## Regional Economic Outlook: Western Hemisphere (Extracts)

## Source details

**Canonical URL:** [Regional Economic Outlook: Western Hemisphere (Extracts)](https://www.imf.org/-/media/files/publications/reo/whd/2019/october/english/text.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/reo/whd/2019/october/english/text.pdf.md)
- [Structured JSON version](/-/media/files/publications/reo/whd/2019/october/english/text.pdf.json)

---

### Preface
- Prepared by Antonio David with contributions from Carlos Gonçalves and Jaime Guajardo, under the guidance of Jorge Roldós and overall direction of Alejandro Werner and Krishna Srinivasan. Ding Ding and Carlos Janada coordinated Caribbean and Central America sections. Genevieve Lindow, Pablo Bejar, and Dan Pan provided research assistance.
- Reflects contents of background papers (IMF 2019a, 2019c, 2019d) and an online annex on spillovers from China and the United States (IMF 2019f).
- Report reflects developments and staff projections through the end of September 2019.

### A Faltering External Environment
- Global growth projections:
  - Decline from 3.6 percent in 2018 to 3.0 percent in 2019.
  - Recover to 3.4 percent in 2020.
- Growth in the United States and China projected to decline in 2019–20.
- Trading partner growth for LAC:
  - Decline from 3 percent in 2017–18 to 2.1 percent in 2019.
- Commodity prices (notably energy and metals) are projected to decline, implying a modest negative impact on regional growth.
- Easier global financial conditions have eased borrowing costs on average (decline in 10-year US government bond yields) but raise medium-term vulnerability risks (October 2019 Global Financial Stability Report).
- Capital flows to LAC:
  - Moderated in 2019 with composition becoming riskier as foreign direct investment share fell in H1 2019.
  - Portfolio flows recovered in Q1 2019 but were subdued thereafter; since 2012 portfolio inflows have driven most variability of capital flows to LAC.
  - Increased sensitivity of capital flows to global financial conditions and growth differentials raises likelihood of sudden stops.

### Regional Outlook: The Elusive Recovery
- LAC growth:
  - 1.0 percent in 2018 to 0.2 percent in 2019.
  - Tentative pick-up to 1.8 percent in 2020.
- Downside drivers of weak 2019 momentum: supply shocks, policy uncertainty in some large economies, slowdown in exports, and Venezuela’s crisis driving migration and weighing on regional growth.
- Recovery in 2020 expected to be driven by private consumption and investment anchored on a rebound in business and consumer confidence.
- Other supporting factors (job creation, wage growth, domestic financial conditions) are not expected to significantly boost consumption and investment.

Key projections (Real GDP Growth, year-over-year percent change):
- Latin America and the Caribbean: 2017 = 1.2; 2018 = 1.0; 2019 = 0.2; 2020 = 1.8.
- LAC excluding Venezuela: 2017 = 1.9; 2018 = 1.7; 2019 = 0.9; 2020 = 2.1.
- South America: 2017 = 0.6; 2018 = 0.4; 2019 = 0.2; 2020 = 1.7.
- CAPDR (Central America, Panama, and the Dominican Republic): 2017 = 4.0; 2018 = 3.9; 2019 = 3.3; 2020 = 3.9.
- Caribbean tourism dependent: 2017 = 0.8; 2018 = 1.8; 2019 = 1.4; 2020 = 1.1.
- Commodity exporters (Caribbean): 2017 = 2.0; 2018 = 0.9; 2019 = 1.0; 2020 = 1.8.
- Memorandum items:
  - LA6: 2017 = 1.5; 2018 = 1.9; 2019 = 1.2; 2020 = 2.1.
  - Brazil: 2017 = 1.1; 2018 = 1.1; 2019 = 0.9; 2020 = 2.0.
  - Mexico: 2017 = 2.1; 2018 = 2.0; 2019 = 0.4; 2020 = 1.3.
- Note: Purchasing-power-parity GDP-weighted averages. CAPDR 5 Central America, Panama, and the Dominican Republic; LAC 5 Latin America and the Caribbean; LA6 5 Brazil, Chile, Colombia, Mexico, Peru, Uruguay.

### Confidence and Scenarios for Private Consumption and Investment
- IMF staff projects a rebound in business and consumer confidence supporting growth, conditional on confidence rebounding in H2 2019 as policy uncertainty abates in some large economies.
- Recent trends: incipient recovery in business and consumer confidence reversed since April 2019 in several countries.
- Bayesian VAR conditional forecasts:
  - Optimistic scenario: business or consumer confidence increases by one standard deviation from current levels, leading to higher growth rates than in the October 2019 World Economic Outlook.
  - Pessimistic scenario: confidence declines by one standard deviation, leading to substantially lower growth rates.
- Policy implication example: decisive fiscal adjustment measures and structural reforms (such as pension reform in Brazil) could help restore confidence and boost private consumption and investment.

### Labor Market Dynamics and Informality
- Formal sector job creation has decelerated sharply in some countries in 2019.
- Real wage growth has been modest.
- Informality typically increases and acts as a buffer mitigating increases in unemployment during low growth periods but results in lower-productivity jobs.
- Conclusion: labor market developments are unlikely to support a strong rebound of overall growth in 2020.

### Domestic Financial Conditions and Corporate Vulnerabilities
- Domestic financial conditions are near neutral and are not expected to boost consumption and investment growth.
- Credit dynamics:
  - Recovery in credit growth in the largest economies after sharp decelerations in 2015–17.
  - Financial conditions index (FCI) near neutral; could tighten suddenly if global risk sentiment shifts.
- Corporate leverage:
  - Leverage has risen since 2018 in several economies, pointing to heightened financial vulnerabilities, especially where foreign-currency-denominated debts are large.
  - In Mexico, rising leverage is partly due to the state-owned oil company Pemex; pemex leverage has continued to rise while other state-owned enterprises have lowered leverage since 2016.
  - Recent efforts to increase efficiency at Pemex have improved cash-generation indicators.
- Risk: sudden tightening of financial conditions would considerably weaken the region’s prospects.

### Contained Inflationary Pressures and External Balances (Section 1)
- Inflation in LAC remains moderate and is expected to stay near the center of the target range in most countries in 2019–20.
- Current account balance: region’s current account deficit is projected at 1.7 percent of GDP in 2019–24.
- International reserves: reserves are sufficient to cover external financing requirements in most countries in 2019.
- Underlying drivers: sound monetary policy frameworks, well-anchored expectations, and negative output gaps projected to narrow gradually over the medium term.

### Risks to the Outlook
- Risks are skewed to the downside, from both external and domestic sources.
- External risks:
  - Trade and supply chain disruptions from escalating trade, investment, and technology sector tensions.
  - Further slowdown in global growth and volatility in commodity prices.
  - A one-off 1 percentage point fall in China’s growth, together with a rise of 100 basis points in sovereign spreads, would lower growth in Chile and Peru by 0.5 percentage point (one-year impact).
  - A similar US shock would lower growth in Costa Rica and Mexico by 0.7 percentage point (one-year impact).
  - A joint shock lowering growth temporarily in China and the United States by 1 percentage point, together with a tightening of financial conditions, would lower growth by 0.5 to 1 percentage point in the largest economies of the region.
- Regional and domestic risks:
  - Heightened policy uncertainty and difficult fiscal consolidation programs.
  - Contagion from financial turmoil in Argentina.
  - Sharp rise in migration from Venezuela straining public services and labor markets in host countries.
  - Natural disasters and extreme weather events (hurricanes, earthquakes, fires in the Amazon region, El Niño impacts).

### Regional Policy Focus and Macro-Financial Vulnerabilities
- Policy trade-off: balance support for growth with rebuilding policy space given weaker global growth, downside risks, still negative output gaps, and high public debt.
- Public debt and fiscal stance:
  - Public debt levels in LAC are projected to exceed 69 percent of GDP in 2019.
  - Most countries in LAC are expected to tighten fiscal policy in 2019–20, though not enough to significantly lower the debt-to-GDP ratio.
  - Fiscal consolidation may drag on activity but credible announcements reduce sovereign spreads and attenuate the drag; larger consolidation packages are associated with greater reductions in spreads.
- Monetary policy:
  - Following recent cuts, monetary policy stance is neutral or marginally accommodative in most countries, except Mexico.
  - Central banks can continue to support growth given stable inflation outlook and well-anchored expectations; clear communication remains key.
- Financial vulnerabilities and exchange rate regimes:
  - Authorities should strengthen monitoring of corporate vulnerabilities, including collecting more data on foreign currency-denominated liabilities.
  - Countries with floating exchange rate regimes tend to experience shorter and less costly sudden stops in capital flows; monetary tightening is also associated with shorter sudden stops.
  - Tighter capital controls do not seem to affect the duration of sudden stops.
- Structural reform priorities:
  - Address gaps in human capital, physical infrastructure, and investment climate.
  - Reforms to boost productivity and inclusiveness: further opening to trade and FDI, align regulations with OECD standards, foster competition, and prioritize low-fiscal-cost reforms.
  - Labor market reforms should balance efficiency and worker protection given rigid employment protection legislation and high minimum wages hamper adjustment and growth.
  - Governance and anti-corruption: progress has been made, but more is needed.

### Country Focus — South America (Key Projections and Developments)
- Argentina:
  - Peso depreciation more than 20 percent in the week after the primary elections.
  - Inflation now expected to reach 57 percent at the end of 2019, up from the 31 percent expected in April.
  - Real GDP growth in 2019 is now projected at –3.1 percent, down from –1.2 percent expected in April.
- Brazil:
  - Growth projected at 0.9 percent in 2019.
  - Policy rate cut to a historic low of 5.5 percent in July.
  - Growth projected to rise to 2.0 percent in 2020.
  - Gross public debt has risen to near 90 percent of GDP and remains on an upward trend.
  - Pension reform progressing; continued structural reforms needed (tax reform, privatization, trade liberalization, improve financial intermediation).
- Bolivia:
  - Real GDP projected to grow at 3.9 percent in 2019.
- Chile:
  - Real GDP projected to grow at 2.5 percent in 2019 and 3.0 percent in 2020.
- Colombia:
  - Growth projected at 3½ percent in 2019–20.
- Ecuador:
  - Growth projected at –0.5 percent in 2019 and 0.5 percent in 2020.
- Paraguay:
  - Real GDP growth for 2019 revised down to 1.0 percent from 3.5 percent.
  - Central bank lowered policy rate five times to 4.0 percent.
- Peru:
  - Growth projected at 2.6 percent in 2019 and 3.6 percent in 2020.
- Uruguay:
  - Growth projected at 0.4 percent in 2019, 2.3 percent in 2020, and 3 percent in 2021.
  - Inflation and inflation expectations remain above the central bank’s 3- to 7-percent target range.
- Venezuela:
  - Real GDP projected to drop by 35 percent this year (a cumulative contraction of about 65 percent since 2013).
  - Hyperinflation continues; annual projections revised downward to 200 thousand percent owing to a sharp tightening of monetary conditions since early 2019.
  - Inflation expected to reaccelerate in the second half of the year as foreign revenue declines and monetary financing increases; migration to neighboring countries expected to continue and potentially intensify.

### CAPDR and Regional Subsections (Growth, Inflation, Fiscal Challenges)
- Growth and investment:
  - Regional growth momentum faded in CAPDR in the first half of 2019; Panama began the year with its lowest quarterly growth rate in a decade.
  - Investment has remained weak and private consumption has been slowing.
  - Growth is projected to accelerate to 1.3 percent in 2020.
  - Regional growth was downgraded to 3.3 percent in 2019 (from 3.8 percent in April 2019).
  - Growth is estimated at 1.6 percent for Jamaica for 2018.
  - Haiti: real GDP growth is projected to stall in 2019 with a medium-term growth outlook of around 1.5 percent absent political stability and policy continuity.
- Inflation and monetary policy:
  - Inflation has been on a declining path and is expected to converge toward the central bank target by year-end.
  - Authorities have started to ease monetary policy and should continue to do so as inflation converges to target.
  - More monetary policy space exists in Costa Rica and the Dominican Republic than in Guatemala and Honduras.
- Country-specific fiscal issues:
  - Costa Rica: Fiscal deficit of 6 percent of GDP in 2018 and public debt approaching 60 percent of GDP.
  - Dominican Republic: Deficit of 3.1 percent of GDP; recommendation for a frontloaded adjustment anchored on widening the tax base.
  - El Salvador: Deficit of 3.4 percent of GDP and public debt higher than 70 percent of GDP; recommendation for frontloaded fiscal consolidation measures of about 2 percent of GDP over 2019–20.
  - Guatemala: Main fiscal challenge is low tax revenue.
  - Honduras: Supported by a 24-month IMF Stand-By Arrangement/Standby Credit Facility and implementing structural reforms.

### Caribbean Outlook, Vulnerabilities, and Policy Priorities
- Tourism and natural disasters:
  - Hurricane Dorian caused tragic loss of life and devastation in the Northern Bahamas.
  - Tourist arrivals in the Eastern Caribbean Currency Union countries rose by 6.5 percent in 2018.
  - The region’s average growth at around 4 percent in both 2018 and 2019.
  - In The Bahamas, 80 percent of hotel capacity remains open for business.
- Country examples:
  - Jamaica: reached staff-level agreement for the sixth and final review under the IMF-supported Stand-By Arrangement; reforms reduced public debt by 50 percentage points of GDP since 2013 to below 95 percent of GDP and achieved unemployment of 7.8 percent.
  - Guyana: large oil discoveries and commencement of production in 2020 expected to provide a substantial boost to growth.
- Key risks and policy priorities:
  - Downside risks: weaker-than-expected global growth, large swings in energy prices, and natural disasters.
  - Long-term impediments: high public debt, limited access to finance and reliable energy, elevated unemployment, brain-drain, crime, and vulnerability to commodity and climate-related shocks.
  - Policy priorities: deepen financial systems and credit, limit brain drain, tackle violent crime, improve business climate and institutions, invest in resilient infrastructure, calibrate disaster risk-financing strategies, and develop contingency plans for post-disaster intervention.
  - Recommendation: embed a comprehensive and credible disaster resilience strategy (DRS) in a consistent macroeconomic framework.

### Financial Sector and Correspondent Banking
- High public debt increases susceptibility to tighter financial conditions.
- Fiscal positions:
  - Some countries (Barbados, Grenada, Jamaica) have taken steps to strengthen fiscal positions; further fiscal tightening needed in Antigua and Barbuda, Belize, Suriname, and Trinidad and Tobago.
  - Well-designed fiscal rules anchored in effective medium-term fiscal frameworks can guide consolidation while allowing escape clauses for large natural disasters (The Bahamas).
- Banking sector:
  - High levels of nonperforming loans constrain credit availability and increase banks’ vulnerability to shocks.
  - Further efforts needed to improve supervision and regulation to clean up bank balance sheets.
  - Caribbean countries continue to lose correspondent banking relationships (CBRs) despite some recovery in cross-border transactions in 2018; concentration risks have risen.
  - Recommendations: improve AML/CFT and supervision frameworks, risk management systems, information exchange between correspondent and respondent banks, and pursue regional bank consolidation.

### Venezuela Crisis and Migration Impacts
- Venezuela:
  - As of October 2019, the United Nations estimated that 4.5 million Venezuelans had left the country, with 3.7 million settling in other countries in Latin America and the Caribbean.
  - Country distribution (as of October 2019): Colombia 1.4 million; Peru 860,900; Chile 371,200; Ecuador 330,400.
  - Economic and humanitarian crisis: collapsing economic activity, hyperinflation, and electricity shortages.
- Migration effects on recipient countries:
  - Short-run: pressures on public services and labor markets, potential increase in informality amid weak economic activity.
  - Medium-term: potential to raise potential growth as labor force size and skills expand and investment increases; near-term growth effects expected to be modest.
  - IMF staff analysis (migration reaches 10 million by 2023 scenario):
    - Public spending increases by 0.6 percent of GDP in Colombia and 0.3 percent in Ecuador and Peru by 2023 (relative to a baseline with no migration).
    - Average potential growth in 2017–30 would rise in the range of 0.2 to 0.3 percentage point in Colombia, Panama, Peru, Chile, and Ecuador (relative to a baseline with no migration).

### Annex: Background Paper Highlights (Selected Findings)
- Capital Flows:
  - Since 2012, portfolio inflows have driven most variability of capital flows to the region.
  - Global risk aversion and growth differentials relative to advanced economies have become more important in driving capital flows.
  - Countries with floating exchange rate regimes tend to experience shorter sudden stops and lower output losses from sudden stops.
- Sovereign Spreads and Fiscal Consolidations:
  - Sovereign spreads decline significantly following news that consolidation measures have been approved by Congress, particularly in periods of high spreads or in countries under an IMF program.
  - Consolidation packages are more successful when spreads significantly decline following the announcement, providing confidence effects that mitigate the drag on economic activity.
- Labor Market Dynamics and Informality:
  - Labor markets in LAC are characterized by high informality, low female participation rates, and relatively rigid employment protection legislation.
  - Informality is countercyclical and reduces the importance of the employment–unemployment margin, dampening Okun’s coefficient relating unemployment to cyclical GDP changes.
  - Rigid employment protection (higher redundancy costs, cumbersome dismissal regulations, high minimum wages) is associated with increased informality.
  - Informality slows adjustment to shocks, negatively impacting productivity and growth.

### Okun’s Coefficient and Informality Responsiveness (Findings)
- Okun’s coefficient axis values in figures range from –1.0 to 0.4.
- Informality responsiveness coefficient axis values range from –0.6 to 0.0 and –0.4 to 0.0 in comparative panels.
- Annex Figure 1.3 shows informality by percent with axis labelled 0 20 40 60 80 100.
- Sources cited for figures: Haver Analytics; International Labour Organization; and IMF staff calculations.
- Country/group abbreviations referenced in figures: AE = advanced economies; CA = Central America; EM = emerging markets; LAC = Latin America and the Caribbean; MEX = Mexico; SA = South America.

### Data and Methodological Disclaimers (Key Technical Notes)
- Argentina consumer price data:
  - Before December 2013: CPI for the Greater Buenos Aires Area (CPI-GBA).
  - December 2013 to October 2015: national CPI (IPCNu).
  - Government discontinued IPCNu in December 2015; released a new CPI for the Greater Buenos Aires Area on June 15, 2016.
  - A new national CPI has been disseminated starting in June 2017.
  - IMF Executive Board on November 9, 2016, considered the new CPI series to be in line with international standards and lifted the declaration of censure issued in 2013.
  - Because of differences across series, the average CPI inflation for 2014, 2015, and 2016 and end-of-period inflation for 2015 and 2016 are not reported in the October 2019 World Economic Outlook (WEO).
- Argentina labor data: Authorities discontinued publication of labor market data in December 2015 and released new series starting in the second quarter of 2016.
- Uruguay public pension transfers and fiscal coverage:
  - Transfers amounted to 1.3 percent of GDP in 2018 and are projected to be 1.2 percent of GDP in 2019, 0.9 percent of GDP in 2020, 0.4 percent of GDP in 2021, 0.2 percent of GDP in 2022, and zero percent of GDP thereafter.
  - Fiscal data coverage changed to nonfinancial public sector (NFPS) with the October 2019 WEO; historical data were revised accordingly.
- Trinidad and Tobago 2018 growth estimates: based on full-year energy sector data and preliminary national accounts; projections from 2019 are unchanged from April 2019 WEO.
- Venezuela data and projections:
  - Projecting Venezuela’s outlook is complicated by lack of discussions with the authorities, incomplete understanding of reported data, and difficulties interpreting reported indicators.
  - Fiscal accounts include budgetary central government, social security, FOGADE, and a sample of public enterprises including Petróleos de Venezuela, S.A. (PDVSA); data for 2018 are IMF staff estimates.
  - IMF staff notes that effects of hyperinflation and paucity of reported data mean the staff’s estimated macroeconomic indicators need to be interpreted with caution.
  - Nominal GDP is estimated assuming the GDP deflator rises in line with the IMF staff’s estimated average inflation.
  - Public external debt in relation to GDP is estimated using the IMF staff’s estimate of the average exchange rate for the year.
  - Venezuela’s consumer prices (CPI) are excluded from all WEO group composites.

### Key Tables and Aggregates (Coverage and Methodological Notes)
- Annex Table 1: Western Hemisphere: Main Economic Indicators — presents output growth (percent), inflation (end of period, percent), and external current account balance (percent of GDP) with data and projections for 2016–2020. The cutoff date for the data and projections in this table is September 30, 2019.
- Annex Table 2: Western Hemisphere: Main Fiscal Indicators — presents public sector primary expenditure (percent of GDP), public sector primary balance (percent of GDP), and public sector gross debt (percent of GDP) with data and projections for 2016–2020. The cutoff date for the data and projections in this table is September 30, 2019.
- Aggregation conventions:
  - Regional output growth aggregates are purchasing-power-parity GDP-weighted averages unless noted otherwise.
  - CPI inflation aggregates exclude Venezuela, but include Argentina starting from 2017, and are geometric averages unless noted otherwise.
  - Current account aggregates are US dollar nominal GDP-weighted averages unless noted otherwise.
  - Public sector indicators are reported on a fiscal year basis; regional aggregates in fiscal tables are fiscal year US dollar nominal GDP-weighted averages unless noted otherwise.

*International Monetary Fund | October 2019*

### Preface v

### Preface v

### Preface
- Prepared by Antonio David with contributions from Carlos Gonçalves and Jaime Guajardo, under the guidance of Jorge Roldós and overall direction of Alejandro Werner and Krishna Srinivasan. Ding Ding and Carlos Janada coordinated Caribbean and Central America sections. Genevieve Lindow, Pablo Bejar, and Dan Pan provided research assistance.
- Reflects contents of background papers (IMF 2019a, 2019c, 2019d) and an online annex on spillovers from China and the United States (IMF 2019f).
- Report reflects developments and staff projections through the end of September 2019.

### A Faltering External Environment
- Global growth projections:
  - Decline from 3.6 percent in 2018 to 3.0 percent in 2019.
  - Recover to 3.4 percent in 2020.
- Growth in the United States and China projected to decline in 2019–20.
- Trading partner growth for LAC:
  - Decline from 3 percent in 2017–18 to 2.1 percent in 2019.
- Commodity prices (notably energy and metals) are projected to decline, implying a modest negative impact on regional growth.
- Easier global financial conditions have eased borrowing costs on average (decline in 10-year US government bond yields) but raise medium-term vulnerability risks (October 2019 Global Financial Stability Report).
- Capital flows to LAC:
  - Moderated in 2019 with composition becoming riskier as foreign direct investment share fell in H1 2019.
  - Portfolio flows recovered in Q1 2019 but were subdued thereafter; since 2012 portfolio inflows have driven most variability of capital flows to LAC.
  - Increased sensitivity of capital flows to global financial conditions and growth differentials raises likelihood of sudden stops.

### Regional Outlook: The Elusive Recovery
- LAC growth:
  - 1.0 percent in 2018 to 0.2 percent in 2019.
  - Tentative pick-up to 1.8 percent in 2020 (Table 1).
- LAC growth has been low since 2015, partly due to the end of the commodity price super cycle.
- Downside drivers of weak 2019 momentum: supply shocks, policy uncertainty in some large economies, slowdown in exports, and Venezuela’s crisis driving migration and weighing on regional growth.
- Recovery in 2020 expected to be driven by private consumption and investment anchored on a rebound in business and consumer confidence.
- Other supporting factors (job creation, wage growth, domestic financial conditions) are not expected to significantly boost consumption and investment.

Key projections from Table 1 (Real GDP Growth, year-over-year percent change):
- Latin America and the Caribbean: 2017 = 1.2; 2018 = 1.0; 2019 = 0.2; 2020 = 1.8.
- LAC excluding Venezuela: 2017 = 1.9; 2018 = 1.7; 2019 = 0.9; 2020 = 2.1.
- South America: 2017 = 0.6; 2018 = 0.4; 2019 = 0.2; 2020 = 1.7.
- CAPDR (Central America, Panama, and the Dominican Republic): 2017 = 4.0; 2018 = 3.9; 2019 = 3.3; 2020 = 3.9.
- Caribbean tourism dependent: 2017 = 0.8; 2018 = 1.8; 2019 = 1.4; 2020 = 1.1.
- Commodity exporters (Caribbean): 2017 = 2.0; 2018 = 0.9; 2019 = 1.0; 2020 = 1.8.
- Memorandum items:
  - LA6: 2017 = 1.5; 2018 = 1.9; 2019 = 1.2; 2020 = 2.1.
  - Brazil: 2017 = 1.1; 2018 = 1.1; 2019 = 0.9; 2020 = 2.0.
  - Mexico: 2017 = 2.1; 2018 = 2.0; 2019 = 0.4; 2020 = 1.3.
- Note: Purchasing-power-parity GDP-weighted averages. CAPDR 5 Central America, Panama, and the Dominican Republic; LAC 5 Latin America and the Caribbean; LA6 5 Brazil, Chile, Colombia, Mexico, Peru, Uruguay.

### Confidence and Prospects for Private Consumption and Investment
- IMF staff projects a rebound in business and consumer confidence supporting growth, but projections assume confidence rebounds in H2 2019 as policy uncertainty abates in some large economies.
- Recent trends: incipient recovery in business and consumer confidence reversed since April 2019 in several countries.
- Conditional forecasts from Bayesian VAR models:
  - Optimistic scenario: business or consumer confidence increases by one standard deviation from current levels, leading to higher growth rates than in the October 2019 World Economic Outlook.
  - Pessimistic scenario: confidence declines by one standard deviation, leading to substantially lower growth rates.
- Policy implications: strong and well-designed policies (for example, decisive fiscal adjustment measures and structural reforms such as pension reform in Brazil) could help restore confidence and boost private consumption and investment.

### Labor Market Dynamics and Informality
- Formal sector job creation has decelerated sharply in some countries in 2019.
- Real wage growth has been modest.
- Background paper findings: informality typically increases and acts as a buffer mitigating increases in unemployment during low growth periods but results in lower-productivity jobs.
- Conclusion: labor market developments are unlikely to support a strong rebound of overall growth in 2020.

### Domestic Financial Conditions and Corporate Vulnerabilities
- Domestic financial conditions are near neutral and are not expected to boost consumption and investment growth.
- Credit dynamics:
  - Recovery in credit growth in the largest economies after sharp decelerations in 2015–17.
  - Financial conditions index (FCI) near neutral; could tighten suddenly if global risk sentiment shifts.
- Corporate leverage:
  - Leverage has risen since 2018 in several economies, pointing to heightened financial vulnerabilities, especially where foreign-currency-denominated debts are large.
  - In Mexico, rising leverage is partly due to the state-owned oil company Pemex; pemex leverage has continued to rise while other state-owned enterprises have lowered leverage since 2016.
  - Recent efforts to increase efficiency at Pemex have improved cash-generation indicators.
- Risk: sudden tightening of financial conditions would considerably weaken the region’s prospects.

_International Monetary Fund | October 2019_

### 1. Latin America: Financial Conditions Index and

### 1. Latin America: Financial Conditions Index and Real Credit Growth

### Contained inflationary pressures and external balances
- Inflation in LAC remains moderate and is expected to stay near the center of the target range in most countries in 2019–20.  
- Current account balance: region’s current account deficit is projected at 1.7 percent of GDP in 2019–24.  
- International reserves: reserves are sufficient to cover external financing requirements in most countries in 2019.  
- Underlying drivers: sound monetary policy frameworks, well-anchored expectations, and negative output gaps projected to narrow gradually over the medium term.

### Risks to the outlook
- Overall: risks are skewed to the downside, from both external and domestic sources.
- External risks:
  - Trade and supply chain disruptions from escalating trade, investment, and technology sector tensions.
  - Further slowdown in global growth and volatility in commodity prices.
  - A one-off 1 percentage point fall in China’s growth, together with a rise of 100 basis points in sovereign spreads, would lower growth in Chile and Peru by 0.5 percentage point (one-year impact).  
  - A similar US shock would lower growth in Costa Rica and Mexico by 0.7 percentage point (one-year impact).  
  - A joint shock lowering growth temporarily in China and the United States by 1 percentage point, together with a tightening of financial conditions, would lower growth by 0.5 to 1 percentage point in the largest economies of the region.
- Regional and domestic risks:
  - Heightened policy uncertainty and difficult fiscal consolidation programs.
  - Contagion from financial turmoil in Argentina.
  - Sharp rise in migration from Venezuela straining public services and labor markets in host countries.
  - Natural disasters and extreme weather events (hurricanes, earthquakes, fires in the Amazon region, El Niño impacts).

### Regional policy focus and macro-financial vulnerabilities
- Policy trade-off: balance support for growth with rebuilding policy space given weaker global growth, downside risks, still negative output gaps, and high public debt.
- Public debt and fiscal stance:
  - Public debt levels in LAC are projected to exceed 69 percent of GDP in 2019.
  - Most countries in LAC are expected to tighten fiscal policy in 2019–20, though not enough to significantly lower the debt-to-GDP ratio.
  - Fiscal consolidation may drag on activity but credible announcements reduce sovereign spreads and attenuate the drag; larger consolidation packages are associated with greater reductions in spreads.
- Monetary policy:
  - Following recent cuts, monetary policy stance is neutral or marginally accommodative in most countries, except Mexico.
  - Central banks can continue to support growth given stable inflation outlook and well-anchored expectations; clear communication remains key.
- Financial vulnerabilities and exchange rate regimes:
  - Authorities should strengthen monitoring of corporate vulnerabilities, including collecting more data on foreign currency-denominated liabilities.
  - Countries with floating exchange rate regimes tend to experience shorter and less costly sudden stops in capital flows; monetary tightening is also associated with shorter sudden stops.
  - Tighter capital controls do not seem to affect the duration of sudden stops, cautioning against overstating their insulating power.
- Structural reform priorities:
  - Address gaps in human capital, physical infrastructure, and investment climate.
  - Reforms to boost productivity and inclusiveness: further opening to trade and FDI, align regulations with OECD standards, foster competition, and prioritize low-fiscal-cost reforms.
  - Labor market reforms should balance efficiency and worker protection given rigid employment protection legislation and high minimum wages hamper adjustment and growth.
  - Governance and anti-corruption: progress has been made, but more is needed.

### Country focus — South America (key projections and developments)
- Argentina:
  - Peso depreciation more than 20 percent in the week after the primary elections.
  - Inflation now expected to reach 57 percent at the end of 2019, up from the 31 percent expected in April.
  - Real GDP growth in 2019 is now projected at –3.1 percent, down from –1.2 percent expected in April.
- Brazil:
  - Growth projected at 0.9 percent in 2019.
  - Policy rate cut to a historic low of 5.5 percent in July.
  - Growth projected to rise to 2.0 percent in 2020.
  - Gross public debt has risen to near 90 percent of GDP and remains on an upward trend.
  - Pension reform progressing; continued structural reforms needed (tax reform, privatization, trade liberalization, improve financial intermediation).
- Bolivia:
  - Real GDP projected to grow at 3.9 percent in 2019, supported by expansionary fiscal policy, strong wage and credit growth.
  - Risk: declining hydrocarbon exports and election-related uncertainties.
- Chile:
  - Real GDP projected to grow at 2.5 percent in 2019 and 3.0 percent in 2020.
  - Recovery led by expansionary monetary policy and fiscal measures; risks tilted to the downside.
- Colombia:
  - Growth projected at 3½ percent in 2019–20.
  - Supported by accommodative monetary policy, higher subnational fiscal spending, lower corporate tax burden, infrastructure projects, and migration from Venezuela.
- Ecuador:
  - Growth projected at –0.5 percent in 2019 and 0.5 percent in 2020.
  - Adjustment to lower oil prices, slower credit growth, and fiscal consolidation; announced measures and protests pose downside risks to growth and upside risks to inflation.
- Paraguay:
  - Real GDP growth for 2019 revised down to 1.0 percent from 3.5 percent.
  - Shocks: drought, flooding, deeper recession in Argentina, slower recovery in Brazil.
  - Policy response: central bank lowered policy rate five times to 4.0 percent; accelerated public investment execution.
- Peru:
  - Growth projected at 2.6 percent in 2019 and 3.6 percent in 2020.
  - Weakness in primary sectors and under-execution of public investment; downside risks from weaker external demand and political uncertainty.
- Uruguay:
  - Growth projected at 0.4 percent in 2019, 2.3 percent in 2020, and 3 percent in 2021.
  - Large infrastructure and investment projects provide a significant buffer; inflation and inflation expectations remain above the central bank’s 3- to 7-percent target range.
- Venezuela:
  - Real GDP projected to drop by 35 percent this year (a cumulative contraction of about 65 percent since 2013).
  - Hyperinflation continues; annual projections revised downward to 200 thousand percent owing to a sharp tightening of monetary conditions since early 2019.
  - Inflation expected to reaccelerate in the second half of the year as foreign revenue declines and monetary financing increases; migration to neighboring countries expected to continue and potentially intensify.

*International Monetary Fund | October 2019*

### 0.4 percent in 2019. Investment has remained

### text - 0.4 percent in 2019. Investment has remained

### Growth performance and near-term outlook
- Regional growth momentum faded in CAPDR in the first half of 2019; Panama began the year with its lowest quarterly growth rate in a decade.
- Investment has remained weak and private consumption has been slowing, reflecting policy uncertainty, weakening global and US manufacturing, budget under-execution, and rising borrowing costs.
- Growth projections:
  - Growth is projected to accelerate to 1.3 percent in 2020 on the back of a modest recovery in domestic demand as uncertainty is expected to begin subsiding.
  - Regional growth was downgraded to 3.3 percent in 2019 (from 3.8 percent in April 2019), mainly due to revisions in Panama (–1.7 percent) and Costa Rica (–0.9 percent).
  - Growth is estimated at 1.6 percent for Jamaica for 2018.
  - Haiti: real GDP growth is projected to stall in 2019 with a medium-term growth outlook of around 1.5 percent absent political stability and policy continuity.
- Inflation and monetary policy:
  - Inflation has been on a declining path and is expected to converge toward the central bank target by year-end.
  - Authorities have started to ease monetary policy amid weakening demand and US policy easing and should continue to do so as inflation converges to target.
  - Current inflation levels compared to targets suggest more monetary policy space in Costa Rica and the Dominican Republic than in Guatemala and Honduras.

### Country-specific fiscal and structural issues in CAPDR
- Costa Rica:
  - Fiscal deficit of 6 percent of GDP in 2018 and public debt approaching 60 percent of GDP.
  - The fiscal reform of December 2018 was a critical step to restore fiscal sustainability, but full and timely implementation is key.
- Dominican Republic:
  - Deficit of 3.1 percent of GDP.
  - Recommendation: a frontloaded adjustment anchored on widening the tax base to reverse upward debt dynamics; implement a medium-term fiscal framework with a clear anchor and fiscal responsibility elements.
- El Salvador:
  - Deficit of 3.4 percent of GDP and public debt higher than 70 percent of GDP.
  - Recommendation: frontloaded fiscal consolidation measures of about 2 percent of GDP over 2019–20 to help anchor fiscal sustainability.
- Guatemala:
  - Main fiscal challenge is low tax revenue, impeding expansion of public services and infrastructure.
- Honduras:
  - Supported by a 24-month IMF Stand-By Arrangement/Standby Credit Facility and implementing structural reforms (notably in the electricity sector), governance strengthening, and business climate improvements.

### Caribbean outlook, vulnerabilities, and policy priorities
- Tourism and natural disasters:
  - Economic prospects generally improving, but substantial variation across countries.
  - Hurricane Dorian caused tragic loss of life and devastation in the Northern Bahamas; region remains highly vulnerable to natural disasters.
  - Tourist arrivals in the Eastern Caribbean Currency Union countries rose by 6.5 percent in 2018 and have remained robust in 2019, keeping the region’s average growth at around 4 percent in both years.
  - In The Bahamas, 80 percent of hotel capacity remains open for business; tourism is projected to support the economy during reconstruction.
- Country examples:
  - Jamaica: reached staff-level agreement for the sixth and final review under the IMF-supported Stand-By Arrangement, ending 6½ years of financial support; reforms reduced public debt by 50 percentage points of GDP since 2013 to below 95 percent of GDP and achieved unemployment of 7.8 percent.
  - Guyana: large oil discoveries and commencement of production in 2020 expected to provide a substantial boost to growth.
- Key risks and policy priorities:
  - Downside risks: weaker-than-expected global growth, large swings in energy prices, and natural disasters.
  - Long-term impediments: high public debt, limited access to finance and reliable energy, elevated unemployment, brain-drain, crime, and vulnerability to commodity and climate-related shocks.
  - Policy priorities: deepen financial systems and credit, limit brain drain, tackle violent crime, improve business climate and institutions, invest in resilient infrastructure, calibrate disaster risk-financing strategies, and develop contingency plans for post-disaster intervention.
  - Recommendation: embed a comprehensive and credible disaster resilience strategy (DRS) in a consistent macroeconomic framework to guide policy design and sequencing, facilitate donor coordination, and catalyze additional financial support.

### Financial sector and correspondent banking
- High public debt increases susceptibility to tighter financial conditions.
- Some countries (Barbados, Grenada, Jamaica) have taken steps to strengthen fiscal positions; further fiscal tightening needed in Antigua and Barbuda, Belize, Suriname, and Trinidad and Tobago.
- Well-designed fiscal rules anchored in effective medium-term fiscal frameworks can guide consolidation while allowing escape clauses for large natural disasters (The Bahamas).
- Banking sector:
  - High levels of nonperforming loans continue to constrain credit availability and increase banks’ vulnerability to shocks.
  - Further efforts needed to improve supervision and regulation to clean up bank balance sheets.
  - Caribbean countries continue to lose correspondent banking relationships (CBRs) despite some recovery in cross-border transactions in 2018; concentration risks have risen.
  - Local banks may need to play a bigger role in securing CBRs if further exits of foreign banks occur.
  - Recommendations: improve AML/CFT and supervision frameworks, risk management systems, information exchange between correspondent and respondent banks, and pursue regional bank consolidation.

### Venezuela crisis and migration impacts
- Venezuela:
  - Economic and humanitarian crisis has deepened with collapsing economic activity, hyperinflation, and electricity shortages; continued emigration.
  - As of October 2019, the United Nations estimated that 4.5 million Venezuelans had left the country, with 3.7 million settling in other countries in Latin America and the Caribbean.
  - Country distribution (as of October 2019): Colombia 1.4 million; Peru 860,900; Chile 371,200; Ecuador 330,400.
- Migration effects on recipient countries:
  - Short-run: pressures on public services and labor markets, potential increase in informality amid weak economic activity.
  - Medium-term: potential to raise potential growth as labor force size and skills expand and investment increases; near-term growth effects expected to be modest.
  - Downside risks: gains in growth could be undermined if migrants are not integrated orderly or if migration leads to social dislocation.
- IMF staff analysis (migration reaches 10 million by 2023 scenario):
  - Public spending increases by 0.6 percent of GDP in Colombia and 0.3 percent in Ecuador and Peru by 2023 (relative to a baseline with no migration).
  - Average potential growth in 2017–30 would rise in the range of 0.2 to 0.3 percentage point in Colombia, Panama, Peru, Chile, and Ecuador (relative to a baseline with no migration).
  - Gains would be larger and more frontloaded if labor markets are flexible and migrants can find jobs in line with their human capital.

### Annex: Background paper highlights
- Capital Flows to Latin America in the Aftermath of the Commodities Super-Cycle
  - Since 2012, portfolio inflows have driven most variability of capital flows to the region.
  - Global risk aversion and growth differentials relative to advanced economies have become more important in driving capital flows.
  - Countries with floating exchange rate regimes tend to experience shorter sudden stops in capital flows and lower output losses from sudden stops.
  - A tighter monetary policy stance following a sudden stop is linked to a reduction in its duration and ensuing deceleration in growth.
  - Increasing capital controls does not affect the duration of sudden stops in a significant way.
- Sovereign Spreads and Fiscal Consolidations
  - Rising public debt and a more challenging external environment have led policymakers to announce fiscal consolidation measures.
  - Empirical results: sovereign spreads decline significantly following news that consolidation measures have been approved by Congress, particularly in periods of high spreads or in countries under an IMF program.
  - Consolidation packages are more successful—leading to smaller output losses and larger reductions in the public debt-to-GDP ratio—when spreads significantly decline following the announcement, providing confidence effects that mitigate the drag on economic activity.
- Labor Market Dynamics and Informality over the Business Cycle in LAC
  - Labor markets in LAC are characterized by high informality, low female participation rates, and relatively rigid employment protection legislation.
  - Informality is countercyclical and reduces the importance of the employment–unemployment margin, dampening Okun’s coefficient relating unemployment to cyclical GDP changes.
  - Aggregate participation rates are positively related to GDP changes; female participation may be countercyclical during recessions in LAC.
  - Rigid employment protection (higher redundancy costs, cumbersome dismissal regulations, high minimum wages) is associated with increased informality.
  - Informality slows adjustment to shocks, negatively impacting productivity and growth; LAC countries typically adjust more slowly to economic shocks in part because of rigid employment protection legislation.

*International Monetary Fund | October 2019 — Regional Economic Outlook: Western Hemisphere (extracts provided in source content)*

### 1. Unemployment’s Responsiveness to GDP Changes

### 1. Unemployment’s Responsiveness to GDP Changes

### Okun’s coefficient and informality responsiveness (findings)
- Okun’s coefficient is presented across country groups with axis values ranging from –1.0 to 0.4 (Annex figure axis labels show –1.0, –0.8, –0.6, –0.4, –0.2, 0.0, 0.2, 0.4).  
- Informality’s responsiveness to GDP changes is shown with coefficient axis values ranging from –0.6 to 0.0 and –0.4 to 0.0 in comparative panels (axis tick labels include –0.6, –0.5, –0.4, –0.3, –0.2, –0.1, 0.0).  
- Annex Figure 1.3 shows informality by percent with an axis labelled 0 20 40 60 80 100 (displayed as 020406080100).
- A scatter panel links informal employment (percent) to Okun’s coefficient, indicating the analysis covers Okun’s coefficient values between –1.0 and 0.4 and informal employment shares across the 0–100 percent range.

### Sources and country-group labels used in figures
- Sources cited: Haver Analytics; International Labour Organization; and IMF staff calculations.
- Country/group abbreviations referenced in figures: AE = advanced economies; CA = Central America; EM = emerging markets; LAC = Latin America and the Caribbean; MEX = Mexico; SA = South America.

### Interpretive emphasis
- The materials present average Okun’s coefficients and average coefficients for informality responsiveness by region and country-group, highlighting cross-country variation in how unemployment and informality respond to GDP changes.

---

### Data and methodological disclaimers (key technical notes)
- Argentina consumer price data:
  - Before December 2013: consumer price index (CPI) for the Greater Buenos Aires Area (CPI-GBA).
  - December 2013 to October 2015: national CPI (IPCNu).
  - Government discontinued IPCNu in December 2015; released a new CPI for the Greater Buenos Aires Area on June 15, 2016.
  - A new national CPI has been disseminated starting in June 2017.
  - IMF Executive Board on November 9, 2016, considered the new CPI series to be in line with international standards and lifted the declaration of censure issued in 2013.
  - Because of differences across series, the average CPI inflation for 2014, 2015, and 2016 and end-of-period inflation for 2015 and 2016 are not reported in the October 2019 World Economic Outlook (WEO).
- Argentina labor data:
  - Authorities discontinued publication of labor market data in December 2015 and released new series starting in the second quarter of 2016.
- Uruguay public pension transfers and fiscal coverage:
  - Starting from October 2018, Uruguay’s public pension system has been receiving transfers recorded as revenues.
  - Transfers amounted to 1.3 percent of GDP in 2018 and are projected to be 1.2 percent of GDP in 2019, 0.9 percent of GDP in 2020, 0.4 percent of GDP in 2021, 0.2 percent of GDP in 2022, and zero percent of GDP thereafter.
  - The fiscal data coverage for Uruguay was changed from consolidated public sector to nonfinancial public sector (NFPS) with the October 2019 WEO; NFPS includes central government, local government, social security funds, nonfinancial public corporations, and Banco de Seguros del Estado. Historical data were revised accordingly.
- Trinidad and Tobago 2018 growth estimates:
  - Based on full-year energy sector data from the Ministry of Energy and Ministry of Finance, preliminary national accounts for the first three quarters from the Central Statistical Office, and staff projections for the fourth quarter nonenergy output.
  - Growth projections from 2019 are unchanged from April 2019 WEO in the absence of updates to published national accounts data.
- Venezuela data and projections (key caveats):
  - Projecting Venezuela’s outlook is complicated by lack of discussions with the authorities (last Article IV consultation in 2004), incomplete understanding of reported data, and difficulties interpreting reported indicators given economic developments.
  - Fiscal accounts include budgetary central government, social security, FOGADE, and a sample of public enterprises including Petróleos de Venezuela, S.A. (PDVSA); data for 2018 are IMF staff estimates.
  - IMF staff notes that effects of hyperinflation and paucity of reported data mean the staff’s estimated macroeconomic indicators need to be interpreted with caution.
  - Nominal GDP is estimated assuming the GDP deflator rises in line with the IMF staff’s estimated average inflation.
  - Public external debt in relation to GDP is estimated using the IMF staff’s estimate of the average exchange rate for the year.
  - Venezuela’s consumer prices (CPI) are excluded from all WEO group composites.

---

### Key tables and aggregates (coverage and methodological notes)
- Annex Table 1: Western Hemisphere: Main Economic Indicators — presents output growth (percent), inflation (end of period, percent), and external current account balance (percent of GDP) with data and projections for 2016–2020. The cutoff date for the data and projections in this table is September 30, 2019.
- Annex Table 2: Western Hemisphere: Main Fiscal Indicators — presents public sector primary expenditure (percent of GDP), public sector primary balance (percent of GDP), and public sector gross debt (percent of GDP) with data and projections for 2016–2020. The cutoff date for the data and projections in this table is September 30, 2019.
- Aggregation and reporting conventions:
  - Regional output growth aggregates are purchasing-power-parity GDP-weighted averages unless noted otherwise.
  - CPI inflation aggregates exclude Venezuela, but include Argentina starting from 2017, and are geometric averages unless noted otherwise.
  - Current account aggregates are US dollar nominal GDP-weighted averages unless noted otherwise.
  - Public sector accounting definitions vary by country; indicators are reported on a fiscal year basis. Regional aggregates in fiscal tables are fiscal year US dollar nominal GDP-weighted averages unless noted otherwise.

---

*International Monetary Fund | October 2019*

---


_Source: https://www.imf.org/-/media/files/publications/reo/whd/2019/october/english/text.pdf_