## Regional Economic Outlook: Western Hemisphere (Selected Excerpts, October 2022)

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### High-level regional overview and recent shocks
- Western Hemisphere developments dominated by two distinct global shocks: the COVID-19 pandemic and the Russian invasion of Ukraine; a third shock—tightening of financial conditions—is shaping the outlook.
- After contracting sharply in 2020, most Western Hemisphere economies recovered strongly in 2021 and early 2022, helped by the global recovery, normalization of service sectors, and booming commodity prices.
- Inflation pressures built up due to pandemic-related disruptions, expansionary policies, rebounding demand, and the impact of the war in Ukraine on energy and food prices.
- LAC monetary authorities responded swiftly—well ahead of other economies—helping contain price pressures and keep long-term inflation expectations anchored, but inflation remains high.
- Outlook and risks:
  - Activity expected to decelerate throughout the Western Hemisphere in late 2022 and 2023.
  - Inflation pressures expected to recede gradually.
  - Downside risks dominate: tighter financial conditions; a more pronounced global slowdown; entrenched inflation; for LAC specifically, a sharp fall in commodity prices and social unrest.
- Policy guidance summary:
  - Monetary policy: avoid easing prematurely; stay the course; clearly communicate intentions to reduce uncertainty and keep inflation expectations anchored.
  - Fiscal policy: fiscal support to mitigate inflation impacts on the most vulnerable should be accompanied by compensating measures where fiscal space does not exist; strengthen fiscal frameworks and pursue inclusive consolidation that protects social objectives.
  - Growth: raise productivity and good-quality public and private investment; supply-side policies to strengthen human capital, simplify and modernize labor regulations, and lift barriers to firm entry and exit.

### United States — performance, outlook, and policy priorities
- Recent performance:
  - 2021: US real GDP expanded by 5.7 percent.
  - Core PCE inflation: 5.3 percent year over year in February 2022; 4.6 percent year over year in July 2022.
  - Employment cost index of private sector wages and salaries: grew by 5.7 percent year over year in Q2 2022.
- Federal Reserve actions:
  - Halted net asset purchases in March 2022.
  - Began reducing balance sheet size in June 2022.
  - Increased policy rates by 300 basis points since February 2022.
  - Signaled expectation to increase the federal funds rate quickly to about 4½ percent (median projection of FOMC participants).
- Financial conditions and currency:
  - US dollar appreciated by about 13 percent on a nominal effective basis since its trough in mid-2021.
- Projections:
  - Growth expected to slow to 1.6 percent in 2022 and to 1 percent in 2023.
  - Current account deficit expected to narrow from 4¾ percent of GDP in Q1 2022 to about 3 percent by end-2023.
  - Unemployment rate projected to rise to more than 5 percent by 2024.
  - Core PCE inflation expected to lower to about 2½ percent by end-2023.
- Policy trade-offs and recommendations:
  - If inflation proves more persistent, the Fed would need to tighten more, worsening growth prospects.
  - Supply-side reforms recommended: expanding childcare support, increasing migration, investing in infrastructure, expanding earned income tax credit, expanding educational opportunities (particularly for low-income students), improving funding for apprenticeships, introducing paid family leave, making a well-targeted, refundable child tax credit permanent, and expanding health care coverage and food assistance.
  - Climate strategy: multipronged approach including broad-based carbon pricing, sectoral “feebates”, regulatory actions, elimination of fossil-fuel subsidies; Inflation Reduction Act includes some elements but additional action is needed.

### Canada — performance, outlook, and policy priorities
- Recent performance:
  - 2020: Real GDP contracted by 5.2 percent.
  - 2021: Real GDP expanded by 4.5 percent and reached prepandemic level by end-2021.
  - Unemployment: record low of 4.9 percent in July 2022, then 5.4 percent in August 2022.
  - CPI inflation: 8.1 percent in June 2022; 7.0 percent in August 2022.
- Projections:
  - GDP growth moderating to 3.3 percent in 2022; projected at 1.5 percent in 2023.
  - Headline inflation projected to moderate to 6.9 percent by end-2022 and to 3.2 percent by end-2023.
- Policy actions and recommendations:
  - Bank of Canada hiked by 75 basis points in September 2022 to 3.25 percent and signaled additional rate hikes.
  - Recommendation: continue decisive withdrawal of monetary accommodation and clearly communicate to keep medium-term inflation expectations anchored.
  - Fiscal: support disinflation by steadily reducing the cyclically adjusted primary deficit; adopt a specific debt anchor supported by an operational rule; consider rules-based automatic stimulus.
  - Structural reforms: remove trade barriers, promote infrastructure investment, diversify economy beyond traditional sectors.
  - Climate: prepare for declining demand for oil and gas given sector importance.

### Latin America and the Caribbean (LAC) — developments, heterogeneity, and LA5 focus
- Recovery and drivers:
  - Region expanded by 6.9 percent in 2021; mobility returned to prepandemic levels in many areas; commodity price rebound and strong US recovery supported activity.
  - GAINS uneven: LA5 and other South American economies benefited from high commodity prices; Caribbean commodity exporters (notably Guyana) saw brisk recovery; CAPDR buoyed by exports, tourism rebound, and remittances.
- Financial systems and corporate sector:
  - Credit to private sector, particularly households, resurged in 2021 and early 2022 despite tightening conditions.
  - Financial systems remained well capitalized and liquid.
  - Corporate credit slowed; corporate balance sheets strengthened; corporate profitability recovered to prior peak levels.
- Inflation dynamics:
  - Inflation on upward trend since early 2021, reaching levels not seen since 1996.
  - August inflation: exceeded central banks’ tolerance bands by 6.2 percentage points on average in LA5; 3.8 percentage points in Brazil; 6.9 percentage points in Colombia.
  - Drivers: global food and energy price increases, pandemic supply disruptions, exchange rate pass-through, accelerating services’ prices from mobility normalization.
  - Monetary response: ex ante real policy rates reached 6 percent in August 2022, up from close to zero in mid-2021.
- Fiscal responses:
  - New fiscal measures to mitigate food and energy price impacts: estimated fiscal cost about 0.8 percent of GDP for 2022, in addition to 0.4 percent of existing subsidies; largely temporary and untargeted.
  - Fiscal stance projected broadly neutral in 2022 after withdrawal of pandemic stimulus in 2021; Chile tightened significantly in 2022; Brazil expected positive fiscal impulse in 2022.
  - Public debt rose close to 9 percentage points of GDP in 2020, reversed in 2021–22; public debt expected to be about 1.7 percent of GDP above prepandemic levels by end-2022.
- External environment and financial conditions:
  - External environment less favorable: tightening global financial conditions, weakening global demand, softening commodity prices (except natural gas).
  - Effects: weakened portfolio flows (bond-related), widened sovereign and corporate spreads, higher domestic yields, equity declines, currency weakening.
  - LA5 sovereigns and corporations reduced external debt issuances significantly recently.
- Regional projections (selected figures from Table 1; year-over-year percent change):
  - Latin America and the Caribbean: 2020 = –7.0; 2021 = 6.9; 2022 = 3.5; 2023 = 1.7; Difference from April 2022 WEO: 2022 = 1.0; 2023 = –0.8
  - LAC excluding Venezuela: 2020 = –6.6; 2021 = 7.0; 2022 = 3.4; 2023 = 1.7; Difference from April 2022 WEO: 2022 = 0.8; 2023 = –0.8
  - South America: 2020 = –6.6; 2021 = 7.3; 2022 = 3.6; 2023 = 1.6; Difference from April 2022 WEO: 2022 = 1.3; 2023 = –0.5
  - CAPDR: 2020 = –7.1; 2021 = 11.0; 2022 = 4.7; 2023 = 3.6; Difference from April 2022 WEO: 2022 = –0.1; 2023 = –0.4
  - Caribbean Tourism Dependent: 2020 = –14.7; 2021 = 7.8; 2022 = 5.2; 2023 = 3.6; Difference from April 2022 WEO: 2022 = 0.5; 2023 = –0.3
  - LA5 (memorandum): 2020 = –6.2; 2021 = 6.3; 2022 = 3.0; 2023 = 1.2; Difference from April 2022 WEO: 2022 = 1.1; 2023 = –0.9
  - Brazil: 2020 = –3.9; 2021 = 4.6; 2022 = 2.8; 2023 = 1.0; Difference from April 2022 WEO: 2022 = 2.0; 2023 = –0.4
  - Mexico: 2020 = –8.1; 2021 = 4.8; 2022 = 2.1; 2023 = 1.2; Difference from April 2022 WEO: 2022 = 0.1; 2023 = –1.3
- Inflation projection highlight:
  - Inflation in LAC projected to reach 14.6 percent by end-2022.

### Revisions, inflation drivers, and projected disinflation
- Revisions:
  - Global and regional inflation initially revised up by 4.6 percentage point compared with April 2022 WEO forecast; projected 9.5 percent by end-2023, a 2.4 percentage point revision.
- LA5 inflation (end-of-period projections):
  - LA5 expected to reach 7.8 percent by end-2022 and 4.9 percent by end-2023; converging to tolerance bands by end-2023 and to the inflation target by late 2024.
- Food and energy pass-through estimates:
  - For each 10 percent increase in international food and energy prices, headline inflation in LAC estimated to increase by 2 percentage points within a year; core inflation increases half as much.
  - About three-quarters of this impact explained by food prices.
  - Observed 2022 changes: international food prices rose 14 percent in 2022; international energy prices rose 41 percent in 2022.
  - These increases may have contributed by as much as 5 percentage points to headline inflation in LAC.
  - Projected 2023 softening: global food prices down about 6 percent and energy prices down about 13 percent in 2023; projected contribution to lowering headline inflation: about 1.6 percentage points during 2023–24.

### Growth outlook, scarring, and spillovers from US tightening
- Medium-term growth:
  - LAC growth projected to return to long-term (1980–2019) average of 2.5 percent.
  - LAC output projected to remain below its prepandemic trend by 4.8 percent by 2024.
- Sources of scarring:
  - Pandemic-related productivity losses main driver; employment losses secondary.
  - Human capital losses: students lost (fully or partially) two-thirds of in-person school days; poor internet connectivity hampered remote learning severely.
- Spillovers from US monetary tightening:
  - LA5 foreign and local currency yields historically very sensitive to US financial conditions.
  - Scenario assumptions: 1 percentage point increase in US two-year bond yield for long-term local currency yield; additional tightening increases likelihood of severe adverse growth outcomes.
  - Public debt impact scenario: effective interest rate on public debt increases by 110 and 190 basis points from baseline in 2023 and 2024, respectively; under this scenario gross public debt and net interest expenses for LA5 would rise materially by 2024.
  - Corporate stress test: effective interest rate on corporate borrowing assumed to increase by 150 basis points from latest level; higher borrowing costs may increase household debt-servicing difficulties and affect banks’ returns.
- Banking system resilience:
  - Banking systems show greater resilience via lower currency mismatches, greater liquidity buffers, and stronger regulation compared with previous episodes.

### Risks and scenario considerations
- Downside external risks:
  - Additional tightening of global financial conditions (tighter-than-anticipated US monetary policy).
  - Slower-than-anticipated global growth: US hard landing, European recession from energy crisis or war escalation, China COVID-19 lockdowns.
  - Natural disasters and extreme weather events increasing due to climate change.
  - Global fragmentation from Russia’s invasion of Ukraine.
- Upside risks:
  - Higher-than-anticipated commodity prices benefiting net commodity exporters but worsening regional inflation.
  - New export opportunities and gains from green-technology demand for metals in Brazil, Chile, Mexico, and Peru, conditional on investment and financing.
  - Faster-than-anticipated productivity growth via accelerated digitalization.
- Regional and domestic risks:
  - Entrenched inflation from rising wage pressures, weaker currencies, and unwinding of tax reductions and administered price caps could require additional monetary tightening.
  - Social tensions increased due to growth deceleration, the pandemic, and spikes in food and energy prices; sustained high costs could lead to social unrest.

### Policy recommendations — Short-term priorities
- Monetary policy:
  - Do not ease prematurely; stay the course.
  - Maintain vigilance: nominal wages trending upward; currency depreciations may pass through to domestic prices; one-year-ahead inflation expectations in LA5 have edged upward.
- Fiscal policy and public debt:
  - Manage fiscal risks from higher interest bills amid limited fiscal space and elevated social spending demands.
  - Strengthen fiscal frameworks, rebuild fiscal space, and pursue inclusive fiscal consolidation that protects the poor.
  - Example consolidation requirement for LA5: reversing by 2027 at least half of the increase in public debt observed since 2019 would require sustaining a primary balance of about 1.8 percent of GDP during 2023–27—1.3 percentage points of GDP higher than currently projected.
- Financial stability:
  - Monitor nonperforming loans; ensure adequate loss provisions and write-offs.
  - Deploy selected macroprudential tools, including countercyclical capital buffers, as needed.
  - Strengthen prudential supervision and regulation of nonbank financial corporations.
  - Monitor nonfinancial firms’ and households’ balance sheets for pockets of debt overhang.
- Structural and growth policies:
  - Boost productivity via reforms: streamline business and labor regulations; improve insolvency frameworks; ease firm entry and exit; bolster human capital through digitalization, basic education, and vocational training.
  - Strengthen financial inclusion and reduce informality.
  - Close labor participation gap by strengthening childcare and leave policies.
  - Climate policy: remove fuel subsidies, increase carbon taxes, adopt climate-supportive regulations, and scale up green investments; invest in resilience and adaptation with private and international support.

### IMF support and capacity development
- IMF engagement since pandemic:
  - Made available close to $200 billion to 24 countries in the region, including canceled credit lines; $135 billion corresponded to Flexible Credit Lines for countries with strong fundamentals.
  - 2021 general SDR allocation directed approximately $52 billion to LAC.
  - Resilience and Sustainability Trust to help low-income and vulnerable middle-income countries build resilience and provide affordable financing for climate and pandemic preparedness.
  - Capacity development spending for the region expected to double in the next few years, with new areas such as climate- and gender-related activities.

### Sectoral labor productivity, remittances, and nonbank finance (selected findings)
- Sectoral labor productivity:
  - Measure: value added per employer in 2017; constant USD PPP, thousands; eight sectors analyzed (agriculture, construction, financial and business services, manufacturing, mining, trade services, utilities, other services).
  - Policy implications: prioritize human capital investment and revert educational losses; modernize business and labor regulation; strengthen insolvency frameworks.
- Remittances and digitalization:
  - Pre-pandemic: 23 percent of remittances sent through digital means.
  - Share of instant digital remittances rose from 8 percent in 2016 to about 17 percent in 2021.
  - Penetration in LAC remains below global average of 24 percent.
  - Mobile money remittances share in LAC: 0.2 percent (global average: 1 percent; sub-Saharan Africa average: 23 percent).
  - Mobile phone access in LAC population: 78 percent.
- Nonbank financial sector:
  - Nonbank sector rose fourfold in size over last 15 years (driven by Chile and Mexico) and outpaced other emerging markets.
  - Banking system supplies about 90 percent of total credit to private sector.
  - Example stress: some collective investment funds in Colombia saw a 32 percent decline in total assets after significant withdrawals.
  - Risks: weaker liquidity and funding profiles, higher leverage, more volatile returns, lighter supervision; policy implication: strengthen prudential supervision and monitor nonbanks closely.

### Fiscal indicators (selected entries from Appendix Table 2)
- Table coverage: 2019, 2020, 2021, 2022, 2023 (projections) for primary expenditure, primary balance, and gross debt (percent of GDP); cutoff date September 26, 2022.
- North America (selected):
  - North America — Primary expenditure: 32.6, 42.3, 38.8, 35.0, 34.8; Primary balance: –2.7, –11.7, –7.7, –2.1, –3.1; Gross debt: 104.1, 129.6, 123.2, 116.9, 117.4.
  - Canada — Primary expenditure: 37.7, 50.1, 43.4, 40.3, 39.2; Primary balance: 0.1, –10.9, –5.5, –2.6, –1.4; Gross debt: 87.2, 117.8, 112.9, 102.2, 98.7.
  - United States — Primary expenditure: 32.9, 42.7, 39.4, 35.2, 35.1; Primary balance: –3.2, –12.4, –8.4, –2.2, –3.5; Gross debt: 108.8, 134.5, 128.1, 122.1, 122.9.
- South America (selected):
  - South America — Primary expenditure: 29.6, 34.1, 29.8, 28.9, 28.3; Primary balance: –1.2, –7.5, –1.4, –0.4, –0.8; Gross debt: 75.7, 86.1, 79.4, 75.9, 75.1.
  - Brazil — Primary expenditure: 30.5, 36.7, 28.7, 29.0, 28.7; Primary balance: –0.9, –9.1, 0.7, 0.8, –0.8; Gross debt: 87.9, 98.7, 93.0, 88.2, 88.9.
  - Peru — Primary expenditure: 19.9, 24.7, 22.2, 21.9, 22.3; Primary balance: –0.2, –6.9, –1.2, –1.0, –1.2; Gross debt: 26.9, 35.0, 36.4, 34.8, 35.7.
- CAPDR and Central America (selected):
  - CAPDR — Primary expenditure: 17.1, 20.2, 18.1, 17.5, 17.2; Primary balance: –0.6, –4.4, –0.9, –0.5, –0.2; Gross debt: 46.3, 59.5, 55.9, 54.3, 53.8.
  - Panama — Primary expenditure: 20.0, 26.0, 22.4, 21.3, 20.6; Primary balance: –1.8, –8.0, –4.6, –1.9, –1.0; Gross debt: 41.9, 65.6, 58.4, 55.6, 55.1.
- Caribbean (selected):
  - Caribbean: Tourism Dependent — Primary expenditure: 22.1, 27.1, 26.7, 24.4, 23.2; Primary balance: 3.6, –1.6, –0.2, 1.2, 2.1; Gross debt: 81.2, 99.8, 99.2, 90.8, 85.9.
  - Jamaica — Primary expenditure: 23.5, 25.6, 23.7, 22.4, 22.4; Primary balance: 7.1, 3.5, 6.5, 5.1, 4.7; Gross debt: 94.3, 108.1, 92.3, 86.2, 79.7.
- Commodity exporters (selected):
  - Commodity Exporters — Primary expenditure: 29.0, 30.4, 27.8, 22.6, 21.9; Primary balance: –3.0, –8.0, –5.6, 0.2, 0.8; Gross debt: 49.9, 66.0, 62.0, 49.6, 47.0.
  - Guyana — Primary expenditure: 27.6, 30.0, 25.3, 15.6, 15.4; Primary balance: –2.0, –7.3, –6.7, –0.4, –0.2; Gross debt: 43.6, 51.1, 42.9, 22.8, 20.9.
- Memoranda:
  - Latin America and the Caribbean — Primary expenditure: 26.7, 30.4, 27.1, 26.8, 26.4; Primary balance: –0.5, –5.5, –1.0, –0.1, –0.5; Gross debt: 67.9, 77.4, 71.8, 69.3, 69.2.
  - LAC excluding Venezuela — Primary expenditure: 26.8, 30.6, 27.3, 27.0, 26.6; Primary balance: –0.3, –5.5, –1.0, 0.0, –0.4; Gross debt: 66.0, 74.8, 69.8, 67.8, 67.8.

*International Monetary Fund | October 2022*

### Preface v

### Preface v

### Preparers and contributions
- Prepared by Santiago Acosta-Ormaechea with contributions from Maximiliano Appendino, Isabela Duarte, Chao He, Takuji Komatsuzaki, and Samuel Pienknagura, under the supervision of Anna Ivanova and the guidance of Gustavo Adler, with overall direction of Ilan Goldfajn and James Morsink.
- Research assistance coordinated by Genevieve Lindow; research assistants: Evelyn Carbajal, Erdem Dorjkhand, Kenji Moreno, Gabriel Moura Queiroz.
- Boxes and country focus contributions coordinated by Metodij Hadzi-Vaskov, Andrew Edward Hodge, Lucy Qian Liu, Adam Siddiq, Bert van Selm, Joyce Wong.
- Annexes 4 and 5 prepared by Yorbol Yakhshilikov and Yuanchen Yang, respectively.
- Report includes content from three background papers prepared by Santiago Acosta-Ormaechea, Maximiliano Appendino, Isabela Duarte, Chao He, Takuji Komatsuzaki, Samuel Pienknagura, and Yuanchen Yang, with guidance from Jorge Roldós.
- Production, editing, translation, and coordination support listed among named staff.
- This report reflects developments and staff projections through September 26, 2022.

### High-level regional overview and recent shocks
- Western Hemisphere developments dominated by two distinct global shocks: the COVID-19 pandemic and the Russian invasion of Ukraine; a third shock—tightening of financial conditions—is shaping the outlook.
- After contracting sharply in 2020, most Western Hemisphere economies recovered strongly in 2021 and early 2022, helped by the global recovery, normalization of service sectors, and booming commodity prices.
- Inflation pressures built up due to pandemic-related disruptions, expansionary policies, rebounding demand, and the impact of the war in Ukraine on energy and food prices.
- LAC monetary authorities responded swiftly—well ahead of other economies—helping contain price pressures and keep long-term inflation expectations anchored, but inflation remains high.
- Amid global monetary and financial tightening and a slowdown in global growth and softening commodity prices:
  - Activity is expected to decelerate throughout the Western Hemisphere in late 2022 and 2023.
  - Inflation pressures are expected to recede gradually.
- Downside risks dominate the outlook and stem from:
  - Tighter financial conditions.
  - A more pronounced global slowdown.
  - Entrenched inflation.
  - For LAC specifically: a sharp fall in commodity prices and social unrest are important risks.
- Policy guidance:
  - Monetary policy should avoid easing prematurely and must stay the course while clearly communicating intentions to reduce uncertainty and keep inflation expectations anchored.
  - Fiscal support to mitigate inflation impacts on the most vulnerable should be accompanied by compensating measures where fiscal space does not exist, and should support monetary efforts to tame inflation.
  - Given rising financing costs, strengthening fiscal frameworks and advancing inclusive fiscal consolidation that protects key social objectives is essential to put public debt on a firm downward path while ensuring social stability.
  - Boosting LAC medium-term growth requires raising productivity and good-quality public and private investment; supply-side policies should strengthen human capital, simplify and modernize labor regulations, and lift barriers to firm entry and exit.

### United States: recent performance, outlook, and policy priorities
- 2021: US real GDP expanded by 5.7 percent.
- Employment rebounded rapidly; unemployment returned to end-2019 levels by early 2022 while participation rate remains below prepandemic values.
- Core personal consumption expenditure (PCE) inflation:
  - Rose to 5.3 percent year over year in February 2022.
  - Declined to 4.6 percent year over year in July 2022.
- Employment cost index of private sector wages and salaries: grew by 5.7 percent year over year in the second quarter of 2022.
- Federal Reserve actions and signals:
  - Halted net asset purchases in March 2022.
  - Began reducing balance sheet size in June 2022.
  - Increased policy rates by 300 basis points since February 2022.
  - Signaled expectation to increase the federal funds rate quickly to about 4½ percent (median projection of FOMC participants).
- Financial conditions and currency:
  - Tightening of monetary policy increased Treasury yields and triggered sell-offs in equity and bond markets.
  - US dollar appreciated by about 13 percent on a nominal effective basis since its trough in mid-2021.
- Growth projections and dynamics:
  - Growth expected to slow to 1.6 percent in 2022.
  - Real GDP growth projected to slow to 1 percent in 2023.
  - Current account deficit expected to narrow from 4¾ percent of GDP in the first quarter of 2022 to about 3 percent by the end of 2023.
  - Slowing economy projected to raise the unemployment rate to more than 5 percent by 2024.
  - Core PCE inflation expected to lower to about 2½ percent by end-2023.
- Policy trade-offs:
  - If inflation proves more persistent, the Federal Reserve would need to tighten monetary policy more, worsening growth prospects.
  - Supply-side reforms recommended to boost productivity, expand labor force, and reduce poverty, including: expanding public support for childcare, increasing migration, investing in infrastructure, expanding earned income tax credit, increasing educational opportunities (particularly for low-income students), improving funding for apprenticeships, introducing paid family leave, making a well-targeted, refundable child tax credit permanent, and expanding health care coverage and food assistance.
  - Climate goals require multipronged strategy: broad-based carbon pricing, sectoral “feebates” (tax/subsides for above/below average emissions), regulatory actions, elimination of fossil-fuel subsidies; the Inflation Reduction Act includes some elements but additional action is needed.

### Canada: recent performance, outlook, and policy priorities
- 2020: Real GDP contracted by 5.2 percent.
- 2021: Real GDP expanded by 4.5 percent and reached prepandemic level by end-2021.
- Labor market:
  - Unemployment rate fell to a record low of 4.9 percent in July 2022, then increased to 5.4 percent in August 2022.
  - Labor force participation returned to prepandemic level; job vacancies elevated and driving wage growth.
- Consumer price index inflation:
  - Reached 8.1 percent in June 2022 (a 40-year high).
  - Moderated to 7.0 percent in August 2022.
- Growth projections:
  - GDP growth moderating to 3.3 percent in 2022.
  - GDP growth projected at 1.5 percent in 2023.
- Inflation outlook:
  - Headline inflation projected to moderate to 6.9 percent by the end of 2022.
  - Headline inflation projected to moderate to 3.2 percent by the end of 2023.
- Policy actions and recommendations:
  - Bank of Canada hiked by 75 basis points in September 2022, bringing policy rate to 3.25 percent and signaled additional rate hikes.
  - Recommendation that Bank of Canada continue decisive withdrawal of monetary accommodation and clearly communicate to keep medium-term inflation expectations anchored.
  - Fiscal policy should support disinflation by steadily reducing the cyclically adjusted primary deficit.
  - To enhance fiscal credibility and transparency, federal government could strengthen medium-term fiscal framework by adopting a specific debt anchor supported by an operational rule to revert fiscal position to the debt anchor after shocks.
  - Fiscal policy could be enhanced through rules-based automatic stimulus.
  - Structural reforms recommended: remove trade barriers, promote infrastructure investment, diversify economy beyond traditional sectors to raise productivity.
  - On climate transition: prepare for declining demand for oil and gas given sector importance.

### Latin America and the Caribbean (LAC): recent developments and heterogeneity
- General summary:
  - Region’s recovery continued on a firm footing in the first half of 2022, at different speeds across subregions, and accompanied by rising inflation pressures.
  - Mobility generally returned to prepandemic levels due to high vaccination rates and milder COVID-19 variants, enabling reopening of contact-intensive sectors.
  - Rebound in commodity prices (further propelled by Russia’s invasion of Ukraine) supported activity; terms of trade played a supporting role.
  - Strong recovery in the United States and still-accommodative global financial conditions through early 2022 also supported activity.
  - GDP surpassed prepandemic levels in most subregions.
- Multispeed recovery details:
  - LA5 (Brazil, Chile, Colombia, Mexico, Peru) and other South American economies continued firmly in early 2022, supported by high commodity prices.
  - Caribbean commodity exporters recovered briskly, driven largely by Guyana’s rapid oil sector expansion.
  - Central America, Panama, and the Dominican Republic (CAPDR): buoyant exports, solid rebound of tourism (helped by rapid US recovery), and policy support in some cases helped solidify recovery in 2021 and early 2022.
  - Strong remittances (driven by US rebound and increased digitalization; see Annex 4) further propelled recovery, though activity slowed more recently.
  - Tourism-dependent Caribbean economies still lag as tourism has yet to return to prepandemic levels despite accelerating rebound.
- LA5 specifics:
  - Activity in first half of 2022 supported by firm growth in private domestic demand—favored by accommodative policies feeding into early 2022 in some cases (Chile, Colombia)—and robust export performance due to solid global demand and high export prices.
  - Both service sector and manufacturing recovered strongly, propelling output beyond prepandemic levels except for Mexico.
  - Employment in LA5 has firmly surpassed prepandemic levels, with heterogeneity across gender and skill levels.
  - Real wages after declining in late 2021 appear to have reached bottom and have [text cuts off in source].

### Figures and indices highlighted in source (text references)
- Figure 1 (United States): real GDP growth, core PCE inflation, and federal funds target rate (year-over-year percent change series referenced).
- Figure 2 (Canada): real GDP growth, core inflation, and target rate (year-over-year percent change series referenced).
- Figure 3 (LAC: Recent Economic Developments) panels include:
  - Changes in Commodity Terms of Trade (Percent change; index weighted by GDP).
  - LAC: Real GDP Level (Index: 2019 = 100).
  - LAC: Remittances and Tourist Arrivals (Index: December 2019 = 100).
  - LA5: Private consumption, gross fixed capital formation, exports, imports.
  - Country-level panels for Brazil, Chile, Colombia, Mexico, Peru: real wage, employment, economic activity.

*International Monetary Fund | October 2022*

### 4. LA5: Real GDP Demand Components

### 4. LA5: Real GDP Demand Components

### Financial systems, credit, and corporate sector
- Economic activity in 2021 and early 2022 was supported by the resurgence of credit to the private sector, particularly households, despite tightening financial conditions.
- Financial systems in most countries in the region remained well capitalized and liquid throughout the downturn.
- Corporate credit slowed in 2021 and remained subdued in early 2022, partly reflecting the unwinding of pandemic-related liquidity support from 2020.
- Corporate balance sheets strengthened in 2021 and the first half of 2022, helped by:
  - the robust economic recovery,
  - high commodity prices,
  - contained wage growth in some cases.
- Corporate profitability recovered to levels last seen during previous peaks in commodity prices, contributing to:
  - weak demand for credit,
  - improving return on assets,
  - improving interest coverage ratio,
  - improving debt-at-risk indicators.

### Inflation dynamics and monetary policy
- Inflation in LAC has been on an upward trend since early 2021, reaching levels not seen since 1996.
- Inflation outcomes by subgroup:
  - Inflation exceeded central banks’ tolerance bands by 6.2 percentage points, on average, in the August inflation print for LA5 economies.
  - Inflation exceeded tolerance bands by 3.8 percentage points in Brazil.
  - Inflation exceeded tolerance bands by 6.9 percentage points in Colombia.
- Drivers of higher inflation in LA5 relative to other emerging markets:
  - larger impact of global food and energy price increases due to consumption basket composition,
  - pandemic-related supply disruptions and rapidly rising commodity prices (imported inflation),
  - pass-through from exchange rate depreciations (notably in Q1 2020 and recently),
  - accelerating services’ prices amid normalization of mobility and reopening of contact-intensive sectors.
- The war in Ukraine amplified inflation pressures through higher food and energy prices, with an especially adverse impact on the poor.
- Inflation pressures have become broad-based, feeding into core inflation and wages and showing signs of increasing persistence.
- Monetary policy response:
  - LAC’s monetary authorities raised policy rates swiftly—ahead of most other emerging market and advanced economies.
  - Ex ante real policy rates reached 6 percent in August 2022, up from close to zero in mid-2021, likely bringing monetary policy into contractionary territory in most cases.
  - Headline inflation in LA5 has shown some recent signs of stabilizing, but core inflation continued rising in some countries and shorter-term inflation expectations have been rising.

### Fiscal policy responses and public debt
- Most countries in LAC introduced fiscal measures (mostly tax cuts and exemptions or subsidies to households and specific industries) to mitigate the impact of high food and energy prices after the war in Ukraine.
- Estimated fiscal cost of new measures:
  - about 0.8 percent of GDP for 2022, in addition to 0.4 percent of existing subsidies.
- Characteristics of measures:
  - largely announced as temporary,
  - largely untargeted.
- Fiscal stance and projections:
  - Fiscal policy in LAC is projected to remain broadly neutral in 2022 after withdrawal of pandemic-related stimulus in 2021.
  - Chile tightened fiscal policy significantly in 2022 after a highly expansionary stance in 2021.
  - A positive fiscal impulse is expected in Brazil during 2022 amid higher transfers and tax cuts.
- Fiscal deficits and debt:
  - Overall fiscal deficit in LAC is expected to remain broadly unchanged from 2021 and marginally higher than in 2019.
  - Net interest payments account for a larger share of the deficit due to tightened financial conditions and shortened public debt maturity.
  - Public debt ratios rose close to 9 percentage points of GDP in 2020, reached historical highs, then reversed in 2021–22 due to inflation surprises and a solid growth rebound.
  - Public debt is expected to be about 1.7 percent of GDP above prepandemic levels by the end of 2022, remaining considerably above levels in other emerging markets.

### External environment and financial conditions
- External environment turning less favorable: tightening global financial conditions, weakening global demand, and softening commodity prices (except natural gas).
- Financial market effects in LAC:
  - portfolio flows into the region weakened, particularly bond-related flows,
  - foreign-currency sovereign and corporate spreads widened,
  - domestic currency yields rose,
  - equity prices declined,
  - domestic currencies weakened (fluctuating with commodity prices).
- With rising financing costs and retrenching capital flows, LA5 sovereigns and corporations reduced external debt issuances significantly in recent months.
- Balance of payments and capital flow indicators show weakening amid these shifts.

### Regional outlook and projections
- LAC growth:
  - Expanded by 6.9 percent in 2021.
  - Projected to grow by 3.5 percent in 2022—entailing a 1 percentage point upward revision to 2022 growth relative to the April 2022 WEO forecast.
  - Projected to slow to 1.7 percent in 2023—a downward revision of the 2023 forecast by 0.8 percentage point relative to April 2022 WEO projections.
- Growth drivers shifting:
  - Private consumption and investment are expected to play a more muted role in late 2022 and 2023.
  - Public consumption and exports are expected to return to prepandemic growth rates.
- Risks and channels:
  - Tighter global financial conditions weigh on domestic activity via lower capital inflows, higher yields, and slower private credit.
  - Weakening commodity prices will affect net commodity exporters in South America and the Caribbean.
  - Lower remittances expected to affect Central America, Panama, and the Dominican Republic.
  - Tourism-dependent Caribbean countries likely to see weaker tourism and competitiveness effects as the US dollar appreciates.
- Table 1: Western Hemisphere: Real GDP Growth (Year-over-year percent change)
  - United States: 2020 = –3.4; 2021 = 5.7; 2022 = 1.6; 2023 = 1.0; Difference from April 2022 WEO: 2022 = –2.1; 2023 = –1.3
  - Canada: 2020 = –5.2; 2021 = 4.5; 2022 = 3.3; 2023 = 1.5; Difference from April 2022 WEO: 2022 = –0.6; 2023 = –1.3
  - Latin America and the Caribbean: 2020 = –7.0; 2021 = 6.9; 2022 = 3.5; 2023 = 1.7; Difference from April 2022 WEO: 2022 = 1.0; 2023 = –0.8
  - LAC excluding Venezuela: 2020 = –6.6; 2021 = 7.0; 2022 = 3.4; 2023 = 1.7; Difference from April 2022 WEO: 2022 = 0.8; 2023 = –0.8
  - South America: 2020 = –6.6; 2021 = 7.3; 2022 = 3.6; 2023 = 1.6; Difference from April 2022 WEO: 2022 = 1.3; 2023 = –0.5
  - CAPDR: 2020 = –7.1; 2021 = 11.0; 2022 = 4.7; 2023 = 3.6; Difference from April 2022 WEO: 2022 = –0.1; 2023 = –0.4
  - Caribbean Tourism Dependent: 2020 = –14.7; 2021 = 7.8; 2022 = 5.2; 2023 = 3.6; Difference from April 2022 WEO: 2022 = 0.5; 2023 = –0.3
  - Other Caribbean: 2020 = 1.3; 2021 = 3.4; 2022 = 16.7; 2023 = 9.3; Difference from April 2022 WEO: 2022 = 2.8; 2023 = –2.7
  - Commodity Exporters (subset): 2020 = 4.0; 2021 = 6.1; 2022 = 24.6; 2023 = 12.8; Difference from April 2022 WEO: 2022 = 4.4; 2023 = –3.6
  - Memorandum: LA5: 2020 = –6.2; 2021 = 6.3; 2022 = 3.0; 2023 = 1.2; Difference from April 2022 WEO: 2022 = 1.1; 2023 = –0.9
  - Brazil: 2020 = –3.9; 2021 = 4.6; 2022 = 2.8; 2023 = 1.0; Difference from April 2022 WEO: 2022 = 2.0; 2023 = –0.4
  - Mexico: 2020 = –8.1; 2021 = 4.8; 2022 = 2.1; 2023 = 1.2; Difference from April 2022 WEO: 2022 = 0.1; 2023 = –1.3

### Inflation projection highlight
- Inflation in LAC is projected to remain high for some time, reaching 14.6 percent by the end of 2022.

*International Monetary Fund | October 2022*

### 4.6 percentage point upward revision compared

### 4.6 percentage point upward revision compared

### Revisions and inflation outlook
- Global and regional forecasts revised up: inflation initially revised up by 4.6 percentage point compared with the April 2022 World Economic Outlook forecast—and 9.5 percent by the end of 2023, a 2.4 percentage point revision (Table 2).
- Drivers of revisions:
  - Higher and more persistent inflation than anticipated, partly driven by high energy and food prices.
  - Faster-than-expected expansion of domestic demand in some cases.
- Table 2 (selected entries, end-of-period inflation, year-over-year percent change; projections and difference from April 2022 WEO):
  - United States: 1.5 7.4 6.4 2.3 1.1 0.0
  - Canada: 0.7 4.7 6.9 3.2 2.3 1.0
  - Latin America and the Caribbean: 6.3 11.6 14.6 9.5 4.6 2.4
  - South America: 8.0 14.1 18.0 12.1 5.9 3.2
  - CAPDR: 2.8 5.1 7.8 4.4 2.2 0.5
  - Caribbean Tourism Dependent: 2.5 5.4 8.3 4.3 8.3 4.3
  - LA5 (memorandum): 3.5 8.3 7.8 4.9 1.5 1.4
  - Brazil (memorandum): 4.5 10.1 6.0 4.7 −0.7 1.2
  - Mexico (memorandum): 3.2 7.4 8.5 4.8 2.6 1.4
- For LA5 (Brazil, Chile, Colombia, Mexico, Peru):
  - Inflation expected to reach 7.8 percent by the end of 2022 and 4.9 percent by the end of 2023.
  - Inflation remains considerably above central banks’ tolerance bands throughout 2022–23, converging to the bands by the end of 2023 and to the inflation target by late 2024.

### Impact of food and energy prices on inflation
- Estimated pass-through: For each 10 percent increase in international food and energy prices, headline inflation in LAC is estimated to increase by 2 percentage points within a year; core inflation increases half as much.
  - About three-quarters of this impact is explained by food prices.
- Observed 2022 price changes and implied impact:
  - International food prices rose 14 percent in 2022.
  - International energy prices rose 41 percent in 2022.
  - These increases may have contributed by as much as 5 percentage points to headline inflation in LAC.
- Projected 2023 softening and implied disinflation:
  - Projected softening: global food prices down about 6 percent and energy prices down about 13 percent in 2023.
  - Projected contribution to lowering headline inflation: about 1.6 percentage points during 2023–24.

### Growth outlook and medium-term scarring
- Short- to medium-term growth projections:
  - Over the medium term, LAC’s growth is projected to return to its long-term (1980–2019) average of 2.5 percent.
  - LAC’s output is projected to remain below its prepandemic trend by 4.8 percent by 2024.
- Sources of scarring:
  - Pandemic-related losses in productivity are the main driver of the output gap, with employment losses contributing to a lesser extent.
  - Interaction of COVID-19 sectoral impacts and obstacles to factor reallocation: informality, rigid labor market regulations, frictions to firm entry or exit.
  - Human capital losses: students in the region lost (fully or partially) two-thirds of in-person school days; poor internet connectivity hampered remote learning severely.

### Spillovers and vulnerabilities from tighter US monetary conditions
- Spillover mechanics and sensitivity:
  - LA5 economies’ foreign and local currency yields have historically been very sensitive to US financial conditions.
  - Impulse assumptions: 1 percentage point increase in US two-year bond yield for long-term local currency yield and one standard deviation tightening of US two-year bond yield on FOMC days for other variables; long-term local-currency yields impact computed within six months.
- Growth-at-risk and tail outcomes:
  - Additional tightening in US monetary policy materially increases the likelihood of severe adverse growth outcomes or “tail events” for LA5.
- Public debt dynamics under an additional US tightening scenario:
  - Assumption: effective interest rate of each country’s public debt increases by 110 and 190 basis points from the baseline in 2023 and 2024, respectively, as a result of rising risk-free rate and risk premium.
  - Under this plausible scenario, gross public debt and net interest expenses for LA5 would rise materially by 2024, reaching high levels in historical perspective and relative to peer countries (EMDE and EMDE investment-grade).
  - Exercise abstracted from growth and exchange rate effects, which are likely to worsen debt dynamics.
- Private sector vulnerabilities:
  - Nonbank borrowing rose markedly in larger economies before the pandemic.
  - Corporate vulnerability stress test: higher interest rate scenario assumes effective interest rate on each corporate increases by 150 basis points from the latest level.
  - Higher borrowing costs may increase households facing debt-servicing difficulties, affecting banks’ returns, especially where consumer loans are large.
  - Banking systems show greater resilience via lower currency mismatches, greater liquidity buffers, and stronger regulation compared with previous episodes.

### Risks to the outlook
- Downside external risks:
  - Additional tightening of global financial conditions (tighter-than-anticipated US monetary policy).
  - Slower-than-anticipated global growth: US hard landing, European recession from energy crisis or war escalation, China COVID-19 lockdowns.
  - Natural disasters and extreme weather events increasing in frequency and intensity due to climate change.
  - Global fragmentation from Russia’s invasion of Ukraine could reduce cooperation on structural challenges and disrupt international transactions.
- Upside risks:
  - Higher-than-anticipated commodity prices benefiting net commodity exporters but worsening regional inflation.
  - New export opportunities and gains from green-technology demand for metals in Brazil, Chile, Mexico, and Peru, conditional on additional investment and financing.
  - Faster-than-anticipated productivity growth via accelerated digitalization post-pandemic.
- Regional and domestic risks:
  - Entrenched inflation from increasing wage pressures, weaker domestic currencies, and unwinding of tax reductions and caps on administered prices could require additional monetary tightening.
  - Social tensions have increased due to growth deceleration, the pandemic, and spikes in food and energy prices, exacerbating food insecurity, poverty, and inequality; sustained high food and energy costs could lead to social unrest.

### Policy recommendations — Short-term priorities
- Monetary policy:
  - Monetary policy should not ease prematurely and must stay the course.
  - Swift policy rate responses by major LAC central banks were instrumental in maintaining long-term inflation expectations broadly anchored despite sizable inflation surprises.
  - Continued vigilance warranted because:
    - Nominal wages are trending upward and accelerating.
    - Currency depreciations may pass through to domestic prices.
    - One-year-ahead inflation expectations in LA5 economies have recently edged upward.
- Other priority considerations implied by analysis:
  - Manage fiscal risks from higher interest bills amid limited fiscal space and elevated social spending demands.
  - Monitor sovereign-bank linkages given rising bank exposure to sovereigns in several economies.
  - Address private sector debt pockets, especially nonbank borrowing and household vulnerability to higher rates.
  - Strengthen resilience to external shocks and facilitate factor reallocation to limit medium-term scarring.

*Source: International Monetary Fund, Regional Economic Outlook: Western Hemisphere (October 2022).*

### Annex 2).

### Annex 2)

### Monetary Policy: stay the course to anchor inflation expectations
- With inflation running well above target and output near or above potential in most countries, monetary authorities should avoid easing prematurely, must stay the course, and be ready to act promptly if new inflation shocks occur or there is incipient evidence of a de-anchoring of medium-term inflation expectations.
- Maintaining a tight monetary stance may become more challenging as economic activity slows, but authorities should be guided by the long-term benefits of low inflation rather than the short-lived trade-off between inflation and output.
- Calibrating policy under high uncertainty is challenging, but the costs of later restoring price stability if inflation becomes entrenched are very high.
- Effective communication of policy intentions—including what developments will guide future policy actions—will be key to reducing policy uncertainty and maintaining anchored inflation expectations.
- With global financial conditions tightening, LA5 economies may face bouts of currency pressures; exchange rates should be allowed to operate as shock absorbers.
- Foreign exchange intervention could be deployed to address disorderly market conditions and prevent abrupt exchange rate movements, particularly where currency mismatches or pass-through to already-high inflation are a concern.

### Fiscal policy: protect the vulnerable, help tame inflation, and rebuild fiscal space
- Governments provided support to vulnerable households to mitigate higher energy and food costs and preserve social cohesion; much of this support was announced as temporary, but the fiscal cost risk could rise if high prices persist.
- Domestic prices should be allowed to converge to international prices as international food and energy prices recede or by gradually withdrawing fiscal support if high international prices prove persistent.
- Strengthen the targeting of support for vulnerable groups to contain fiscal costs while incentivizing production and restraining demand for scarce goods.
- Fiscal support to mitigate the inflation shock should be accompanied by compensating measures where fiscal space does not exist, and should support monetary authorities’ efforts to tame inflation.
- Strengthening fiscal accounts will increase resilience to changing global financial conditions.

### Financial stability and private sector balance sheets
- Bank regulators should continue monitoring the evolution of nonperforming loans as financial conditions tighten while ensuring adequate loss provisions and write-offs.
- Selected macroprudential tools, including countercyclical capital buffers, may need to be deployed to make the financial system more resilient to shocks as conditions tighten.
- Policymakers should strengthen prudential supervision and regulation of nonbank financial corporations, which have grown in importance in the region.
- Balance sheets of nonfinancial firms and households should be monitored closely as pockets of debt overhang could emerge after the pandemic and tightening financial conditions.

### Public debt dynamics and medium-term fiscal adjustment needs
- LAC’s public debt is projected to remain broadly stable over the medium term, though above already-elevated prepandemic levels and with significant heterogeneity across subregions.
- Public debt of LA5 economies is expected to follow an upward trajectory over the medium term; debt in other economies of the region is projected to decrease, especially in countries that embarked on debt-restructuring operations and in commodity-exporting Caribbean economies experiencing strong growth.
- Public debt foreign-currency exposures and gross financing needs are expected to remain high by historical standards and relative to peers, partly reflecting the shortening of debt maturities since the outbreak of the pandemic.
- Rapidly rising ex ante real interest rates would exert upward pressure on debt dynamics and require larger fiscal surpluses to stabilize debt.
- Progress in reducing fiscal deficits during 2021–22 largely reflects inflation surprises—which have helped contain real spending and wage growth—instead of structural measures to durably reduce spending, implying pressures to unwind some savings could mount.
- Reining in real spending growth will require well-designed expenditure caps because inflation surprises are unlikely to contribute again.
- Example fiscal consolidation requirement: reversing by 2027 at least half of the increase in public debt observed in LA5 economies since 2019 would require, under baseline assumptions, sustaining a primary balance of about 1.8 percent of GDP during 2023–27—1.3 percentage points of GDP higher than currently projected, sizably higher than the region’s historical average, and higher than the level required in other emerging markets.

### Inclusive fiscal consolidation and revenue/expenditure reforms
- Fiscal consolidation must be inclusive and socially sensitive: protect the poor while maintaining longer-term fiscal sustainability and raising potential growth.
- Revenue mobilization measures:
  - Strengthen personal income taxation by improving minimum and maximum income thresholds, statutory rates and exemptions, and providing well-targeted compensations to low-wage earners—particularly female workers—to incentivize formal labor participation.
  - Improve efficiency of value-added tax and corporate income tax.
  - Use the ongoing global corporate income tax reform opportunity to revisit corporate taxation, including taxation of rents from natural-resource extraction that safeguard investment and growth.
- Expenditure rationalization should focus on wages and goods and services, along with social benefits and pension reforms where appropriate.
- The region devotes limited resources to capital spending, contributing to low investment rates and economic growth relative to peers; spending pressures and rising financing costs tend to reduce capital spending further.
- Improving spending efficiency, public procurement systems, and targeting of social transfers, along with reductions in energy subsidies, are key to containing spending growth.
- Making spending rationalization inclusive means protecting spending to support the poor—through well-targeted social spending, efficient investment, and health and education spending.
- Countries that protected investment, education, and health spending during consolidation episodes tended to fare better in growth and income distribution.

### Boosting productivity and structural reforms to raise potential growth
- Tackling LAC’s longstanding productivity underperformance is crucial to boosting potential growth and resilience.
- A comprehensive reform agenda should include streamlining and modernizing business and labor regulations to reduce informality, increase productivity, and enhance flexibility and resilience to shocks.
- Improve insolvency frameworks and ease firms’ entry and exit to facilitate resource reallocation and productivity gains.
- Simplify and improve labor and corporate taxation, including lowering compliance costs for workers and firms, to reduce informality.
- Bolster human capital accumulation through high-quality investment in digitalization, basic education, and vocational and technical training.
- Strengthen financial inclusion through appropriate financial regulations to reduce skills mismatches, support productivity growth, and limit pandemic scars.
- Close the labor participation gap by strengthening childcare and leave policies to expand the supply of skilled workers and boost GDP growth.
- A broad set of government policies is needed to tackle climate change: remove fuel subsidies, increase carbon taxes, adopt climate-supportive regulations, and scale up green investments; vulnerable countries need to invest in resilience building and climate adaptation, with private sector and international community engagement to ease public finance burdens.

### IMF support and capacity development
- Since the beginning of the pandemic, the IMF has made available close to $200 billion to 24 countries in the region, including canceled credit lines, of which $135 billion corresponded to Flexible Credit Lines for countries with strong fundamentals and policy frameworks.
- The 2021 general special drawing rights allocation directed approximately $52 billion to LAC.
- The recently established Resilience and Sustainability Trust will help low-income and vulnerable middle-income countries build resilience to external shocks and ensure sustainable growth, providing affordable financing to address longer-term challenges including climate change and pandemic preparedness.
- The IMF continues to provide policy advice and capacity development throughout the pandemic; capacity development spending for the region is expected to double in the next few years, with new areas such as climate- and gender-related activities supplementing traditional topics.
- The IMF stands ready to continue engaging with the region through surveillance, programs, and capacity development.

### Regional outlook and country-specific policy priorities (Central America, Panama, Dominican Republic, and others)
- Strong external demand and tourism recovery bolstered activity in Central America, Panama, and the Dominican Republic in early 2022; remittance inflows remained strong—especially in Guatemala, Honduras, and Nicaragua—supporting domestic demand.
- The weakening external environment, adverse inflation shock effects on real incomes, and tightening domestic policies are weighing on activity; growth is expected to slow in the second half of 2022, with prospects for 2023 weakened and sizable downside risks (weaker external demand, further food and energy price increases, new COVID-19 outbreaks, tighter global financial conditions, natural disasters).
- Inflation in the region has reached levels unseen in over a decade, largely driven by global food and energy prices; price pressures have fed into core inflation reflecting robust domestic demand.
- Most countries with independent monetary policy have raised policy rates; all countries introduced fiscal measures to mitigate price increases, largely subsidies and price freezes—many announced as temporary but several extended multiple times, adding fiscal pressure.
- Policy guidance for selected countries:
  - Costa Rica: a vigilant data-dependent approach for monetary policy remains appropriate; fiscal consolidation under the fiscal rule should advance while making space to protect the most vulnerable, incentivize formal employment, pursue women’s economic empowerment, and support the transition to a low-carbon economy.
  - Dominican Republic: continue monetary and macro-financial policy normalization while maintaining temporary fiscal support to contain commodity price impacts; global developments pose risks and may require nimble policies to shield the vulnerable and keep inflation expectations anchored.
  - El Salvador: fiscal situation remains critical; fiscal consolidation is the top priority; risks from adoption of Bitcoin as legal tender need to be addressed.
  - Guatemala: policies should be agile to shield the vulnerable from high food and energy prices and focus on addressing longstanding social and infrastructure gaps, supported by a solid medium-term fiscal framework.
  - Honduras: preserve macroeconomic stability while continuing to support the population.
  - Nicaragua: priorities include ensuring medium-term fiscal sustainability in an inclusive manner, solidifying financial stability, and strengthening anti–money laundering/combating the financing of terrorism frameworks.

*Prepared by IMF staff (Annex 2).*

### Box 1. Central America, Panama, and the Dominican Republic: Country Focus

### Box 1. Central America, Panama, and the Dominican Republic: Country Focus

### Recovery and growth patterns
- The recovery remains gradual and uneven.
- Tourism-dependent economies are expected to grow by about 5.2 percent in 2022 and 3.6 percent in 2023, after a deep recession in 2020, and a modest recovery in 2021.
- Commodity exporters (Guyana, Suriname, Trinidad and Tobago) are benefiting from high global commodity prices; Guyana’s growth is expected to remain in double digits in 2022 and 2023, as oil production continues increasing sharply.
- Countries that rely heavily on remittances (such as Belize, Haiti, and Jamaica) could see reduced inflows as the US economy slows.
- With tourism remaining below prepandemic levels for most countries, tourism-dependent economies face a slower return to prior activity.

### Inflation, prices, and monetary policy
- High global food and fuel prices and supply-chain disruptions have put upward pressure on domestic prices and threatened food and energy security because most countries in the region rely on imported fuel and food.
- In countries with floating exchange rates (such as Jamaica), policy interest rates have been raised, but the monetary policy transmission is weak.

### Fiscal positions and public debt
- Government debt is elevated in most countries, and rising financing costs heighten the need to restore or safeguard debt sustainability.
- In Panama, the gradual fiscal consolidation should continue as envisioned under the Social and Fiscal Responsibility Law to ensure that public debt remains on a declining path.
- In Panama, building on recent progress, efforts should focus on swiftly exiting the Financial Action Task Force on Money Laundering gray list, which remains the authorities’ top priority.

### Risks to the outlook
- Risks are tilted to the downside and include:
  1. slower growth in tourism source markets,
  2. additional US dollar appreciation that could dent the competitiveness of countries that peg to the US dollar,
  3. an escalation of the war in Ukraine,
  4. additional supply-chain disruptions,
  5. new COVID-19 outbreaks,
  6. natural disasters.
- Risks from tighter global financial conditions are limited, given the region’s low financial integration.

### Policy recommendations and resilience measures
- In response to high inflation:
  - Provide temporary and well-targeted transfers to the vulnerable by expanding social assistance programs.
  - Allow a gradual pass-through of international prices and phase out generalized subsidies.
- With elevated government debt and rising financing costs, policies should focus on restoring or safeguarding debt sustainability.
- As tourism returns to prepandemic levels, fiscal consolidation will be needed to restore fiscal space in tourism-dependent economies.
- Ensuring debt sustainability may require novel financing solutions.
- For countries at risk of large natural disasters, contract clauses that allow for delayed repayments when disaster strikes (such as those recently introduced by Barbados and Grenada) are a promising way to increase financial resilience.
- Belize recently agreed to specific marine protections in exchange for a reduction in its international debt to private bondholders—a “debt-for-nature” swap.

*This box was prepared by Bert van Selm, with research assistance by Adam Siddiq.*

### 1. Labor Productivity Levels across Sectors

### 1. Labor Productivity Levels across Sectors

### Sectoral labor productivity: measures and data sources
- Value added per employer in 2017; constant USD PPP, thousands.
- Sectoral labor productivity is calculated for eight sectors: agriculture, construction, financial and business services, manufacturing, mining, trade services, utilities, and other services including transport services.
- PPP GDP-weighted average used for aggregates.
- Sources: Diepe (2021); IMF, World Economic Outlook database; World Bank Enterprise Surveys; and IMF staff calculations.
- Note: For countries included in the other emerging markets, other EMDEs, and LAC samples, see IMF (2022c). EMDEs = emerging market and developing economies; LAC = Latin America and the Caribbean; PPP = purchasing power parity; USA = United States.

### Pre– and post–Global Financial Crisis differences
- Chart basis: data from last survey before the global financial crisis (around 2007) and first survey after the global financial crisis (around 2015). Specific years vary by country due to availability of surveys.
- Bars indicate estimated difference in key variables pre– and post–global financial crisis for an average firm in LAC and in other EMDEs outside the region.
- For a detailed explanation of the four groups of obstacles and methodological details, see IMF (2022c).
- Four groups of major obstacles faced by firms highlighted in the chart notes:
  - Labor regulation, informality, and business licensing
  - Access to finance and barriers to trade
  - Poor governance, high instability
  - Tax rates and administration

### Key findings and quantitative indicators related to LAC productivity and informality
- LAC’s productivity agenda should prioritize investments in human capital accumulation, focusing on improving its quality by addressing skills mismatches, and reverting the educational losses from the pandemic.
- Modernizing and streamlining business and labor regulation, including by strengthening insolvency frameworks to facilitate firms’ entry and exit, could also yield significant productivity gains.
- Policy mix recommended: tax reforms that enhance the design of labor and capital taxation to incentivize formalization while preserving fiscal sustainability.
- Expected outcomes of proposed reforms: lower compliance costs, reduce informality, promote productivity-enhancing investments, and increase the region’s resilience to economic downturns.
- The link between informality, productivity, and economic resilience suggests that such a reform agenda would also have sizable benefits in terms of increasing economic resilience.

### Related quantitative context from adjoining annex material (productivity, remittances, and nonbank finance)
- Digital remittances and remittance modes in LAC:
  - Before the pandemic, only 23 percent of remittances were sent through digital means (including personal bank account transfers); the rest were cash-based and conducted through brick-and-mortar remittances operators.
  - Share of instant digital remittances in LAC increased from 8 percent in 2016 to about 17 percent in 2021.
  - Penetration of digital modes in LAC remains below the 24 percent global average.
  - Share of mobile money remittances in the region at 0.2 percent—below the world average of 1 percent and significantly below the average of 23 percent in the sub-Saharan Africa region.
  - Mobile phone access in LAC population reported at 78 percent.
  - Example: In El Salvador, growth in remittances through bank account transfers averaged at 37 percent year-over-year in the second half of 2020.
- Nonbank financial sector risks and size dynamics in LAC:
  - Over the last 15 years, the nonbank financial sector has risen fourfold in size (driven mainly by nonbank activities in Chile and Mexico) and outpaced other emerging market economies.
  - The banking system supplies about 90 percent of the total credit to the private sector.
  - Example of market stress: some collective investment funds in Colombia faced significant investor withdrawals leading to a 32 percent decline in total assets.
  - Risk features of nonbanks noted: weaker liquidity and funding profiles, higher leverage, more volatile returns, and lighter prudential and conduct supervision.
  - Policy implication: rapid growth of largely unregulated and intrinsically more vulnerable nonbank financial institutions could pose risks to financial stability; policymakers should consider strengthening prudential supervision and regulation and monitor them closely.

_International Monetary Fund | October 2022 — text excerpt from "1. Labor Productivity Levels across Sectors" and adjoining annexes_

### Appendix Table 2. Western Hemisphere: Main Fiscal Indicators¹

### Appendix Table 2. Western Hemisphere: Main Fiscal Indicators¹

### Overview: General Government Primary Expenditure, Primary Balance, and Gross Debt (Percent of GDP)
- Table contains indicators for 2019, 2020, 2021, 2022, 2023 (projections) for:
  - General Government Primary Expenditure (Percent of GDP)
  - General Government Primary Balance (Percent of GDP)
  - General Government Gross Debt (Percent of GDP)
- Regional aggregates are fiscal year US dollar nominal GDP-weighted averages.
- Cutoff date for the data and projections in this table is September 26, 2022.

### North America (selected entries)
- North America — Primary expenditure: 32.6, 42.3, 38.8, 35.0, 34.8; Primary balance: –2.7, –11.7, –7.7, –2.1, –3.1; Gross debt: 104.1, 129.6, 123.2, 116.9, 117.4.
- Canada — Primary expenditure: 37.7, 50.1, 43.4, 40.3, 39.2; Primary balance: 0.1, –10.9, –5.5, –2.6, –1.4; Gross debt: 87.2, 117.8, 112.9, 102.2, 98.7.
- Mexico — Primary expenditure: 21.8, 24.2, 23.0, 23.6, 23.8; Primary balance: 1.4, –0.5, 0.0, 0.8, 0.3; Gross debt: 53.3, 60.1, 57.6, 56.8, 58.7.
- United States — Primary expenditure: 32.9, 42.7, 39.4, 35.2, 35.1; Primary balance: –3.2, –12.4, –8.4, –2.2, –3.5; Gross debt: 108.8, 134.5, 128.1, 122.1, 122.9.
- Puerto Rico — Primary expenditure: 19.0, 19.3, 18.9, 19.1, 18.8; Primary balance: 4.0, 1.5, 1.7, 2.4, 2.0; Gross debt: 48.9, 50.2, 47.9, 16.0, 14.8.

### South America (selected entries)
- South America (aggregate) — Primary expenditure: 29.6, 34.1, 29.8, 28.9, 28.3; Primary balance: –1.2, –7.5, –1.4, –0.4, –0.8; Gross debt: 75.7, 86.1, 79.4, 75.9, 75.1.
- Argentina — Primary expenditure: 33.7, 39.6, 36.0, 34.9, 33.7; Primary balance: –0.4, –6.2, –2.5, –1.9, –1.4; Gross debt: 88.8, 102.8, 80.9, 76.0, 69.5.
- Brazil — Primary expenditure: 30.5, 36.7, 28.7, 29.0, 28.7; Primary balance: –0.9, –9.1, 0.7, 0.8, –0.8; Gross debt: 87.9, 98.7, 93.0, 88.2, 88.9.
- Chile — Primary expenditure: 25.5, 28.3, 32.6, 24.9, 24.8; Primary balance: –2.4, –6.6, –6.9, 1.1, –0.7; Gross debt: 28.3, 32.6, 36.3, 36.2, 36.9.
- Colombia — Primary expenditure: 29.8, 30.5, 31.2, 31.4, 30.3; Primary balance: –1.0, –4.4, –3.9, –3.1, 0.4; Gross debt: 52.4, 65.7, 64.6, 64.6, 61.1.
- Ecuador — Primary expenditure: 34.4, 33.7, 34.2, 33.7, 32.8; Primary balance: –0.7, –4.3, –0.2, 2.3, 3.4; Gross debt: 51.4, 60.9, 62.2, 58.9, 56.2.
- Peru — Primary expenditure: 19.9, 24.7, 22.2, 21.9, 22.3; Primary balance: –0.2, –6.9, –1.2, –1.0, –1.2; Gross debt: 26.9, 35.0, 36.4, 34.8, 35.7.
- Uruguay — Primary expenditure: 28.8, 30.2, 28.9, 27.7, 27.3; Primary balance: –0.5, –2.1, –0.7, –0.7, 0.1; Gross debt: 61.0, 68.3, 65.1, 61.2, 62.6.
- Venezuela — Primary expenditure: 18.7, 9.2, 10.5, . . , . . ; Primary balance: –10.0, –4.9, –4.5, . . , . . ; Gross debt: 201.4, 319.1, 240.5, . . , . .

### Central America, Panama, Dominican Republic (CAPDR) and Central America (selected entries)
- CAPDR (aggregate) — Primary expenditure: 17.1, 20.2, 18.1, 17.5, 17.2; Primary balance: –0.6, –4.4, –0.9, –0.5, –0.2; Gross debt: 46.3, 59.5, 55.9, 54.3, 53.8.
- Costa Rica — Primary expenditure: 17.6, 17.7, 16.1, 14.6, 13.9; Primary balance: –2.6, –3.8, –0.3, 1.1, 1.4; Gross debt: 56.4, 67.2, 68.2, 67.6, 66.5.
- Dominican Republic — Primary expenditure: 13.8, 18.9, 15.4, 15.0, 14.4; Primary balance: 0.6, –4.7, 0.2, –0.4, 0.0; Gross debt: 53.6, 71.5, 63.1, 58.4, 57.6.
- El Salvador — Primary expenditure: 23.5, 28.7, 27.5, 26.9, 27.0; Primary balance: 0.6, –3.8, –1.1, –0.2, –0.5; Gross debt: 71.3, 89.4, 82.4, 80.3, 81.3.
- Guatemala — Primary expenditure: 11.8, 13.9, 11.8, 12.4, 12.3; Primary balance: –0.6, –3.2, 0.6, –0.1, –0.3; Gross debt: 26.4, 31.5, 30.8, 30.8, 30.0.
- Panama — Primary expenditure: 20.0, 26.0, 22.4, 21.3, 20.6; Primary balance: –1.8, –8.0, –4.6, –1.9, –1.0; Gross debt: 41.9, 65.6, 58.4, 55.6, 55.1.

### Caribbean — Tourism Dependent and Other (selected entries)
- Caribbean: Tourism Dependent (aggregate) — Primary expenditure: 22.1, 27.1, 26.7, 24.4, 23.2; Primary balance: 3.6, –1.6, –0.2, 1.2, 2.1; Gross debt: 81.2, 99.8, 99.2, 90.8, 85.9.
- The Bahamas — Primary expenditure: 17.6, 22.8, 28.7, 22.7, 21.5; Primary balance: 0.8, –4.2, –9.3, –1.1, –0.7; Gross debt: 59.7, 75.0, 103.3, 90.7, 86.6.
- Barbados — Primary expenditure: 24.5, 30.9, 29.8, 28.6, 25.6; Primary balance: 6.2, –1.0, –0.9, 1.0, 3.5; Gross debt: 123.2, 147.0, 135.4, 117.9, 110.0.
- Jamaica — Primary expenditure: 23.5, 25.6, 23.7, 22.4, 22.4; Primary balance: 7.1, 3.5, 6.5, 5.1, 4.7; Gross debt: 94.3, 108.1, 92.3, 86.2, 79.7.
- Dominica — Primary expenditure: 45.8, 65.8, 51.7, 48.8, 47.2; Primary balance: –6.2, –5.7, 7.6, –1.7, 1.2; Gross debt: 97.9, 114.5, 102.7, 102.8, 98.3.
- Haiti (Caribbean: Other) — Primary expenditure: 9.9, 9.6, 10.5, 9.9, 10.7; Primary balance: –1.8, –2.1, –2.2, –1.2, –2.0; Gross debt: 25.8, 21.3, 24.2, 23.1, 22.1.

### Commodity Exporters and Select Commodity Exporters
- Commodity Exporters (aggregate) — Primary expenditure: 29.0, 30.4, 27.8, 22.6, 21.9; Primary balance: –3.0, –8.0, –5.6, 0.2, 0.8; Gross debt: 49.9, 66.0, 62.0, 49.6, 47.0.
- Guyana — Primary expenditure: 27.6, 30.0, 25.3, 15.6, 15.4; Primary balance: –2.0, –7.3, –6.7, –0.4, –0.2; Gross debt: 43.6, 51.1, 42.9, 22.8, 20.9.
- Suriname — Primary expenditure: 39.4, 26.9, 28.5, 25.9, 23.5; Primary balance: –19.0, –8.4, –1.3, 1.7, 3.5; Gross debt: 85.2, 146.1, 125.7, 134.0, 117.1.
- Trinidad and Tobago — Primary expenditure: 27.5, 30.9, 28.6, 26.0, 25.5; Primary balance: –0.6, –8.2, –5.7, 0.3, 1.0; Gross debt: 45.4, 59.3, 60.6, 54.7, 54.4.

### Memorandum and Regional Aggregates
- Latin America and the Caribbean — Primary expenditure: 26.7, 30.4, 27.1, 26.8, 26.4; Primary balance: –0.5, –5.5, –1.0, –0.1, –0.5; Gross debt: 67.9, 77.4, 71.8, 69.3, 69.2.
- LAC Excluding Venezuela — Primary expenditure: 26.8, 30.6, 27.3, 27.0, 26.6; Primary balance: –0.3, –5.5, –1.0, 0.0, –0.4; Gross debt: 66.0, 74.8, 69.8, 67.8, 67.8.
- Eastern Caribbean Currency Union (ECCU) — Primary expenditure: 25.9, 32.4, 31.1, 31.5, 27.8; Primary balance: 0.3, –3.1, 0.4, –2.7, 0.7; Gross debt: 66.1, 85.4, 85.2, 80.3, 77.1.

### Notes on Definitions, Coverage, and Special Cases (as in table footnotes)
- Definitions of government vary across countries, depending on country-specific institutional differences, including on what constitutes the appropriate coverage from a fiscal policy perspective, as defined by the IMF staff. All indicators are reported on a fiscal year basis.
- Regional aggregates are fiscal year US dollar nominal GDP-weighted averages.
- For cross-country comparability, expenditure and fiscal balances of the United States exclude the items related to the accrual-basis accounting of government employees’ defined-benefit pension plans.
- Puerto Rico is classified as an advanced economy; it is a territory of the United States, but its statistical data are maintained on a separate and independent basis.
- Specific country coverage notes:
  - Mexico: Includes central government, social security system funds, nonfinancial public corporations, and nonmonetary public financial corporations.
  - Argentina: Primary expenditure and primary balance include the federal government, provinces, and social security funds. Gross debt is for the federal government only.
  - Bolivia: Nonfinancial public sector, excluding the operations of nationalized mixed-ownership companies in the hydrocarbon and electricity sectors.
  - Brazil: Nonfinancial public sector, excluding Petrobras and Eletrobras, and consolidated with the Sovereign Wealth Fund.
  - Colombia: Nonfinancial public sector reported for primary balances (excluding statistical discrepancies); combined public sector including Ecopetrol and excluding Banco de la República’s outstanding external debt reported for gross public debt.
  - Ecuador: Public sector gross debt includes liabilities under advance oil sales; historical and projection numbers are presented on a consolidated basis after a 2016 definition change.
  - Costa Rica: Staff projections updated in the context of the Third Extended Fund Facility Review mission. Central government only. As of January 2021, central government definition expanded to include 51 public entities as per Law 9524. Data adjusted back to 2019 for comparability.
  - Central government, nonfinancial public sector, and consolidated public sector distinctions apply across various listed countries as noted in the table footnotes.
- For Haiti, estimates and projections reflect information available through early September 2022.
- Primary expenditures for Suriname exclude net lending.
- Eastern Caribbean Currency Union comprises Antigua and Barbuda, Dominica, Grenada, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines, as well as Anguilla and Montserrat (which are not IMF members).

*Sources: IMF, World Economic Outlook database; and IMF staff calculations and projections.*

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_Source: https://www.imf.org/-/media/files/publications/reo/whd/2022/october-2022/english/text.pdf_