconomic and policy developments in the United States through trade and migration channels. - Domestic political risks—elections, rising populist sentiment, and corruption scandals—could have important adverse effects on economic prospects. *Regional Economic Outlook: Western Hemisphere. International Monetary Fund | April 2018* ### 2. OUTLOOK fOR LATIN AMERICA ANd THE CARIbbEAN: THE RIGHT pOLICy MIx fOR sUsTAINING THE RECOvERy ### 2. OUTLOOK fOR LATIN AMERICA ANd THE CARIbbEAN: THE RIGHT pOLICy MIx fOR sUsTAINING THE RECOvERy ### Risks and transmission channels - Trade and remittance channels remain important for spillovers within the region. - Trade links with China: - Remain an important driver of external demand for South America. - Ongoing rebalancing in China and accumulation of financial vulnerabilities from rising nonfinancial sector debt could spill over through trade linkages and commodity prices. - Noneconomic factors: - Geopolitical tensions could adversely affect global financial markets, commodity prices, global economic activity, and external demand, with spillovers to the region. - Climate change, extreme weather events, and natural disasters are important risks, notably for the Caribbean. - Election cycle in Latin America: - 2018 elections could generate economic and policy uncertainty; rising populism poses risks to reform implementation. - Regional spillovers from Venezuela: - Sharp deterioration in social conditions: plummeting purchasing power; increasing scarcity of basic goods (for example, food, personal hygiene items, medicine); collapse of the health system; high crime rates. - Humanitarian crisis has caused sharp emigration to Colombia, Brazil, and to a lesser extent Argentina, Chile, Ecuador, and Peru, putting pressure on social services. - Spillovers through trade and PetroCaribe agreements have materialized for some countries. - Investors view Venezuelan debt as a distressed asset, with no contagion to other emerging market assets. ### Policy priorities: overall framework - In the context of a gathering economic recovery, moderating inflation, and widening risks, the right policy mix is crucial: - Where fiscal consolidation is warranted, improve the quality of adjustment. - Monetary policy can support growth provided inflation expectations remain well anchored. - Implement comprehensive structural policies to foster investment and private sector participation to boost potential growth inclusively and sustainably. ### Improving the quality of fiscal adjustment - End of commodity super-cycle led to a sharp fall in commodity revenues and deterioration in fiscal balances; some countries face exacerbating domestic slowdowns and crises. - Deterioration in debt dynamics, low expected commodity prices, and reduced fiscal buffers call for fiscal adjustment. - Status of fiscal positions and adjustment: - For several countries, the required fiscal adjustment—in terms of changes in the primary fiscal balance to reach the debt-stabilizing level—is relatively small. - For most countries, primary balances remain noticeably below debt-stabilizing levels, most notably in Argentina, Bolivia, Brazil, and Trinidad and Tobago. - Countries with larger increases in debt ratios after the commodity super-cycle generally have more ambitious fiscal consolidation plans (Figure 2.13). - Some countries’ plans are front-loaded (Chile, Trinidad and Tobago); others are gradual/back-loaded (Brazil, Peru). - Design principles for adjustment: - Aim to place debt ratios on a sustainable path. - Tune pace and composition to support and protect growth and productivity-enhancing spending. - Fiscal multipliers evidence: - Analysis suggests fiscal consolidation episodes in the region have an impact on growth somewhat larger than previously thought (Chapter 4). - Multipliers for public investment are larger than those for public consumption—consolidation packages should aim to preserve public investment where possible. - Where fiscal sustainability or credibility is at risk, front-load adjustment. - A well-designed and transparent fiscal adjustment plan enhances policy credibility and investor confidence; this can improve funding conditions, particularly for countries with higher average spreads relative to peers (Figure 2.14), and help garner public support. - Broader fiscal reform: - Entitlement reform to contain future fiscal pressures from demographic changes—particularly public pension and health expenditure—would improve long-term fiscal sustainability while having relatively small short-term growth effects. ### Enhancing monetary policy effectiveness while supporting growth - Recent inflation declines have provided space for easing monetary policy; with inflation within or close to target bands and inflation expectations anchored, most inflation-targeting central banks have cut policy rates (Figure 2.15). - Going forward, with fiscal consolidation in large parts of the region, monetary policy could support the recovery while keeping inflation expectations anchored. - Strengthening institutional and operational frameworks enhances credibility and effectiveness. - Improve central bank communication and transparency (for example, press releases and minutes) to increase predictability and traction (Chapter 3). - Greater transparency increases room to maneuver for transitory supply shocks and helps maintain credibility. - Exchange rate considerations: - Inflation-targeting progress is reflected in lower exchange rate pass-through into domestic inflation across several countries. - Central banks remain challenged by bouts of exchange rate volatility and large depreciations; large depreciations have led to procyclical monetary policy stances even when inflation expectations were anchored (Figure 2.16). - Exchange rate flexibility has facilitated external adjustment (Chapter 3, April 2017 REO). - The degree of exchange rate flexibility varies across countries even when facing similar shocks (Figure 2.17). - Maintaining flexible exchange rates enhances resilience to external shocks, including sudden changes in global financial conditions, and minimizes disruptive capital flow reversals. ### Subdued growth prospects and need for deep structural reforms - Cyclical recovery is strengthening, but long-term prospects remain dim—raising potential growth requires deep, comprehensive reforms. - Policy areas for raising growth potential: - Human capital development: more efficient education spending to boost productivity and inclusive growth. Despite higher spending, educational attainment and learning outcomes remain low relative to other emerging market regions (Figure 2.18). - Infrastructure: tackle bottlenecks to boost investment; investment levels remain lower than other emerging market regions, including sub-Saharan Africa (Figure 2.19). - Governance and business climate: reduce corruption to improve confidence, private investment, and development; corruption perceptions at regional level broadly in line with other emerging markets but vary significantly across countries even after adjusting for per capita income (Figure 2.20). - Trade and financial liberalization: trade openness in LAC is low compared to other regions, particularly in large economies like Argentina and Brazil (Figure 2.21). Regional integration can promote openness and global integration. - The Comprehensive and Progressive Agreement for a Trans-Pacific Partnership, signed in early March by 11 countries in the region including Chile, Mexico, and Peru, would boost trade with Asia. ### South America: developments and outlook - After a sharp contraction in 2015–16, South America resumed growth in 2017, averaging 0.7 percent (in purchasing-power-parity terms). - Supported by a positive external environment, relatively higher commodity prices, and cyclical domestic demand recovery, growth is expected to accelerate in 2018 and 2019. - Regional aggregates are dominated by recoveries in larger economies, notably Argentina and Brazil. Country highlights - Argentina: - Continued expansion in Q4 2017; high-frequency indicators point to robust activity in early 2018. - Severe drought will negatively affect agricultural production and exports. - Forecasts: - Real GDP growth of 2.0 percent in 2018 (below the January WEO Update forecast). - Growth expected to pick up to 3.2 percent in 2019 as drought impact reverses, higher real wages and pensions sustain private consumption, and private investment rebounds. - Fiscal outlook: - Primary fiscal deficit expected to decline in line with federal targets, mainly reflecting announced reduction of subsidies and consistent with the new Fiscal Responsibility Law at the provincial level. - Overall fiscal deficit will fall more slowly due to a larger interest bill. - Continued reduction of the primary fiscal deficit via more front-loaded reductions in primary current spending would help anchor inflation expectations amid lower interest rates, reduce vulnerability from high gross fiscal financing needs, and place public debt on a more sustainable path. - Structural reforms remain necessary for stronger, sustainable, and inclusive growth. - Bolivia: - Growth remains among the highest in the region but faces medium-term challenges. - Since the 2014 terms-of-trade shock, policy has been expansionary fiscally and monetarily, financed by drawdown of savings and increased borrowing. - Real GDP: - Grew by 4.2 percent in 2017. - Projected to grow by 4 percent in 2018. - The sizable fiscal and current account deficits that emerged in 2014 are expected to persist absent material policy changes, albeit at lower levels. *International Monetary Fund | April 2018* ### 2. Distribution within Latin America and the Caribbean ### 2. Distribution within Latin America and the Caribbean ### Regional overview - South America experienced deteriorated external and fiscal positions following the end of the commodity super-cycle; debt ratios increased sharply in several countries, particularly in recession economies. - Higher commodity revenues are creating some additional policy space, enabling adjustment of the pace and composition of fiscal consolidation and opening opportunities for fiscal reform (including pension system reform). - Monetary policy should support the recovery and may provide some accommodation to accompany fiscal adjustment, provided inflation convergence toward targets and anchored inflation expectations. Exchange rate flexibility should remain the first line of defense against external shocks. ### Country assessments and outlooks - Brazil - Real GDP is expected to grow at 2.3 percent in 2018, driven by favorable external conditions and a rebound in private consumption and investment. - The uptick in activity will lead to a moderate deterioration of the current account. - Inflation is expected to accelerate gradually from 3 percent toward the midpoint of the inflation target in 2019, owing to an accommodative monetary policy stance and an increase in food price inflation. - Fiscal consolidation continued in 2017 with improved revenue collection and postponement of discretionary expenditures. - The current budget implies an expansionary fiscal stance in 2018 and fiscal consolidation starting in 2019, with yearly reductions in federal government expenditure of 0.5 percent of GDP over the next 10 years. - Social security reform has been postponed; reforming other mandatory outlays, including the wage bill, is important to meet the constitutional expenditure rule and ensure fiscal sustainability. - Key risks: policy agenda changes following the October presidential election could increase market volatility and medium-term uncertainty. - Chile - Growth for 2018 has been revised up to 3.4 percent—noticeably higher than in 2017 (1.5 percent). - Recovery is led by mining and nonmining exports and business investment, supported by solid household spending and slightly looser financial conditions. - Monetary policy is appropriately accommodative; the central bank should wait until inflation shows clear convergence toward its target and growth momentum is self-sustaining before normalizing policy. - Fiscal policy should stay on a gradual consolidation course and balance social and development objectives. - Colombia - Policy easing and a favorable global environment will lift growth to 2.7 percent in 2018. - Mildly expansionary fiscal policy and lagged effects of 2017 monetary easing will support domestic demand. - Investment is expected to increase strongly due to infrastructure projects, oil sector projects, and the 2016 tax reform. - Inflation will return to and remain within the target band, allowing for potential further policy rate cuts. - Current account deficit will narrow with relatively higher oil prices and increasing nontraditional exports. - Ecuador - Recovery supported by partial rebound in oil prices, favorable external financial conditions, and continued public sector spending. - Vulnerabilities: weak fiscal position, real effective exchange rate overvaluation, low foreign reserves, and domestic political and policy uncertainty. - A clear, front-loaded, balanced, and well-communicated fiscal reform path is recommended to bolster market confidence and lower financing costs; structural reforms are needed to address competitiveness problems. - Paraguay - Economy expected to expand by 4½ percent in 2018, led by strong domestic demand. - Bank credit is recovering; Central Bank of Paraguay eased monetary policy further in August 2017. - Inflationary pressures have begun to rise as domestic demand strengthens and credit growth resumes, pointing to a need to gradually remove monetary accommodation. - While the fiscal anchor is operating well, additional restraint on current primary spending growth relative to budget plans is needed in 2018. - Peru - Economy grew 2.5 percent in 2017, reflecting adverse impact of El Niño and spillovers from the Odebrecht corruption investigation, offsetting strong export expansion. - Inflation spiked in early 2017 due to weather conditions affecting food prices; inflation closed the year at 1.4 percent. - Central bank reduced the policy rate six times since May and lowered reserve requirements. - Government increased 2017–19 deficit targets to finance reconstruction and rehabilitation projects, with consolidation planned thereafter to bring the deficit in line with the fiscal rule. - Policies are expected to help growth rebound to around 3¾ percent in 2018, though downside risks from the Odebrecht investigation persist. - Medium-term focus: structural reforms to improve tax system efficiency, expand economic and financial inclusion, and close the infrastructure gap. - Uruguay - Growth expected to exceed 3 percent in 2018 due to prudent policies and favorable external conditions. - Tight monetary policy and an appreciating exchange rate contributed to a notable decline in inflation, bringing it within the central bank’s target range (3 to 7 percent) in 2017 for the first time in seven years. - Some monetary tightening would be appropriate as inflation edged up early in the year and demand pressures from upcoming large investment projects materialize. - The 2017 fiscal deficit was slightly larger than projected; saving possible growth-related revenue windfalls in 2018 is recommended to safeguard the 2019 fiscal deficit target of 2.5 percent of GDP. - Reorienting budget spending from the public wage bill toward investment is important given infrastructure gaps. - Venezuela - Economic crisis worsening; expected to contract by 15 percent in 2018 following a cumulative 35 percent contraction over 2014–17. - Hyperinflation since November due to large fiscal deficits financed by monetary creation and loss of currency confidence. - Consumer price inflation estimated at about 2,800 percent in 2017 and projected to rise to about 13,000 percent in 2018. - International reserves dropped to about $9.3 billion by the end of January 2018; liquid net international reserves appear to be exhausted. - Bonds for the Republic and for PDVSA are in selected default since the last quarter of 2017. - Government unified and depreciated the official exchange rate in early February 2018, but underlying economic imbalances remain unaddressed. - Mexico - Output growth is expected to accelerate from 2 percent in 2017 to 2.3 percent in 2018, supported by net exports and remittances and higher US growth. - Inflation is projected to continue falling in 2018 and converge toward the central bank’s 3 percent target around the middle of 2019 as administered fuel price effects fade and food price inflation declines. - Downside risks: outcome of NAFTA renegotiation, potential implications of US tax reform, and Mexico’s July presidential election; a disorderly NAFTA breakup would severely disrupt regional supply chains. - Central America, Panama, and the Dominican Republic (CAPDR) - Growth remained robust at about 4 percent in 2017, supported by solid domestic demand and the upswing in global trade. - Consumption was the main growth driver; strong remittances supported spending in the Northern Triangle countries and the Dominican Republic. - Recovering agricultural commodity production and prices and remittances led to further reduction in current account deficits in 2017 despite rising oil bills. - Reserve buffers strengthened in some countries (Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua). - Inflation accelerated in 2017 in most countries but remains within target ranges in inflation-targeting frameworks. - After three years of reductions, fiscal deficits widened in 2017 in most countries due to broader spending pressures; average public-debt-to-GDP ratio in CAPDR continued to increase. - Risks: tighter US immigration policy reducing remittances, tighter global financial conditions, weaker-than-expected global growth, retreat from cross-border integration, and political dissonance at home (El Salvador, Honduras). ### Policy priorities (regional and country-specific) - Aim to place debt-ratio paths on a sustainable footing while minimizing adverse impacts on short- and medium-term growth. - Use current favorable commodity revenues to adjust the pace and composition of fiscal consolidation and to advance fiscal reforms (including pensions). - Monetary policy should support recovery and may provide accommodation if inflation converges toward targets and expectations remain anchored. - Maintain exchange rate flexibility as the first line of defense against external shocks. - Brazil: front-load fiscal adjustment and implement structural reforms to improve credit allocation, open the economy, boost infrastructure quality, simplify the tax system, and reduce red tape. - Chile: keep fiscal policy on a gradual consolidation course while balancing social and development goals. - Colombia: allow room for monetary easing if inflation remains within the target band; support investment through infrastructure projects and reforms. - Ecuador: implement a clear, front-loaded, balanced, and well-communicated fiscal reform path and structural reforms to restore competitiveness. - Paraguay: restrain growth of current primary spending relative to budget plans to avoid unwarranted fiscal stimulus. - Peru: consolidate after countercyclical fiscal measures and pursue structural reforms to improve tax efficiency and inclusion. - Uruguay: save growth-related revenue windfalls to meet the 2019 fiscal deficit target of 2.5 percent of GDP and reorient spending toward investment. - Venezuela: address severe fiscal and monetary imbalances; current measures (exchange rate unification and depreciation) do not resolve underlying problems. - Mexico: preserve macroeconomic stability, continue prudent fiscal policy to reduce public-debt-to-GDP ratio, increase efficiency of public expenditure and tax collection, and implement structural and anti-corruption reforms. - CAPDR: pursue fiscal consolidation where needed through revenue mobilization (broadening tax bases, strengthening tax administration, aligning tax rates with regional averages) and containment of current spending; protect the vulnerable by improving the efficiency and quality of education and health spending and increasing targeted social spending; strengthen fiscal policy frameworks and credible medium-term fiscal anchors. - In countries with flexible exchange rates: maintain exchange rate flexibility, increase transparency on foreign exchange intervention, and improve central bank communication and monetary policy frameworks to reinforce inflation-targeting credibility. *International Monetary Fund | April 2018* ### 1. CAPDR: Real GDP Growth ### wreo0518-chp2 - 1. CAPDR: Real GDP Growth ### Regional growth and near-term outlook - Central America, Panama, and the Dominican Republic (CAPDR) region: charts presented on Real GDP Growth (year-over-year percent change), Inflation (end of period; year-over-year percent change), Overall Fiscal Balance (Percent of fiscal year GDP), and Government Gross Debt (Percent of fiscal year GDP). - Caribbean: prospects generally improving; growth in both tourism-dependent economies and commodity exporters projected in the 1–2 percent range for 2018 and 2019. - Several Caribbean countries registered strong tourism growth in 2017 (Barbados, Belize, Jamaica, St. Lucia); tourism support expected to continue in 2018 due to higher US growth (with exceptions such as Barbados heavily dependent on the United Kingdom). - Countries hit by the 2017 hurricane season face protracted recoveries; Dominica GDP projection: decline by 16.3 percent in 2018, before rebounding in 2019 as reconstruction gathers pace. - Commodity exporters: Trinidad and Tobago and Suriname experienced recessions (Trinidad and Tobago 2015–17; Suriname 2015–16); modest return to growth expected in 2018 and 2019 as commodity prices improve somewhat. - Guyana: stronger growth supported by two new large gold mines and positive sentiment ahead of the beginning of oil production in 2020. - Long-term growth: Latin America and the Caribbean projected at 1.8 percent in per capita terms. ### Financial sector, macro-financial risks, and correspondent banking - Financial sector generally sound; region progressing in AML/CFT compliance, reinforcing frameworks via legislative measures and strengthening implementation to help maintain correspondent banking relationships. - Policy and regulatory priorities to support stability: - Integrate systemic risk into supervisory and regulatory frameworks, including development of macroprudential policy frameworks, to manage macro-financial risks and foreign-exchange-related risks in highly dollarized economies (Costa Rica, Dominican Republic, Honduras, Nicaragua). - Continue transition toward Basel III and strengthen consolidated and risk-based supervision via enhanced supervisory cooperation and cross-border coordination. - Strengthen tax transparency and financial integrity. - Correspondent banking risks: secure relationships through more effective AML/CFT implementation, bank consolidation, and improved communication and information exchange with correspondent banks. - Financial sector weaknesses: numerous banks still have high levels of nonperforming loans, constraining credit and raising vulnerability to shocks; need to strengthen oversight of nonbank financial institutions and enhance capital adequacy of indigenous banks. ### Fiscal positions and debt vulnerabilities - Public sector debt remains a major vulnerability in the Caribbean. - Debt dynamics and fiscal policy: - In several tourism-dependent economies (Grenada, Jamaica, St. Kitts and Nevis) debt ratios are retreating from very high levels after multiyear fiscal consolidation efforts; continued fiscal prudence needed to reduce debt-to-GDP ratios and build buffers. - In Antigua and Barbuda, Barbados, and Belize there is a clear need to tighten fiscal stance combined with structural reforms to bolster growth and reduce public debt. - Commodity exporters (Trinidad and Tobago, Suriname): sudden decline in commodity prices in 2014–15 led to large fiscal deficits and rapid public debt increases; tighter fiscal policies in a medium-term macroeconomic adjustment are needed to reestablish sustainable fiscal paths and ensure debt sustainability. - Policy instrument: a well-designed fiscal rule can help guide consolidation and broaden support. ### Structural and governance priorities - Corruption, law enforcement, and security remain critical constraints (El Salvador, Guatemala, Honduras) for attracting FDI and raising investment and potential growth; tackling violent crime is imperative. - Broader structural reforms required to raise productivity and potential growth, including: - Reduce high electricity costs through energy conservation and diversifying the energy mix. - Deepen financial systems and enhance access to credit. - Improve the business climate and strengthen institutions to reduce unemployment and brain drain. - Sector-specific policies to support structural transformation and bolster tourism (advertising, training, nature conservation, transportation infrastructure). ### Disaster risk, insurance, and IMF support - The Caribbean is highly vulnerable to natural disasters; Hurricane Maria preliminary assessment estimated recovery costs for Dominica at more than 200 percent of GDP. - IMF disaster-related policy tools and recent changes: - Increased annual access limits under the Rapid Credit Facility (RCF) and the Rapid Financing Instrument (RFI) to 60 percent of quota for countries experiencing large natural disasters (exceeding 20 percent of GDP in damages) as of May 2017. - The interest rate on RCF loans is set at zero percent. - Risk management and financing options: - Build disaster and climate risks into budgets, fiscal rules, and public investment plans; establish fiscal buffers or contingency funds sized to assessed disaster risks. - Use insurance and financial hedging tools; regional pooling can reduce costs. - Example: Caribbean Catastrophe Risk Insurance Facility (CCRIF) provides parametric insurance with quick settlement (usually within 14 days); CCRIF made payments totaling $55 million following Hurricanes Irma and Maria in 2017. Parametric insurance can leave gaps where triggers are not reached. - Improved sovereign debt design (state-contingent clauses) can help smooth cash flow post-disaster (example: Grenada’s 2015 debt restructuring). ### Resource allocation and productivity in manufacturing (Box findings) - Misallocation of capital and labor identified as an important drag on productivity in Latin America. - Spread of revenue productivity (ratio of 75th percentile to 25th percentile of relative TFPR) across firms within manufacturing sectors (data apply to 2015): - United Kingdom: 6.8 - Mexico: 11.3 - Brazil: 12.4 - Colombia: 15.7 - Estimated gains in manufacturing total factor productivity (TFP) from equalizing revenue productivity across firms within each sector: - Brazil: 51 - Colombia: 61 - Mexico: 48 - Drivers and policy implications: - Tax incentives for small enterprises may allow unproductive firms to survive at the expense of productive entrants. - Distortions such as higher tax rates on machinery than on buildings (Brazil) reduce allocative efficiency and investment incentives. - State subsidies and lack of competition can perpetuate misallocation. - Regulatory burdens that slow firm creation and limited access to early-stage financing reduce allocative efficiency. - Informality is associated with higher allocative inefficiency; policies to reduce informality can improve resource allocation and productivity. - These TFP gain estimates are indicative and may be upper bounds; advanced economies also show some misallocation. *Source: International Monetary Fund, Regional Economic Outlook: Western Hemisphere, April 2018 (chapter content provided).* ### Box 2.3. Resilience to Natural Disasters and Climate Change ### Box 2.3. Resilience to Natural Disasters and Climate Change ### Crime as a central challenge in CAPDR and the Caribbean - Chronically high crime is identified as one of the biggest challenges in the Caribbean and the Central America, Panama, and Dominican Republic (CAPDR) regions. - These countries account for only half a percent of the world’s population but for 5 percent of nonwar homicides. - Crime disproportionately affects the poor and the young and imposes large public and private costs that sap economic growth. ### Selected crime facts and statistics - Homicide rankings and rates: - El Salvador and Jamaica have the top two homicide rates worldwide. - Honduras peaked at a homicide rate of 87 per 100,000 people in 2011 and saw this rate halve to 43 per 100,000 people by 2017. - Belize, St. Kitts and Nevis, and Guatemala are ranked fourth to sixth, significantly above averages for the rest of Latin America and the world. - Conviction rates: - Conviction rates for homicides over 2007–15 in both CAPDR and the Caribbean averaged only about 20 percent (versus 40 percent globally). - Victimization perceptions: - Over a quarter of the population in CAPDR and the Caribbean cites crime as the biggest problem, versus the Latin America and Caribbean average of 11 percent. - Victimization incidence tends to be higher for men, youth, and those with lower levels of education. - Deportation context used for causal identification: - For the top four countries, the cumulative number of deportees from 1998–2014 was only about 2.5 percent, 2.4 percent, 1.5 percent, and 1.4 percent of the labor force for El Salvador, Honduras, Jamaica, and Guatemala, respectively. - Emigration link: - Probit results using victimization surveys suggest that being a victim of a crime can increase a person’s probability of wanting to emigrate by as much as 10 percentage points. ### Crime’s effect on economic growth and quantified impacts - Identification approach: - Criminal deportations from the United States are used to capture the causation effect of homicides on growth to address reverse causality concerns. - Growth impact estimates: - If CAPDR and Caribbean countries reduced their crime rates to the world average, GDP growth could be higher by around 0.4 percentage point a year in El Salvador, Jamaica, and Honduras. - Cumulative GDP losses during 1999–2015 due to high crime rates: - El Salvador: about 9½ percentage points of GDP. - Honduras: about 7½ percentage points of GDP. - Jamaica: about 7 percentage points of GDP. - Broader quantified costs: - According to IDB (2017), the cost of crime (cost of goods lost; public and private spending on prevention, deterrence, and imprisonment; and lost productivity from prison populations and victims) can add up to about 4 to 5 percent of GDP a year for CAPDR and the Caribbean countries. ### Channels and nonmonetary effects - Key channels through which crime reduces growth: 1. Cost of goods lost. 2. Public and private costs for prevention, deterrence, and imprisonment. 3. Lost productivity from the prison population and victims. - Nonmonetary and longer-term effects: - Criminal activity and shorter life spans discourage investment in human and physical capital by lowering expected returns and eroding job creation. - Firm-level data from Colombia show that lowering victimization rates improves both investment and employment outcomes. - Crime fosters brain drain, which is especially pertinent for the Caribbean where growth has been chronically low. - High crime among the young can generate a cycle of negative labor market outcomes that further foster criminality and lower growth. ### Policy implications and recommendations - Core economic strategy: - Tackle crime with a combination of: 1. Implementing policies to spur growth and promote economic opportunities. 2. Improving deterrence and crime prevention. 3. Strengthening the criminal justice system. - Design principles given fiscal constraints: - Interventions should be targeted and evidence based. - Priority interventions include programs directed towards at-risk youth and investment in data collection and monitoring. - Security and prevention budget composition: - Security budgets should go beyond deterrence to include skill development and vocational and social programs for youth. - Criminal justice and rehabilitation: - Strengthen the credibility and efficiency of the criminal justice system to enable swift judgments. - Provide basic skills training to convicts to bolster reintegration into the productive sector. - Reduce prison overcrowding and improve prison quality to help prevent criminal activity within prisons. *Box 2.3 prepared by Uma Ramakrishnan and Joyce Wong.* ### 2. OUTLOOK fOR LATIN AMERICA ANd THE CARIbbEAN: THE RIGHT pOLICy MIx fOR sUsTAINING THE RECOvERy ### 2. OUTLOOK fOR LATIN AMERICA ANd THE CARIbbEAN: THE RIGHT pOLICy MIx fOR sUsTAINING THE RECOvERy ### Annex Table 2.2 — Fiscal Indicators: Public Sector Primary Expenditure, Primary Balance, and Gross Debt (Percent of GDP) - Coverage and timing: - Definitions of public sector accounts vary by country; all indicators reported on fiscal year basis. - Consistent with the IMF World Economic Outlook, the cutoff date for the data and projections in this table is April 2, 2018. - Regional aggregate (US dollar nominal GDP-weighted averages, fiscal year): - Latin America and the Caribbean: Public Sector Primary Expenditure 28.9 (2015), 28.7 (2016), 28.2 (2017), 27.7 (2018 est.), 27.1 (2019 proj.); Public Sector Primary Balance 22.7 (2015), 22.6 (2016), 22.1 (2017), 21.7 (2018 est.), 21.3 (2019 proj.); Public Sector Gross Debt 54.5 (2015), 57.8 (2016), 60.5 (2017), 64.7 (2018 est.), 65.7 (2019 proj.). - Selected country entries (percent of GDP; 2015–2019 where shown): - Canada: Primary Expenditure 36.8, 37.7, 37.5, 37.4, 37.3; Primary Balance 0.5; Gross Debt 90.5, 91.1, 89.7, 86.6, 83.8. - Mexico: Primary Expenditure 24.5, 24.1, 21.8, 21.1, 21.6; Primary Balance 21.0; Gross Debt 52.9, 56.8, 54.2, 53.5, 53.4. - United States: Primary Expenditure 32.8, 33.0, 33.1, 33.2, 33.2; Primary Balance 21.6, 22.2, 22.5, 23.0, 23.4; Gross Debt 105.3, 107.2, 107.8, 108.0, 109.4. - Brazil: Primary Expenditure 30.2, 30.8, 30.2, 30.6, 29.7; Primary Balance 22.0, 22.5, 21.7, 22.3, 21.8; Gross Debt 72.6, 78.4, 84.0, 87.3, 90.2. - Argentina: Primary Expenditure 39.8, 39.8, 38.6, 37.5, 35.9; Primary Balance 24.4, 24.7, 24.5, 23.5, 22.4; Gross Debt 55.1, 53.3, 52.6, 54.1, 52.7. - Venezuela: Primary Expenditure 34.8, 33.9, 40.6, 37.4, 36.6; Primary Balance 215.9, 216.8, 231.5, 224.2, 224.7; Gross Debt 31.9, 31.3, 34.9, 162.0, 172.1. - Subregional and group aggregates (selected): - South America: Primary Expenditure 31.3 (2015), 30.4 (2016), 30.8 (2017), 30.4 (2018 est.), 29.5 (2019 proj.); Primary Balance 23.7, 24.0, 25.1, 24.0, 23.3; Gross Debt 41.4, 43.5, 45.8, 59.6, 60.9. - CAPDR (Central America and Dominican Republic): Primary Expenditure 18.6, 18.8, 19.1, 18.9, 19.0; Primary Balance 20.4, 20.4, 20.4, 20.3, 20.3; Gross Debt 37.4, 39.0, 40.9, 41.2, 41.8. - Caribbean (Tourism dependent): Primary Expenditure 24.5, 25.1, 25.5, 25.1, 24.6; Primary Balance 2.5, 4.3, 3.5, 2.3, 2.1; Gross Debt 87.9, 85.0, 83.8, 82.8, 80.7. - Country-specific methodological notes (examples): - United States: Expenditure and fiscal balances adjusted to exclude items related to accrual accounting of government employees’ defined-benefit pension plans for cross-country comparability. - Brazil: Nonfinancial public sector excluding Petrobras and Eletrobras, and consolidated with the Sovereign Wealth Fund (SWF); national definition of general government gross debt note included. - Belize: Gross debt includes both public and publicly guaranteed debt; 2017 primary balance projection includes a one-off capital transfer of 2.5 percent of GDP—excluding it, a primary surplus of 1.3 percent of GDP is projected. - Suriname: Primary expenditures exclude net lending. - Uruguay: Public debt includes the debt of the central bank. - Venezuela: See Annex 2.1 for details on Venezuela’s data. ### Annex Table 2.3 — Selected Economic and Social Indicators, 2008–17 - Coverage and timing: - Consistent with the IMF World Economic Outlook, the cut-off date for the data and projections in this table is April 2, 2018. - Regional aggregates are purchasing-power-parity GDP-weighted averages, except for regional GDP in US dollars and population where totals are computed. - Regional totals and averages: - Latin America and the Caribbean: GDP 5,492.9 (billions of US dollars, 2017); Population 619.8 (million); GDP per Capita (PPP US dollars) 15,785; Share of LAC Region 100.0 (percent); Real GDP Growth 2.1 (percent); CPI Inflation 4.9 (percent); Current Account 2 (percent of GDP); Domestic Saving 2.0 (percent of GDP); Trade Openness 19.3 (percent of GDP); Gross Reserves 42.5 (percent of GDP); Unemployment Rate 15.7 (percent); Gini Coefficient 49.5. - Selected country-level indicators (latest available and averages as shown): - United States: GDP 19,390.6 (billions of US dollars); Population 325.9 (million); GDP per Capita (PPP US dollars) 59,501; Real GDP Growth 1.4 (percent); CPI Inflation 1.6 (percent); Current Account 2.7 (percent of GDP); Domestic Saving 17.1 (percent of GDP); Trade Openness 28.6 (percent of GDP); Unemployment Rate 4.4 (percent). - Mexico: GDP 1,149.2; Population 123.5; GDP per Capita (PPP US dollars) 19,903; Share of LAC Region 20.9 (percent); Real GDP Growth 2.1 (percent); CPI Inflation 4.2 (percent); Current Account 2 (percent of GDP); Domestic Saving 1.6 (percent of GDP); Trade Openness 21.6 (percent of GDP); Gross Reserves 65.8 (percent of GDP); Unemployment Rate 3.4 (percent); Poverty Rate 11.7 (percent); Gini 51.8; Sovereign Credit Rating BBB. - Brazil: GDP 2,055.0; Population 207.7; GDP per Capita (PPP US dollars) 15,603; Share of LAC Region 37.4 (percent); Real GDP Growth 1.6 (percent); CPI Inflation 6.1 (percent); Current Account 2 (percent of GDP); Domestic Saving 2.5 (percent of GDP); Trade Openness 17.1 (percent of GDP); Gross Reserves 23.6 (percent of GDP); Unemployment Rate 12.8 (percent); Poverty Rate 9.2 (percent); Gini 51.7; Sovereign Credit Rating BB. - Argentina: GDP 637.7; Population 44.1; GDP per Capita (PPP US dollars) 20,876; Share of LAC Region 11.6 (percent); Real GDP Growth 1.7 (percent); CPI Inflation . . . (noted as excluded in CPI series); Current Account 2 (percent of GDP); Domestic Saving 1.2 (percent of GDP); Trade Openness 16.4 (percent of GDP); Gross Reserves 31.0 (percent of GDP); Unemployment Rate 8.7 (percent); Poverty Rate 8.4 (percent); Gini 42.1; Sovereign Credit Rating B. - Chile: GDP 277.0; Population 18.4; GDP per Capita (PPP US dollars) 24,537; Share of LAC Region 5.0 (percent); Real GDP Growth 3.0 (percent); CPI Inflation 3.1 (percent); Current Account 2 (percent of GDP); Domestic Saving 1.7 (percent of GDP); Trade Openness 22.4 (percent of GDP); Gross Reserves 65.3 (percent of GDP); Unemployment Rate 6.7 (percent); Poverty Rate 2.9 (percent); Gini 48.2; Sovereign Credit Rating A. - Peru: GDP 215.2; Population 31.8; GDP per Capita (PPP US dollars) 13,334; Share of LAC Region 3.9 (percent); Real GDP Growth 4.9 (percent); CPI Inflation 3.1 (percent); Current Account 2 (percent of GDP); Domestic Saving 3.0 (percent of GDP); Trade Openness 21.2 (percent of GDP); Gross Reserves 49.5 (percent of GDP); Unemployment Rate 6.7 (percent); Poverty Rate 9.0 (percent); Gini 44.7; Sovereign Credit Rating BBB. - Venezuela: GDP 210.1; Population 31.4; GDP per Capita (PPP US dollars) 12,114; Share of LAC Region 3.8 (percent); Real GDP Growth 2 (percent); CPI Inflation 2.9 (percent); Current Account 353.4 (percent of GDP); Domestic Saving 1.7 (percent of GDP); Trade Openness 22.8 (percent of GDP); Gross Reserves 47.3 (percent of GDP); Unemployment Rate 4.6 (percent); Poverty Rate 27.1 (percent); Gini 33.1; Sovereign Credit Rating SD. - Caribbean and small-state notes: - Tourism-dependent Caribbean (simple average of The Bahamas, Barbados, Jamaica, and ECCU members): GDP-share indicators and fiscal patterns provided in Annex Table 2.2; Table 2.3 provides per-country GDP, population, GDP per Capita (PPP), real growth, CPI inflation, current account, domestic saving, trade openness, gross reserves, unemployment, poverty, Gini, and sovereign ratings where available. - Eastern Caribbean Currency Union: Data limitations noted; averages for current account balance, domestic saving, and trade openness use 2014–2017 due to historical data limitations. - Social indicators and data sources: - Poverty rate defined as share of population earning less than US$2.5 a day; for LAC poverty is defined as share earning less than US$3.1 a day from the IDB. - Notes on Venezuela poverty estimates: SEDLAC estimates end in 2006; official 2015 (first semester) reported; ENCOVI estimates show increase from 48.4 percent in 2014 to 87 percent in 2017 with known historical differences relative to official INE data. - Gini index for aggregate is population-weighted average from the IDB. - Data sources cited in the tables: - IMF, International Financial Statistics database; IMF, World Economic Outlook database; Inter-American Development Bank (IDB); national authorities; Socio-Economic Database for Latin America and the Caribbean (CEDLAS and World Bank); IMF staff calculations. - CPI series exclude Argentina and Venezuela. *International Monetary Fund | April 2018 — Annex Tables 2.2 and 2.3 (data and notes as presented in source).* --- _Source: https://www.imf.org/-/media/files/publications/reo/whd/2018/may/wreo0518-chp2.pdf_