## Outlook for Latin America and the Caribbean

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### Prospects — Key Messages
- A race between vaccinations and variants
- Slow and uneven recovery of employment
- Monetary policy having to respond to anchor inflation dynamics
- Public debt dynamics necessitating withdrawal of fiscal support
- Policy contraction implies a heavy reliance on a private-sector recovery
- Limited policy space and social pressures exacerbate vulnerabilities

### Health and Vaccination
- Share of People Vaccinated Against COVID-19 (Percent; as of September 23, 2021): charted by country with distinction Full dose / One dose; IMF’s suggested benchmark: Forty percent
- New COVID-19 Deaths per Million (7-day moving average; as of September 23, 2021): series plotted Mar-20 through Sep-21 by region: North America, SA+MEX, CAPDR, Caribbean
- Rapid vaccination campaigns in some LAC countries have helped mitigate the impact of the pandemic, with new deaths per million declining in SA+MEX though still high

### Growth, Demand, and Inflation
- Real GDP (Index: 2019Q4 = 100): LA5 = purchasing-power-parity GDP-weighted average of Brazil, Chile, Colombia, Mexico, and Peru; 2019Q4–2021Q2 series showing rapid recovery in CHL/PER on strong private consumption; recovery in Brazil and Peru supported by rebound in investment
- Core Inflation (Year-over-year percent change): series Jan-19 through Jul-21 for BR A CHL COL MEX PER; noted rapid upswing in inflation
- Key observation: Fast rebound of demand, upswing in inflation

### External Conditions and Trade
- Contributions to Merchandise Exports Growth (3-month moving sum; year-over-year percent change): components include LAC, CHN, JPN-KOR, USA-CAN, EU, Other; Jan-20 to Jul-21 showing recovery in trading partner growth (US/China)
- Commodity Prices (Index: January 1, 2020 = 100): Oil, Copper, Iron ore, Soybeans series Jan-20 to Sep-21; commodity price surge described as "now abating"
- Ten-year Government Bond Yields (Percent): series 2014–2021 showing LA6 median vs United States; favorable financing conditions noted as "now tightening"

### Labor Markets
- LA4: Employment and Economic Activity Index (Index: January 2020 = 100): Formal, Informal, Total employment and Economic activity index series Jan-20 to Jul-21 showing recovery in labor lagging activity
- LA5: Employment by Gender and Education (Index: 2019:Q4 = 100): Female, Low; Female, Med/High; Male, Low; Male, Med/High series 2019Q3–2020Q4 showing disproportionate impact on female and less-educated workers
- LA5: Reasons for Labor Force Inactivity (Male; millions): series 2019Q3–2020Q4 with categories Discouraged, Health, Family duties, Other (incl. COVID-19); main reason behind labor inactivity being concern about the pandemic
- Specific figures (selected from charts): examples include discouraged, health, family duties, other (incl. COVID-19) plotted with values such as 2.4, 2.6, 4.7, 3.7, 3.8, 4.3, 4.2, 4.3, 4.7, 4.5, 4.6, 2.1, 2.1, 2.4, 3.6, 2.8, 3.3, 4.2, 4.4, 5.3, 13.2, 9.0, 6.7

### Policy Support Withdrawal and Monetary Stance
- General Government Fiscal Impulse (Percentage points of GDP; +/– = loosening/tightening): country series 2020, 2021, 2022 for BRA CHL COL DOM MEX PRY PER URY LAC; large fiscal stimulus in BRA, DOM, PRY, and PER is expected to be largely withdrawn; still large fiscal stimulus in CHL, COL in 2021
- Nominal Neutral and Policy Rates (Percent): Brazil, Mexico, Colombia, Chile, Peru policy rate and nominal neutral rate ranges plotted; Monetary policy has been accommodative in most LA5 countries though the tightening cycle has started
- Noted: Policy rate increases may be needed to anchor inflation dynamics

### Heterogeneous Recovery — Growth Projections
- Latin America and the Caribbean: Real GDP Growth (Year-over-year percent change) — projections and return-to-end-2019-level years:
  - Latin America and the Caribbean: Year of return to End-2019 level: 2022; Projections 2019 2020 2021 2022 Avg. 2023–26 listed as ...0.1–7.06.33.02.4
  - LAC excl. Venezuela: 2022; ...0.9–6.76.53.12.5
  - South America: 2022; ...–0.1–6.66.32.32.3
  - Argentina: 2023; ...–2.1–9.97.52.52.0
  - Brazil: 2021; ...1.4–4.15.21.52.1
  - Chile: 2021; 1.0–5.811.02.52.2
  - Colombia: 2021; 3.3–6.87.63.83.4
  - Peru: 2022; 2.2–11.010.04.63.5
  - Mexico: 2022; –0.2–8.36.24.02.1
  - CAPDR: 2021; 3.2–7.17.74.64.0
  - Caribbean Tourism dependent: 2024; –0.0–9.52.34.12.2
  - Commodity exporters (Caribbean): 2020 2022; 0.44.05.621.15.6
- Observation: A heterogeneous recovery across the LAC region

### Long-term Consequences
- LAC: Real GDP (Index: 2019 = 100): October 2021 vs Pre-pandemic (January 2020 WEO) series 2019–2026 showing LAC’s real GDP is not expected to return to the pre-pandemic trend
- LA7: Potential Output and Production Factors Post-pandemic Relative to Pre-Pandemic (Percent of pre-pandemic projection) in 2024: Real GDP, Employment, Total factor productivity, Capital stock plotted with declines noted; conclusion: largely due to expected productivity and employment losses

### The Caribbean: Tourism and Fiscal Vulnerabilities
- The Caribbean: Total Tourist Arrivals (Percent change relative to the same month in 2019): ECCU vs Non-ECCU series Jan-20 to May-21 showing tourism recovery in the Caribbean has been slow
- Tourism-Dependent Caribbean: Real GDP (Index: 2019 = 100): 2019–2026 October 2021 vs Pre-pandemic series showing continued weighing on GDP recovery
- The Caribbean: Overall Fiscal Balance (Percent of GDP): series showing exacerbated pre-existing fiscal vulnerabilities
- Country list in chart: GRD HTI JAM KNA BRB VCT ATG BHS BLZ LCA DMA ABW GUY TTO SUR (plotted relative changes)

### Central America and Remittances Spillovers
- CAPDR: Real GDP Growth (Year-over-year percent change) series 2020–2022 showing positive spillovers from US supporting Central America combined with strong exports growth to the U.S.
- CAPDR: Remittances (Millions of US dollars) series Jan-20 through Jul-21 for HND DOM NIC SLV GTM showing strong remittances growth supporting growth in CAPDR in 2021

### Risks
- Risks are tilted to the downside
  - DOWNSIDE: COVID variants; Financial conditions; Electoral calendar; Social unrest
  - UPSIDE: Faster vaccination

### Social Impact and Trust
- LAC: Poverty Ratio (Share of population; $5.5 threshold): time series 2011–2027 plotted with values including 26.6, 23.8, 22.2, 21.1, 20.3, 21.9, 20.0, 18.6, 17.2; statement: the pandemic is estimated to have increased poverty significantly, reversing the gains over the past 8 years
- LAC: Confidence in Government (Percent): Latinobarometro series 1996–2018 plotted with values including 28, 25, 19, 30, 36, 43, 39, 44, 45, 45, 40, 39, 33, 28, 25, 22; noted: even before the pandemic, trust in government in LAC was eroding
- Potential for social impact of pandemic feeding into unrest

### Policy Priorities — Overview
- Public health measures to contain the pandemic
- Policy rate increases may be needed to anchor inflation dynamics
- Targeted fiscal support within credible MT frameworks is needed
- Reshaping direct taxes would help
- Diversified approach to both climate mitigation and adaptation

### Monetary Policy: Inflation and Expectations
- Inflation (Year-over-year percent change): country bars for Brazil, Mexico, Peru, Chile, Colombia with Target range; August 2021 and expectations Current year and 3-year ahead shown
- Inflation Expectations Anchoring, 2011–21 (Index; lower means better anchored): comparison USEM LA5 (min-max range) across metrics: Deviation of LT forecasts from target; Variability of LT forecasts; Dispersion of LT forecasts; Sensitivity of LT forecasts to inflation surprises
- Policy Rates and Expectations (Percent): Brazil, Mexico, Colombia, Chile policy rate, 2021Q4 expectation, 2022Q4 expectation
- Conclusion: While expectations remain well-anchored, inflation is outside the target range; LA5 central bank credibility falls short that of the US Fed though higher than that of EMs on average; market expectations point to additional rate hikes this and next year

### Fiscal Policy: Targeted Support and Country Recommendations
- General guidance: Targeted near-term fiscal support with a framework for deficit reduction over the medium-term
- Brazil:
  - A positive to extend the targeted cash transfers into 2021
  - Going forward, pace of consolidation should be guided by existing fiscal rules
- Chile:
  - Withdraw fiscal stimulus, while targeting support to the most vulnerable
  - Put in place a consolidation plan guided by the fiscal rule
- Colombia:
  - Prioritize public investment and social spending as the planned consolidation proceeds
  - Over the medium term, further tax reform will be needed to durably raise additional revenues
- Mexico:
  - Scope for additional spending on social safety nets, education, health, and quality public investment
  - Over medium-term, a comprehensive tax reform that permanently raises revenues
- Peru:
  - Continue to gradually remove the fiscal stimulus by raising tax revenues while accelerating high-quality investment and maintaining support for households
  - Identify a realistic path and the necessary measures to support a return to the fiscal rules

### Tax Reform Opportunities
- Statutory Rates and Productivity, 2019 (Percent): LA7 statutory CIT rates much higher; CIT productivity in the three largest economies is lower than peers and OECD average, pointing to significant base erosion
- LA5: Micro-simulations of PIT Reforms, 2019 (Percent) — scenarios and outcomes:
  - Baseline: Average effective PIT rate 4.3; Revenue change relative to baseline ...; Gini change relative to baseline 9.2
  - No deductions: Revenue change relative to baseline 1376.1; Average effective PIT rate 14.3; Gini change relative to baseline -1.6
  - No deductions + EITC: Revenue change relative to baseline 1066.2; Average effective PIT rate 14.3; Gini change relative to baseline -3.6
- Finding: Eliminating deductions and adding an EITC substantially increases PIT revenues while reducing inequality in LA5

### Climate Mitigation and Resilience
- Reduction of Gross Greenhouse Gas Emissions (excl. LULUCF) from Illustrative Scenario of Subsidy Removal and Carbon Tax (Percent of 2030 BAU): scenarios including Subsidy removal, $25 carbon tax, $50 carbon tax, $75 carbon tax, NDC shown by country
- Output and Fiscal Gains from Resilient Investment (Percent): country-level output and fiscal gains showing benefits from scaling up investment in structural and financial climate resilience, notably for Caribbean and Central American economies
- Recommendation: Strong mitigation policy actions (carbon taxes, removal of fuel subsidies, feebates, ETS, NbS, others) are needed to reach LAC’s NDCs; scaling up resilient investment could support macroeconomic performance

### Capacity Development
- Composition of CD Delivery to WHD Countries (Millions of US dollars): CD delivery fell substantially in FY21, but it is expected to recover in FY22 and over the medium-term
- CD in new and cross-cutting topics benefits from acquired expertise and experience (examples: CARTAC’s PFM, Macroeconomic, and Debt Management programs)
- Upcoming activities highlighted: Regional seminars on climate change, financial sector risks, Fintech regulation, use of big data; TA missions on CBDC adoption, digital money legislation

*IMF | Western Hemisphere Department - Regional Economic Outlook — presentation (October 2021)*

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_Source: https://www.imf.org/-/media/files/publications/reo/whd/2021/english/presentation.pdf_