## wreo1018

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---

### Preface and authorship
- Prepared by Juan Yépez, under the guidance of Jorge Roldós and overall direction of Alejandro Werner and Krishna Srinivasan.
- Contributors and coordinators: Jorge Restrepo; Ali Alichi (Caribbean); Jasmin Sin (Central America); Carlos Caceres, Diego Cerdeiro, Troy Matheson, and Peter Williams (box on effects of US tariffs and potential retaliatory measures).
- Background papers coordinated by Jorge Roldós and authored by Pablo Bejar, Carlos Goncalves, Frederic Lambert, Ana Lariau, Nicolas E. Magud, Pedro Rodriguez, Frederik Toscani, and Fabio Di Vittorio.
- Research, production, translation, and editorial support: Genevieve Lindow; Ravi Sundararajan; Linda Long; Carlos Viel; Virginia Masoller; Solange M. dos Santos; María Fraile de Manterola.
- The report reflects developments and staff projections through early September 2018.

### Global crosscurrents: key external developments and risks
- Global growth
  - Global growth is projected at 3.7 percent for 2018–19—0.2 percentage point lower for both years than forecast in the April 2018 World Economic Outlook.
  - Risks to global growth are skewed to the downside in a context of high policy uncertainty.
- China
  - Growth in China is projected to moderate from 6.9 percent in 2017 to 6.6 percent in 2018 and 6.2 percent in 2019.
  - Growth was marked down in 2019 by 0.2 percentage point as a result of recently announced trade measures, including the tariffs imposed on $200 billion in US imports from China.
- United States
  - GDP continues to grow faster than potential in the United States, led largely by a sizable fiscal stimulus.
  - US growth is expected to dip over the next few years as the economy hits capacity constraints and the current tax cuts begin reversing in 2020.
- Commodities and financial conditions
  - Commodity prices have recovered from their trough but are expected to remain considerably below 2011–12 levels.
  - Financial conditions have tightened somewhat since the spring but remain accommodative overall.
  - As of August, the US dollar had appreciated close to 5 percent in real effective terms.
  - Many regional currencies have depreciated in line with the stronger US dollar; net portfolio capital flows to the region have turned negative in recent months.
  - Sovereign and corporate spreads remain low by historical standards, while equity prices are elevated.
- Trade tensions
  - Sequence of US tariff actions and retaliation by trading partners complicate trade relations.
  - IMF staff simulations indicate direct impact on global activity of tariffs imposed to date is small, but material; indirect effects via uncertainty and financial volatility could be large if tensions persist or escalate.
  - Mexico faces particularly high risk due to deep integration in global and regional supply chains.
  - A preliminary agreement among the United States, Canada, and Mexico includes significant changes to rules of origin for the automobile sector and a review clause after six years.

### An uneven regional recovery: LAC outlook and divergences
- Regional growth projections
  - Growth projections for LAC: 1.2 percent in 2018 and 2.2 percent in 2019.
  - Prospects for long-term growth in LAC: 2.8 percent.
- Regional heterogeneity and country-group figures (from Table 1)
  - Latin America and the Caribbean: –0.6 (2016), 1.3 (2017), 1.2 (2018 projection), 2.2 (2019 projection).
  - LAC excluding Argentina and Venezuela: 0.3 (2016), 1.8 (2017), 2.3 (2018 projection), 2.8 (2019 projection).
  - South America: –2.4 (2016), 0.7 (2017), 0.6 (2018 projection), 1.9 (2019 projection).
  - CApdR (Central America, Panama, and the Dominican Republic): 4.6 (2016), 4.0 (2017), 3.8 (2018 projection), 4.1 (2019 projection).
  - Caribbean (Tourism dependent): 1.1 (2016), 1.1 (2017), 1.4 (2018 projection), 1.8 (2019 projection).
  - Commodity exporters: –4.7 (2016), –1.3 (2017), 1.4 (2018 projection), 1.6 (2019 projection).
  - Memorandum items:
    - LA6: –0.1 (2016), 1.5 (2017), 2.1 (2018 projection), 2.7 (2019 projection).
    - Brazil: –3.5 (2016), 1.0 (2017), 1.4 (2018 projection), 2.4 (2019 projection).
    - Mexico: 2.9 (2016), 2.0 (2017), 2.2 (2018 projection), 2.5 (2019 projection).
- Observations
  - Recovery has slowed sharply in Brazil and Mexico and has come to a halt in Argentina.
  - Higher oil prices and increased political uncertainty have dampened near-term outlooks in several Central American economies.
  - Better terms of trade and improved consumer and business confidence have boosted growth prospects in some Andean economies.
  - Activity is recovering in the Caribbean, reflecting an uptick in tourism owing to robust US and global growth.
  - Regional spillovers from major-economy slowdowns have been limited so far.

### Private investment, domestic demand, and credit
- Investment trends
  - Private investment contracted for three consecutive years but is estimated to have stopped being a major drag in 2017 and is gaining strength.
  - Contribution of investment to growth turned positive in late 2017 and early 2018 and is projected to continue supporting the recovery in 2018–19.
  - Investment levels are expected to remain below levels observed in other regions, partly explained by low aggregate saving rates.
- Consumption and labor
  - Private consumption is projected to remain the largest contributor to regional growth.
  - IMF staff analysis suggests unemployment in the region has remained relatively stable in recent years despite the commodity price bust.
  - Employment and real wage growth remain solid in some key economies.
- Monetary conditions and credit
  - Several central banks have ended monetary policy easing recently, but monetary policy overall remains supportive amid subdued inflation pressure.
  - Real policy rates are at or below neutral levels in most cases, with Mexico as a notable exception.
  - The delayed pass-through from policy interest rates to market rates and credit is estimated to take about 12–18 months in several inflation-targeting economies in LAC.
  - Real credit growth decelerated in many countries in 2015–17, except Mexico and Trinidad and Tobago; a credit recovery is expected as pass-through from easing materializes.
  - Banking sector capital ratios remain above regulatory requirements despite modest declines in profitability and some increases in nonperforming loans.
  - The Caribbean faces higher nonperforming loan levels, constraining credit availability and increasing bank vulnerability; loss of corresponding banking relations has increased financial transaction costs and risk of financial exclusion.
  - Nonfinancial corporate balance sheets have deteriorated following sharp currency depreciations; metrics of debt repayment capacity remain stretched in some large economies.

### Fiscal developments and projections
- Fiscal improvement and drivers
  - In 2018, half of the countries in the region are expected to reduce their primary fiscal deficit as a share of GDP.
  - Improvement in primary balances has been driven primarily by an increase in revenues rather than a reduction in expenditures.
- Fiscal impulse (percentage points of GDP)
  - Argentina: 2018 = -2.3; 2019 = -1.8
  - Brazil: 2018 = 1.0; 2019 = -0.2
  - Chile: 2018 = -0.4; 2019 = 0.2
  - Colombia: 2018 = 0.3; 2019 = -0.1
  - Ecuador: 2018 = -1.2; 2019 = 0.3
  - Mexico: 2018 = 0.5; 2019 = 0.1
  - Peru: 2018 = -0.1; 2019 = -0.3
  - Uruguay: 2018 = -0.2; 2019 = -0.2
  - Latin America (regional aggregate): 2018 = 0.2; 2019 = -0.3
- Notes and implications
  - Regional aggregate is fiscal year US dollar nominal GDP-weighted average.
  - Public debt continues to rise because primary deficits exceed debt-stabilizing levels.
  - Fiscal policy in some large economies is modestly expansionary, providing a fiscal impulse of 0.2 percent of GDP for the region as a whole in 2018; this fiscal impulse is expected to reverse in 2019 as these economies pursue fiscal adjustment.

### Risks to the outlook
- External risks
  - Waning growth momentum in main trade partners and a slowdown in global trade (rising protectionism, escalation of trade disputes).
  - Rising US interest rates and a stronger US dollar, coupled with intensified trade tensions, have reduced net capital inflows, increased borrowing costs, and weakened local currencies in emerging markets.
  - IMF staff estimates: a 10 percent real exchange rate appreciation of the US dollar could cause a one standard deviation tightening of the financial conditions index (FCI) for financially integrated LAC economies and is estimated to lower the level of one-year-ahead GDP by between 0.5 and 1 percent.
  - A deterioration in sovereign and corporate balance sheets would further increase borrowing costs and exacerbate the negative impact on economic activity.
- Regional and domestic risks
  - Political risks from upcoming elections (Brazil in 2018; Argentina, Bolivia, Ecuador, El Salvador, Guatemala, Panama, Peru, Uruguay in 2019) that increase economic and policy uncertainty.
  - A larger-than-expected recession in Argentina could have significant trade and financial spillovers to neighboring countries.
  - Noneconomic risks: climate change, extreme weather events, and natural disasters—particularly for the Caribbean.
- Financial channel risks
  - Higher capital outflows could pose serious problems for countries with large external financing needs, significant currency mismatches, and high corporate leverage.
  - Sovereign spreads in the region remain highly sensitive to global market developments.

### Monetary, exchange rate, and financial sector policies
- Monetary policy
  - Needs to manage the trade-off between supporting activity and keeping inflation expectations anchored amid higher commodity prices and exchange rate depreciations.
  - Firmer anchoring of inflation expectations reduces inflation persistence and limits pass-through of currency depreciations to domestic prices, allowing monetary policy greater leeway to support output.
- Exchange rate policy
  - Exchange rate flexibility has served the region well; foreign exchange market intervention could be appropriate under excessive volatility and market dislocation.
  - Most central banks have converged to using transparent and preannounced mechanisms to deal with excessive foreign exchange volatility, maintain financial stability, and deepen financial markets.
- Financial sector supervision
  - Despite sizable depreciations and financial distress in Argentina, most LAC economies have avoided systemic stress due to improved policy and supervisory frameworks, increased hedging practices, and reduced financial dollarization.
  - Supervisory authorities should ensure corporate balance sheets are not overstretched and that banks’ asset quality remains sound.
  - Adequate consolidated supervision is important where financial and nonfinancial companies are interlinked.
  - Strengthening and proactively enforcing AML/CFT frameworks is high on the agenda given risks from potential withdrawal of correspondent banks.

### Long-term growth and productivity: challenges and recommendations
- Growth outlook and drivers
  - Prospects for long-term growth in LAC remain weak: estimated to grow at about 1.9 percent in per capita terms over the medium term.
  - Comparison: EMDE (2020–23) = 3.6 percent.
  - Low productivity contribution to growth raises sustainability concerns amid demographic transitions toward an older population.
- Contributing factors to low productivity
  - Misallocation of labor resources, particularly in the nontradables sector.
  - Policy distortions: entry and exit restrictions, targeted subsidies, national content laws, import tariffs, poorly functioning credit markets, and financial subsidies to firms/sectors.
- Policy recommendations to boost long-term growth
  - Streamline entry and exit restrictions, targeted subsidies, national content laws, and import tariffs.
  - Improve functioning of credit markets and reduce financial subsidies to individual firms and sectors.
  - Prioritize high-quality public investment projects and improve efficiency of public investment management frameworks.
  - Ensure fiscal consolidation does not fall disproportionately on public capital spending and safeguard spending on education and infrastructure.
  - Consider entitlement reform to contain future fiscal pressures in light of demographic changes.
  - Increase personal income tax revenues while rebalancing spending to maintain key social transfers and infrastructure spending.
  - Tackle corruption, improve law enforcement and security (Central America and the Caribbean), and entrench resilience to natural disasters and climate change (Caribbean).

### Country highlights (selected)
- Brazil
  - Expected growth: 2018 = 1.4 percent; 2019 = 2.4 percent.
  - Up from 1 percent growth in 2017, driven by a recovery of private demand.
  - Growth forecast for 2018 was revised downward due to a nationwide truck drivers’ strike and tighter financial conditions.
  - Medium-term growth is expected to moderate to 2.2 percent.
  - Inflation is projected to accelerate to 4.2 percent in 2019 as monetary policy remains supportive and food price inflation rebounds.
- Argentina
  - Economy expected to contract this year and next, reflecting recent financial market disruptions, high real interest rates, and faster fiscal consolidation under an IMF-supported exceptional access Stand-By Arrangement.
  - Inflation likely to end the year above 40 percent, driven by significant currency depreciation, and to gradually decline in 2019.
  - Policy priorities: front-loaded fiscal rebalancing; strengthen social safety net; safeguard key social programs; pension reform to underpin consolidation.
- Mexico and CAPDR
  - Mexico: Growth projected to reach 2.5 percent in 2019; inflation projected to average 4.8 percent in 2018 before gradually converging to 3 percent around mid-2019.
  - CAPDR region: growth decelerated since early 2018; fiscal discipline and significant fiscal consolidations needed; dollarization remains persistently high in most CAPDR countries.
- Caribbean
  - Regional prospects improving; growth expected to firm up in 2018 and 2019 supported by higher US and global growth.
  - Dominica: GDP projected to decline by 14.1 percent in 2018, then rebound by about 9.4 percent in 2019 as reconstruction proceeds.
  - Guyana oil production expected to start in 2020.

### Trade tensions: US tariffs and regional implications (Box 1 summary)
- US tariff actions since January 2018
  - Steel at 25 percent and aluminum at 10 percent.
  - 25 percent levy on about $50 billion in imports from China.
  - Additional tariffs on $200 billion in imports from China introduced in September 2018 at 10 percent, increasing to 25 percent at the beginning of 2019 in the absence of a deal.
- Retaliatory measures
  - China and others announced tariffs on more than $30 billion in US exports in response to US steel and aluminum tariffs.
  - China also imposed tariffs on $50 billion and on an additional $60 billion in US exports in response to the last two rounds of US tariffs, respectively.
- Magnitude of US trade (2017)
  - Total US imports (exports) of goods and services amounted to close to $2.9 trillion ($2.4 trillion) in 2017, of which roughly 80 percent (two-thirds) are imports (exports) of goods.
  - China, the euro area, Canada, and Mexico account for roughly 60 percent of total US merchandise trade.
- Quantified impacts and scenarios (model results)
  - Direct effects of the tariffs and retaliatory measures are estimated to be small but material for most partners, with China the most affected in IMF model simulations.
  - GIMF simulation: United States peak real GDP fall around 0.4 percent.
  - In IMF simulations using the Global Integrated Monetary and Fiscal Model, China appears most affected by combined US tariffs, with output losses of about 0.6 percent (relative to a no tariff baseline).
  - Example indirect channel: a 100 basis point increase in risk spreads using the US Federal Reserve Board model leads to a fall in US investment of 1.4 percent and a fall in real output of 0.4 percent.
- Box 1 sectoral motor-vehicle scenario (sectoral trade model)
  - Scenario: United States imposes a 25 percent tariff on motor vehicle imports and a 10 percent tariff on imports of auto parts.
  - Estimated real GDP impacts (country-level)
    - United States: real GDP fall of around 0.4 percent (at its peak).
    - NAFTA trading partners: decline almost three times larger than the United States (as reported).
  - Estimated changes in total exports (motor vehicle/auto-parts tariff scenario)
    - Brazil: total exports fall by about ¼ percent.
    - Canada: total exports fall by 6 percent.
    - Mexico: total exports fall by 10 percent.
    - United States: total exports fall by 9 percent.
  - Sectoral impacts and labor-market implications
    - In Canada and Mexico, motor vehicles sector exports reduced by about half in the most affected sector.
    - In the United States, agriculture and mining sector exports reduced by more than 25 percent in the most affected sector.
    - Sectoral disruptions and undoing of value chains can generate large labor market dislocations and amplify negative macroeconomic effects.

### Policy implications and recommendations (selected)
- Near-term policy space
  - With major currencies registering sharp declines and debt levels relatively elevated in many economies, the scope for near-term countercyclical policy support is generally limited.
  - External financing needs are relatively high in some countries while capital flows are ebbing; policymakers should be prepared for further capital outflow pressures.
- Exchange rate and market intervention
  - Exchange rate flexibility will remain key.
  - Foreign exchange market intervention could be appropriate under excessive volatility and market dislocation.
- Structural reforms for medium-term resilience
  - Increase saving and investment rates.
  - Reduce misallocation of resources.
  - Make labor markets more flexible and reduce informality.
  - Liberalize trade and improve the business climate.
  - Continue strengthening anti-corruption frameworks.
  - Prioritize high-quality public investment and protect spending on education and infrastructure.
  - Consider entitlement reform and increase personal income tax revenues while maintaining key social transfers.

_International Monetary Fund | October 2018_

### Preface v

### Preface v

### Preface
- The October 2018 Regional Economic Outlook: Western Hemisphere was prepared by Juan Yépez, under the guidance of Jorge Roldós and the overall direction of Alejandro Werner and Krishna Srinivasan.
- Contributors and coordinators named include Jorge Restrepo; Ali Alichi (Caribbean section); Jasmin Sin (Central America section); Carlos Caceres, Diego Cerdeiro, Troy Matheson, and Peter Williams (box on effects of US tariffs and potential retaliatory measures).
- Background papers (2018a, 2018b, 2018c, 2018d, and 2018e) were coordinated by Jorge Roldós and prepared by Pablo Bejar, Carlos Goncalves, Frederic Lambert, Ana Lariau, Nicolas E. Magud, Pedro Rodriguez, Frederik Toscani, and Fabio Di Vittorio.
- Genevieve Lindow provided research assistance; Ravi Sundararajan provided production support; Linda Long coordinated editing and production.
- Translation and editing leadership: Carlos Viel and Virginia Masoller (Spanish edition); Solange M. dos Santos (Portuguese edition). Administrative support: María Fraile de Manterola.
- The report reflects developments and staff projections through early September 2018.

### Global Crosscurrents: Key External Developments and Risks
- Global growth:
  - Global growth is projected at 3.7 percent for 2018–19—0.2 percentage point lower for both years than forecast in the April 2018 World Economic Outlook.
  - Risks to global growth are skewed to the downside in a context of high policy uncertainty.
- China:
  - Growth in China is projected to moderate from 6.9 percent in 2017 to 6.6 percent in 2018 and 6.2 percent in 2019.
  - Growth was marked down in 2019 by 0.2 percentage point as a result of recently announced trade measures, including the tariffs imposed on $200 billion in US imports from China.
- United States:
  - GDP continues to grow faster than potential in the United States, led largely by a sizable fiscal stimulus.
  - US growth is expected to dip over the next few years as the economy hits capacity constraints and the current tax cuts begin reversing in 2020.
- Commodities and financial conditions:
  - Commodity prices have recovered from their trough but are expected to remain considerably below 2011–12 levels.
  - Financial conditions have tightened somewhat since the spring but remain accommodative overall.
  - Many regional currencies have depreciated in line with the stronger US dollar; net portfolio capital flows to the region have turned negative in recent months.
  - Sovereign and corporate spreads remain low by historical standards, while equity prices are elevated.
- Trade tensions:
  - A sequence of US tariff actions and retaliation by trading partners has complicated trade relations.
  - IMF staff simulations indicate the impact on global activity of tariffs imposed to date is small, but material; indirect effects via uncertainty and financial volatility could be large if tensions persist or escalate.
  - Mexico faces particularly high risk due to deep integration in global and regional supply chains.
  - A preliminary agreement among the United States, Canada, and Mexico on a trilateral deal includes significant changes to rules of origin for the automobile sector and a review clause after six years.

### An Uneven Regional Recovery: LAC Outlook and Divergences
- Regional growth projections:
  - Growth projections for LAC: 1.2 percent in 2018 and 2.2 percent in 2019.
  - Prospects for long-term growth in LAC: 2.8 percent.
- Regional heterogeneity:
  - Recovery has slowed sharply in some of the region’s largest economies (Brazil and Mexico) and has come to a halt in Argentina.
  - Higher oil prices and increased political uncertainty have dampened near-term outlooks in several Central American economies.
  - Better terms of trade and improved consumer and business confidence have boosted growth prospects in some Andean economies.
  - Activity is recovering in the Caribbean, reflecting an uptick in tourism owing to robust US and global growth.
- Country-group figures (from Table 1):
  - Latin America and the Caribbean: –0.6 (2016), 1.3 (2017), 1.2 (2018 projection), 2.2 (2019 projection).
  - LAC excluding Argentina and Venezuela: 0.3 (2016), 1.8 (2017), 2.3 (2018 projection), 2.8 (2019 projection).
  - South America: –2.4 (2016), 0.7 (2017), 0.6 (2018 projection), 1.9 (2019 projection).
  - CApdR (Central America, Panama, and the Dominican Republic): 4.6 (2016), 4.0 (2017), 3.8 (2018 projection), 4.1 (2019 projection).
  - Caribbean (Tourism dependent): 1.1 (2016), 1.1 (2017), 1.4 (2018 projection), 1.8 (2019 projection).
  - Commodity exporters: –4.7 (2016), –1.3 (2017), 1.4 (2018 projection), 1.6 (2019 projection).
  - Memorandum items:
    - LA6: –0.1 (2016), 1.5 (2017), 2.1 (2018 projection), 2.7 (2019 projection).
    - Brazil: –3.5 (2016), 1.0 (2017), 1.4 (2018 projection), 2.4 (2019 projection).
    - Mexico: 2.9 (2016), 2.0 (2017), 2.2 (2018 projection), 2.5 (2019 projection).
- Regional spillovers from major-economy slowdowns have been limited so far.

### Private Investment and Domestic Demand
- Investment trends:
  - Private investment contracted for three consecutive years but is estimated to have stopped being a major drag in 2017 and is gaining strength.
  - The contribution of investment to growth turned positive in late 2017 and early 2018 and is projected to continue supporting the recovery in 2018–19.
  - Investment levels are expected to remain below levels observed in other regions, partly explained by low aggregate saving rates.
- Consumption and labor:
  - Private consumption is projected to remain the largest contributor to regional growth.
  - IMF staff analysis suggests unemployment in the region has remained relatively stable in recent years despite the commodity price bust.
  - Employment and real wage growth remain solid in some key economies.
- Monetary conditions and credit:
  - Several central banks have ended monetary policy easing recently, but monetary policy overall remains supportive amid subdued inflation pressure.
  - Real policy rates are at or below neutral levels in most cases, with Mexico as a notable exception.
  - The delayed pass-through from policy interest rates to market rates and credit is estimated to take about 12–18 months in several inflation-targeting economies in LAC.
  - Real credit growth decelerated in many countries in 2015–17, except Mexico and Trinidad and Tobago; a credit recovery is expected as pass-through from easing materializes.
  - Banking sector capital ratios remain above regulatory requirements despite modest declines in profitability and some increases in nonperforming loans.
  - The Caribbean faces higher nonperforming loan levels, constraining credit availability and increasing bank vulnerability; loss of corresponding banking relations has increased financial transaction costs and risk of financial exclusion.
  - Nonfinancial corporate balance sheets have deteriorated following sharp currency depreciations, erasing earlier improvements; metrics of debt repayment capacity remain stretched in some large economies.

### Policy Implications and Recommendations
- Near-term policy space:
  - With major currencies registering sharp declines and debt levels relatively elevated in many economies, the scope for near-term countercyclical policy support is generally limited.
  - External financing needs are relatively high in some countries while capital flows are ebbing; policymakers should be prepared for further capital outflow pressures.
- Exchange rate and market intervention:
  - Exchange rate flexibility will remain key.
  - Foreign exchange market intervention could be appropriate under excessive volatility and market dislocation.
- Structural reforms for medium-term resilience:
  - Countries should focus on structural reforms to boost productive capacity and anchor strong, durable, and inclusive medium-term growth.
  - Recommended reform areas include increasing saving and investment rates; reducing misallocation of resources; making labor markets more flexible and reducing informality; liberalizing trade; improving the business climate; and continued strengthening of anti-corruption frameworks.

_International Monetary Fund | October 2018_

### 1. Real Credit Growth and NPLs

### wreo1018 - 1. Real Credit Growth and NPLs

### Regional macroeconomic outlook and external adjustment
- Recovery of consumption and investment primarily in net oil-exporting countries has, together with higher oil import bills in net commodity importers, resulted in a widening of the region’s current account deficit compared to its 2017 level.
- As of August, the US dollar had appreciated close to 5 percent in real effective terms.
- Exchange rate flexibility in the largest economies should prevent a larger deterioration of the external accounts.

### Fiscal developments and projections
- In 2018, half of the countries in the region are expected to reduce their primary fiscal deficit as a share of GDP.
- So far, improvement in primary balances has been driven primarily by an increase in revenues rather than a reduction in expenditures.
- Fiscal policy in some large economies is modestly expansionary, providing a fiscal impulse of 0.2 percent of GDP for the region as a whole in 2018; this fiscal impulse is expected to reverse in 2019 as these economies pursue fiscal adjustment.
- Public debt continues to rise because primary deficits exceed debt-stabilizing levels.
- Fiscal impulse (percentage points of GDP):
  - Argentina: 2018 = -2.3; 2019 = -1.8
  - Brazil: 2018 = 1.0; 2019 = -0.2
  - Chile: 2018 = -0.4; 2019 = 0.2
  - Colombia: 2018 = 0.3; 2019 = -0.1
  - Ecuador: 2018 = -1.2; 2019 = 0.3
  - Mexico: 2018 = 0.5; 2019 = 0.1
  - Peru: 2018 = -0.1; 2019 = -0.3
  - Uruguay: 2018 = -0.2; 2019 = -0.2
  - Latin America (regional aggregate): 2018 = 0.2; 2019 = -0.3
- Notes on fiscal measures:
  - Regional aggregate is fiscal year US dollar nominal GDP-weighted average.
  - Definitions: change in structural primary deficit; general government adjustments; changes in nonmining or non-oil structural balances as specified.

### Risks to the outlook
- External risks:
  - Waning growth momentum in main trade partners and a slowdown in global trade (rising protectionism, escalation of trade disputes).
  - Rising US interest rates and a stronger US dollar, coupled with intensified trade tensions, have reduced net capital inflows, increased borrowing costs, and weakened local currencies in emerging markets.
  - IMF staff estimates: a 10 percent real exchange rate appreciation of the US dollar could cause a one standard deviation tightening of the financial conditions index (FCI) for financially integrated LAC economies and is estimated to lower the level of one-year-ahead GDP by between 0.5 and 1 percent.
  - A deterioration in sovereign and corporate balance sheets would further increase borrowing costs and exacerbate the negative impact on economic activity.
- Regional and domestic risks:
  - Political risks from upcoming elections (Brazil in 2018; Argentina, Bolivia, Ecuador, El Salvador, Guatemala, Panama, Peru, Uruguay in 2019) that increase economic and policy uncertainty.
  - Regional spillovers: a larger-than-expected recession in Argentina could have significant trade and financial spillovers to neighboring countries.
  - Noneconomic risks: climate change, extreme weather events, and natural disasters—particularly for the Caribbean.
- Financial channel risks:
  - Higher capital outflows could pose serious problems for countries with large external financing needs, significant currency mismatches, and high corporate leverage.
  - Sovereign spreads in the region remain highly sensitive to global market developments.

### Monetary, exchange rate, and financial sector policies
- Monetary policy:
  - Needs to manage the trade-off between supporting activity and keeping inflation expectations anchored amid higher commodity prices and exchange rate depreciations.
  - Firmer anchoring of inflation expectations reduces inflation persistence and limits pass-through of currency depreciations to domestic prices, allowing monetary policy greater leeway to support output.
- Exchange rate policy:
  - Exchange rate flexibility has served the region well, but excessive exchange rate volatility and lack of hedging instruments during large external shocks could warrant foreign exchange market intervention.
  - Most central banks in the region have converged to using transparent and preannounced mechanisms to deal with excessive foreign exchange volatility, maintain financial stability, and deepen financial markets.
- Financial sector supervision:
  - Despite sizable depreciations and financial distress in Argentina, most LAC economies have avoided systemic stress in sovereign, corporate, and banking sectors due to improved policy and supervisory frameworks, increased hedging practices, and reduced financial dollarization.
  - Supervisory authorities should ensure corporate balance sheets are not overstretched and that banks’ asset quality remains sound.
  - Adequate consolidated supervision is important where financial and nonfinancial companies are interlinked.
  - Strengthening and proactively enforcing AML/CFT frameworks is high on the agenda given risks from potential withdrawal of correspondent banks.

### Long-term growth and productivity
- Prospects for long-term growth in LAC remain weak: estimated to grow at about 1.9 percent in per capita terms over the medium term.
- Comparison: emerging market and developing economies are estimated at 3.6 percent (EMDE (2020–23) = 3.6%).
- Low productivity contribution to growth raises sustainability concerns amid demographic transitions toward an older population.
- Contributing factors to low productivity:
  - Misallocation of labor resources, particularly in the nontradables sector.
  - Policy distortions that limit productivity, including entry and exit restrictions, targeted subsidies, national content laws, import tariffs, poorly functioning credit markets, and financial subsidies to firms/sectors.
- Policy recommendations to boost long-term growth:
  - Streamline entry and exit restrictions, targeted subsidies, national content laws, and import tariffs.
  - Improve functioning of credit markets and reduce financial subsidies to individual firms and sectors.
  - Prioritize high-quality public investment projects and improve the efficiency of public investment management frameworks.
  - Ensure fiscal consolidation does not fall disproportionately on public capital spending and safeguard spending on education and infrastructure.
  - Consider entitlement reform to contain future fiscal pressures in light of demographic changes.
  - Increase personal income tax revenues while rebalancing spending to maintain key social transfers and infrastructure spending.
  - Tackle corruption, improve law enforcement and security (Central America and the Caribbean), and entrench resilience to natural disasters and climate change (Caribbean).

### Country focus — South America (selected points)
- Brazil:
  - Expected growth: 2018 = 1.4 percent; 2019 = 2.4 percent.
  - Up from 1 percent growth in 2017, driven by a recovery of private demand.
  - Growth forecast for 2018 was revised downward due to a nationwide truck drivers’ strike and tighter financial conditions.
  - Medium-term growth is expected to moderate to 2.2 percent.
  - Inflation is projected to accelerate to 4.2 percent in 2019 as monetary policy remains supportive and food price inflation rebounds.

*Source: IMF, Regional Economic Outlook: Western Hemisphere, October 2018 (wreo1018 - 1. Real Credit Growth and NPLs).*

### 2017. Regarding policies, given the high and rising

### wreo1018 - 2017. Regarding policies, given the high and rising

### Regional overview and near-term outlook
- Near-term regional growth projected to remain robust at about 3.8 percent for 2018, lower than the 4 percent observed in 2017.
- Overall inflation expected to continue increasing for the rest of 2018 due to higher fuel prices but remain within central bank target ranges for most countries.
- Fiscal deficits projected to widen in most countries over the next few years; debt-to-GDP ratios expected to continue rising or remain at elevated levels over the forecast horizon.
- Ongoing trade tensions pose downside risks; indirect effects through higher uncertainty and financial market volatility could be large, especially if trade tensions escalate.

### Argentina
- Economy expected to contract this year and next, reflecting recent financial market disruptions, high real interest rates, and faster fiscal consolidation under an IMF-supported exceptional access Stand-By Arrangement.
- Inflation likely to end the year above 40 percent, driven by significant currency depreciation, and to gradually decline in 2019.
- Policy priorities:
  - Front-loaded fiscal rebalancing to lessen financing burden and put public debt on a firm downward trajectory.
  - Smooth impact on the most vulnerable by strengthening the social safety net and safeguarding spending on key social programs.
  - A much-needed pension reform underpins fiscal consolidation.

### Uruguay, Paraguay, Bolivia
- Uruguay:
  - Growth expected to slow from 2.7 percent in 2017 to 2.0 percent in 2018 owing to drought, peso depreciation effects on real wages and consumption, and worsening outlook for Argentina and Brazil.
  - Central bank tightened monetary targets in July; real short-term interest rates remain low, warranting vigilance to avoid deanchoring of inflation expectations amid wage negotiations.
- Paraguay:
  - Economy expected to grow by about 4½ percent in 2018.
  - With expansion underway, policy focus should shift from demand support to boosting potential GDP.
- Bolivia:
  - Real GDP projected to grow by 4.3 percent in 2018, supported by accommodative fiscal policy, strong wages, and credit growth.
  - Direct negative spillovers from Argentina and Brazil expected to be limited in the near term; indirect impacts via market sentiment remain possible.
  - Policy recommendation: change in policy stance needed to restore external balance, narrow fiscal and current account deficits, and improve competitiveness.

### Chile, Peru, Colombia, Ecuador
- Chile:
  - 2018 growth revised up to 4 percent, supported by strong momentum and rebound in confidence.
  - Headline inflation gradually moving toward target; monetary policy remains accommodative but normalization may soon be warranted.
  - Structural reform implementation constitutes an upside risk to the outlook.
- Peru:
  - GDP growth accelerated in H1 2018; annual growth expected to remain above 4 percent.
  - Average inflation in 2018 expected to reach 1.4 percent.
  - Policy priorities: close infrastructure gaps, improve financial development, and expand social protection.
- Colombia:
  - Recovery driven by higher oil prices and stronger private investment.
  - Inflation moderated and is broadly in line with the central bank’s target.
  - Fiscal policy anchored by the fiscal rule; flexible exchange rate, ample reserves (including the Flexible Credit Line with the IMF), and strong policy framework are important buffers.
- Ecuador:
  - Economic activity cooling after 2017 recovery; fiscal consolidation and limited access to capital markets are headwinds.
  - Policy priorities: address fiscal imbalances, strengthen competitiveness, build reserve cushions, and implement supply-side reforms.

### Venezuela
- Real GDP projected to fall by about 18 percent in 2018, implying an economic contraction of about 45 percent since 2013.
- Drivers: significant drop in oil production, widespread micro-level distortions, and large macroeconomic imbalances.
- Monetary financing of large fiscal deficits expected to continue with collapsing money demand, leading to accelerating inflation.
- Scenario risks: inappropriate stabilization policies in the fragile socioeconomic context could rapidly exacerbate the crisis.

### Mexico, Central America, Panama, and the Dominican Republic (CAPDR)
- Mexico:
  - Growth projected to reach 2.5 percent in 2019, aided by a modest contribution of net exports and gradual recovery amid lingering trade uncertainty and tight financial conditions.
  - Inflation projected to average 4.8 percent in 2018 before gradually converging to 3 percent around mid-2019.
  - Policy recommendations: use new administration’s mandate to address structural challenges while maintaining macro stability; fiscal consolidation to stabilize public debt; stand ready to ease monetary policy at year-end if inflation remains firmly on a downward path and inflation expectations anchored.
- CAPDR region:
  - Growth decelerated since early 2018; factors include worsening terms of trade and subdued domestic demand.
  - Country-specific slowdowns caused by long election cycle (Costa Rica), low business confidence (Costa Rica and Guatemala), low public investment (Honduras), and prolonged construction strike (Panama).
  - Nicaragua: political crisis caused economic activity to contract by 12 percent in June (year over year).
  - Dominican Republic and El Salvador: growth accelerated to above potential, supported by remittances and, in the Dominican Republic, monetary easing in mid-2017.
  - Intraregional trade in Central America suffered from Nicaragua unrest, increasing logistics costs.
  - Inflation accelerated in most CAPDR countries in H1 2018 due to rising oil and food prices but remained within or slightly below central bank target ranges in several countries.
  - Fiscal guidance:
    - Fiscal discipline and significant fiscal consolidations needed.
    - Fiscal policy actions should include measures to increase revenue, reduce current spending, and reform entitlements.
    - Revenue measures: broadening tax bases, strengthening tax administration, and aligning tax rates with regional averages where warranted.
    - Subsidy reform to contribute to consolidation and reduce regressivity.
    - Fiscal reform needed for entitlement pressures and demographic changes, notably pensions and health care.
  - Dollarization:
    - Dollarization remains persistently high in most CAPDR countries, exposing banking systems to solvency and liquidity risks and reducing monetary policy effectiveness.
    - Except for fully dollarized El Salvador and Panama, allowing greater exchange rate flexibility would create buffers to external shocks and help reduce dollarization.
    - Recommendations: increase transparency on foreign exchange intervention (Costa Rica and Dominican Republic), improve central bank communication, and calibrate macroprudential regulation to discourage dollarization.
  - Governance and structural reforms:
    - Continue strengthening AML/CFT framework to counter corruption and organized crime.
    - Structural policies to improve business environment, institutions, and reduce corruption are crucial to boost investment and productivity.
    - Higher investments needed in health, education, and infrastructure.

### The Caribbean
- Regional prospects improving; growth expected to firm up in 2018 and 2019 supported by higher US and global growth.
- Reconstruction from 2017 hurricanes delayed but expected to pick up in 2019.
- Commodity exporters projected to see stronger growth in 2018–19 due to rising commodity prices and production.
- Country highlights:
  - Dominica: GDP projected to decline by 14.1 percent in 2018, then rebound by about 9.4 percent in 2019 as reconstruction proceeds.
  - Trinidad and Tobago: expected moderate growth in 2018–19 after two years of recession.
  - Guyana and Suriname: new gold mines and oil-sector investments boost 2018–19 growth prospects; Guyana oil production expected to start in 2020.
- Fiscal vulnerabilities:
  - High fiscal deficits and public debt remain major vulnerabilities; some tourism-dependent economies are reducing debt through multiyear consolidation (Grenada, Jamaica, St. Kitts and Nevis).
  - Antigua and Barbuda needs tighter fiscal stance plus structural reforms; a well-designed fiscal rule could help.
  - Barbados: new government reached IMF staff-level agreement on a 48-month Extended Fund Facility; IMF Executive Board approved arrangement on October 1.
- Financial sector resilience:
  - Many banks continue to have high nonperforming loans, constraining credit and increasing vulnerability.
  - Reforms underway in some countries (Eastern Caribbean Currency Union) including enforcement of capital requirements and balance-sheet cleanups; further steps needed such as oversight of nonbank financial institutions and enhancing capital adequacy.
  - Priority: secure correspondent banking relationships via stronger AML/CFT implementation, bank consolidation, and improved communication with correspondent banks.
- Structural priorities: reduce electricity costs, diversify energy mix, deepen financial systems, enhance access to credit, tackle violent crime, reduce unemployment and brain drain, and support tourism through targeted policies.

### Trade tensions: US tariffs and regional implications
- Since January 2018 the US enacted tariffs including:
  - Steel at 25 percent and aluminum at 10 percent.
  - A 25 percent levy on about $50 billion in imports from China.
  - Additional tariffs on $200 billion in imports from China introduced in September 2018 at 10 percent, increasing to 25 percent at the beginning of 2019 in the absence of a deal.
- Retaliatory measures:
  - China and others announced tariffs on more than $30 billion in US exports in response to US steel and aluminum tariffs.
  - China also imposed tariffs on $50 billion and on an additional $60 billion in US exports in response to the last two rounds of US tariffs, respectively.
- Magnitude of US trade:
  - Total US imports (exports) of goods and services amounted to close to $2.9 trillion ($2.4 trillion) in 2017, of which roughly 80 percent (two-thirds) are imports (exports) of goods.
  - China, the euro area, Canada, and Mexico account for roughly 60 percent of total US merchandise trade.
- Quantified impacts and scenarios:
  - Direct effects of the tariffs and retaliatory measures are estimated to be small but material for most partners, with China the most affected in IMF model simulations.
  - In IMF simulations using the Global Integrated Monetary and Fiscal Model, China appears most affected by combined US tariffs, with output losses of about 0.6 percent (relative to a no tariff baseline).
  - Indirect effects through increased uncertainty can be larger; example simulation: a 100 basis point increase in risk spreads using the US Federal Reserve Board model leads to a fall in US investment of 1.4 percent and a fall in real output of 0.4 percent.
- Policy implication: beyond direct output losses, tariffs have heterogeneous sectoral impacts that can disrupt regional and global value chains and generate large labor market dislocations.

*REGIONAL ECONOMIC OUTLOOK: WEsTERN HEMIspHERE International Monetary Fund | October 2018*

### Box 1. Effects of US Tariffs and Potential Retaliatory Measures

### Box 1. Effects of US Tariffs and Potential Retaliatory Measures

### Summary of scenarios analyzed
- Scenario: United States imposes a 25 percent tariff on motor vehicle imports and a 10 percent tariff on imports of auto parts (sectoral trade model).
- Other trade-policy exposures shown: Tariffs on $200 billion in imports from China; tariffs on additional $267 billion in imports from China; tariffs on imports of autos and auto parts. (Figure labels: $200 billion in Chinese goods; Additional $267 billion in Chinese goods; Autos and auto parts.)

### Estimated macroeconomic impacts (country-level)
- Real GDP impact (model simulations):
  - United States: real GDP fall of around 0.4 percent (at its peak).
  - NAFTA trading partners: decline almost three times larger than the United States (as reported).
- Estimated changes in total exports (in the motor vehicle/auto-parts tariff scenario):
  - Brazil: total exports fall by about ¼ percent.
  - Canada: total exports fall by 6 percent.
  - Mexico: total exports fall by 10 percent.
  - United States: total exports fall by 9 percent.

### Sectoral impacts and labor-market implications
- Large sectoral heterogeneity; some sectors experience substantial contractions:
  - In Canada and Mexico, the sector with the largest export contraction (motor vehicles) sees exports reduced by about half.
  - In the United States, the sector with the largest export contraction (agriculture and mining) sees exports reduced by more than 25 percent.
- Short- to medium-term effects:
  - Sectoral disruptions and the undoing of regional and global value chains can lead to large labor market dislocations as workers in the most affected sectors need to look for opportunities elsewhere.
- Additional risk channel:
  - Rising trade tensions could also affect confidence, firms’ investment plans, and tighten financial conditions, amplifying negative macroeconomic effects (see Scenario Box in Chapter 1 of the October 2018 World Economic Outlook).

### Modeling approach and key assumptions
- Sectoral model: perfect competition model with intermediate-input trade (Costinot and Rodríguez-Clare 2014).
- Data and aggregation:
  - Model run using 2014 world input-output data (Timmer and others 2015).
  - Aggregation into nine countries/regions and 15 sectors.
- Retaliation assumption:
  - Partners’ retaliation on goods imports coming from the United States is set so as to match static tariff revenue (in line with World Economic Outlook assumptions).
- General equilibrium macro link:
  - Simulations under the Global Integrated Monetary and Fiscal Model (GIMF) underpin the reported GDP impacts (United States peak fall around 0.4 percent; NAFTA partners’ declines nearly three times larger).

*Source: Box 1. Effects of US Tariffs and Potential Retaliatory Measures, Regional Economic Outlook: Western Hemisphere, International Monetary Fund | October 2018.*

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_Source: https://www.imf.org/-/media/files/publications/reo/whd/2018/october/wreo1018.pdf_