## 1. Navigating a Shifting Global Environment

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### Global Economy — A Shifting Global Environment
- Key developments and shocks:
  - The global economy is facing significant policy shifts and persistent shocks; uncertainty levels reached decade-highs.
  - United States trade and immigration policy changes:
    - Tariffs: country- and product-specific tariffs on imports from about 70 countries; a 10-percent universal tariff for many countries; some exemptions.
    - These measures raised US import tariffs to levels not seen since 1930 and prompted some retaliatory measures.
    - Shift in immigration policies—particularly in the United States—likely to have a negative impact on net migration flows into those countries.
  - Geopolitical conflicts continue to disrupt global trade and affect commodity markets.
- Market and activity dynamics in H1 2025:
  - Market volatility increased following trade policy announcements, but commodity prices and financial conditions remained broadly stable around end-2024 levels.
  - Equity and other asset prices fell initially, the US dollar depreciated, key commodity prices declined initially, then equity markets recovered and commodity prices remained broadly stable.
  - Global economic activity showed notable strength in the first half of 2025 amid accommodative financial conditions and some frontloading of trade.
- IMF staff GDP forecasts for major economies:
  - United States: GDP growth decelerates to 2 percent in 2025 and remains at 2.1 percent in 2026 (from 2.8 percent in 2024).
  - China: growth projected at 4.8 percent in 2025 (close to 5 percent in 2024) and decelerating to 4.2 percent in 2026.
  - Euro area: modest pickup to 1.2 percent in 2025 (from 0.9 in 2024) and around 1.1 percent in 2026.
- Inflation outlook:
  - Global inflation is expected to decline amid cooling global demand and falling energy prices.
  - For countries where tariffs represent a negative demand shock, inflationary pressures are expected to ease.

### Recent Economic Developments in Latin America and the Caribbean (LAC)
- Regional growth and buffers in H1 2025:
  - Growth in LAC was supported by structural and external factors: relatively low trade exposure of many economies to the United States, lower global tariff rates than originally announced, and the region’s lower tariff rates compared with other emerging market economies.
  - After initial volatility in spring 2025, sovereign spreads fell below end-2024 levels; regional currencies rebounded, bond yields declined and differentiated across countries, and commodity prices stabilized.
  - Empirical evidence points to lags in the effect of global uncertainty on growth in the region, and activity surprised to the upside in several countries early in the year.
  - Recent US dollar depreciation may be tempering shock effects by reducing inflationary pressures.
- Contributions to growth in H1 2025:
  - Export contribution increased as export volumes grew at par with global trends—solid copper and manufacturing exports (Chile, Mexico) and higher agricultural exports (Argentina, Brazil, Colombia, Uruguay).
  - Private consumption contributions declined in some large economies (Brazil, Mexico) but remained strong in Argentina, Colombia, Paraguay, Uruguay due to solid labor markets and consumer credit growth.
  - Corporate lending moderated; investment contribution to growth remains muted.
  - CAPDR supported by a pickup in remittances; Caribbean growth solid from tourism, construction, and higher energy production in some countries.
- Inflation and disinflation dynamics:
  - Disinflation toward targets continues but at a slower pace since early 2024.
  - Country specifics:
    - Headline inflation broadly stable around the target in Peru and Paraguay.
    - Headline inflation continued to fall in Chile and Uruguay amid currency appreciations, tighter policies, and/or fading effects of past utility tariff hikes.
    - Inflation in Brazil and Mexico picked up in early 2025 because of still strong demand and/or residual exchange rate pass-through from previous depreciations.
    - After a decline in H1 2025, inflation edged up in Colombia.
    - Argentina continued to make progress in the context of its stabilization program.
  - Regional core inflation:
    - After declining rapidly from its 2022 peak, core goods and core services inflation rose slightly in the region in 2025, reflecting positive output gaps, increases in labor costs, and/or inflation expectations above target in some countries.
  - Imported inflation:
    - Pressures from imported inflation are gradually receding as currencies strengthened following 2024 depreciations.

### Policies — Fiscal, Monetary, and Structural Considerations
- Fiscal developments and public debt:
  - Most countries expected to strengthen fiscal positions in 2025, but public debt ratios continue to increase and have reached or surpassed pandemic peaks in some countries.
  - Region faces an unfavorable interest rate-growth differential; financing costs increase with debt.
  - Primary balance improvements reflect a combination of revenue upticks (including improvements in tax administration in Paraguay) and expenditure restraint.
  - Some countries are planning ambitious fiscal adjustments but face challenges identifying and enacting medium-term measures (Brazil, Mexico).
  - Others are targeting gradual deficit reductions and face uncertainties around revenue performance and legislative approval (Chile, Peru).
  - Assuming financing costs in line with long-term trends, primary balances needed to stabilize LA7 debt at current levels are, on average, about 1½ percentage points of GDP higher than the 2024 outcomes.
- Monetary policy calibration:
  - Monetary policy in LAC has responded to inflation developments, helping keep inflation contained amid fiscal consolidation delays.
  - Country actions:
    - Mexico continued its easing cycle that started in early 2024.
    - Chile, Colombia, Peru, Uruguay resumed easing after pausing and/or pivoting in early 2025.
    - Brazil pivoted toward tightening in early 2025.
    - Paraguay stayed on hold.
  - Monetary stance:
    - In some countries (Brazil, Colombia, Mexico), the monetary stance remains restrictive.
    - Timely monetary policy actions have helped keep inflation expectations close to targets.
    - A continued cautious approach to monetary policy is warranted given heightened uncertainty, inflation expectations that are stable but remain above target, and increased expectations regarding both the short-term policy rate path and the terminal rate compared to last year.
- Structural policy priorities:
  - Addressing fiscal challenges would support monetary policy implementation.
  - With lackluster medium-term growth prospects—partly reflecting persistent resource misallocation—structural reforms remain critical to foster productivity, enhance the business environment, and harness opportunities for further trade integration, including within the region.

### Regional outlook and projections (aggregate)
- Growth and inflation projections:
  - Growth in LAC is projected at 2.4 percent in 2025 and 2.3 percent in 2026.
  - Inflation in LAC (excluding Argentina and Venezuela) is expected to remain broadly stable at 4.3 percent in 2025 and to reach 3.5 percent in 2026.
  - The medium-term growth outlook for LAC is projected at about 2½ percent annually.
- Subregional notes:
  - CAPDR: Growth expected to decelerate in 2025 before picking up in 2026, particularly in the Dominican Republic. Inflation in CAPDR is expected to rise to 2.2 percent in 2025 and 3.3 percent in 2026.
  - Caribbean (excluding Guyana and Haiti): Expected to grow 1.9 percent in 2025 and 1.9 percent in 2026. External factors such as higher shipping and import costs are projected to lift inflation moderately in 2025 before dropping to 6.1 percent by the end of 2026.

### Output gaps, inflation gaps, and risks
- Output and inflation gaps:
  - Positive output gaps are expected to narrow in Brazil and Mexico and remain broadly balanced in Chile.
  - Inflation gap is measured as the deviation of end-of-period inflation from the inflation target.
- Risks to growth (tilted to the downside):
  - Global risks: slower-than-expected growth in major economies, heightened global policy uncertainty, tighter financial conditions, higher trade barriers and shipping costs.
  - Domestic risks: tighter-than-expected macroeconomic policies, more frequent or intense natural disasters.
  - Upside risks: potential trade diversion, stronger progress in long-standing reforms, higher commodity prices.
- Risks to inflation (more balanced):
  - Upside inflation risks: persistent services inflation, higher labor costs, delays in fiscal consolidation.
  - Downside inflation risks: stronger negative demand shock from trade policies and elevated uncertainty.
  - Exchange rate movements and commodity price fluctuations pose risks in both directions.

### Fiscal and Monetary Policy Assessment — Guidance
- Fiscal guidance:
  - Fiscal consolidation is deemed critical and cannot be further delayed given the uncertain external environment, high financing costs, and an unfavorable interest rate-growth differential in the region.
  - Fiscal policy has been expansionary amid tight monetary policy since 2022.
  - Structural primary balances for 2025 and 2026 are projected to be lower than anticipated in October 2024, pointing to fiscal consolidation delays.
  - Greater efforts needed to put debt on a downward path; fiscal targets need to be supported by concrete actions as some measures are yet to be identified.
  - Policy recommendations: address spending inefficiencies, implement growth-friendly revenue mobilization, and anchor fiscal policy within credible multiyear frameworks underpinned by clear rules.
- Monetary guidance:
  - Monetary policy should remain cautious and data-driven to bring inflation back to targets while avoiding undue pressures on activity.
  - Authorities should monitor global trade developments, financial conditions, inflation expectations, and fiscal policy stances.
  - Preserve and strengthen monetary policy frameworks, including central bank independence, capitalization, and governance.
  - Where feasible, exchange rates should be allowed to absorb shocks; the IMF’s Integrated Policy Framework can guide foreign exchange market interventions when warranted.

### Structural challenges and reform priorities
- Productivity and investment:
  - Low potential growth driven by slowing labor force growth, low public investment, stagnant total factor productivity, and persistent resource misallocation.
  - Key reforms: address resource misallocation and firm-level frictions (size-based policies, financial constraints, limited competition); remove policy distortions (subsidies, differential tax treatment) to strengthen incentives for firm growth.
- Trade integration:
  - Low trade integration, including intra-regional trade, constrains growth; intra-regional trade is between 40 and 50 percent lower than in comparable regions.
  - Opportunities: deepen global integration, foster trade diversification, improve transport- and customs-related infrastructure, streamline regulatory frameworks, and reach trade agreements.
- Governance and stability:
  - Stronger governance, less volatile inflation, and lower debt help mitigate the negative impact of uncertainty and foster growth.
  - Improving security and addressing crime, including curtailing money laundering and combating financing of terrorism, would help boost investment, productivity, and long-term growth.

### Trade and Effect of Uncertainty on LAC Economic Activity and Financial Conditions (Box 1.1 highlights)
- Figure panels and measures:
  - Six panels: Goods Exports by Destination (Average 2018–24 excluding 2020; percent); Forward and Backward GVC Participation (Average 2015–18; percent of gross exports); Commodity Exports (Average 2018–24; percent); Response of Real GDP Growth to a One-Standard-Deviation Increase in Uncertainty (Percent); Response of Sovereign Spread to a One-Standard-Deviation Increase in Uncertainty (Percent); The United States and China’s Imports by Origin: LA8 Top Export Products, 2022–24 (Percentage of goods imports).
  - Response measures shown as percent changes to a one-standard-deviation increase in uncertainty: Real GDP growth (Percent) and Sovereign spread (Percent).
  - Example visual numeric scales in panels include 0–100 (percent), and ranges such as −2.0, −1.5, −1.2, −1.0, −0.9, −0.6, −0.5, −0.3, 0, 0.3, 0.5, 1.0, 1.5, 2.0.
- Trade structure and top export products:
  - LA8 top exports to the US and China include: Crude petroleum oils; Copper ores; Iron ores; Soybeans; Coffee; Frozen meat; Vehicle parts; Goods transp. vehicles; Personal vehicles; Refined copper; Carbonates.
- Definitions and notes:
  - Forward participation: "Forward participation refers to the export of inputs used in the importing country’s exports."
  - Backward participation: "Backward participation refers to the use of imported inputs in exports."
  - Commodity exports include SITC Rev. 4 codes 0–4 for traditional (non-manufactured) commodities.
  - LA8 = Latin America 8 (Argentina, Brazil, Chile, Colombia, Mexico, Paraguay, Peru, Uruguay).
  - Data labels use ISO country codes; regional abbreviations defined (CAPDR, CARIB, EMDE, ROW, etc.).
- Data sources: EORA Global Supply Chain database; IMF, Direction of Trade Statistics database; IMF, World Economic Outlook database; Trade Data Monitor; UN Comtrade (SITC Rev. 4); World Bank, World Integrated Trade Solution; and IMF staff calculations.

### Regional policy stance and short-term projection (headline)
- Continued monetary restraint remains appropriate given inflation dynamics; staff expects inflation to gradually converge to the 3 percent target by the end of 2027.
- At about 0.6 percent of GDP, the primary fiscal deficit is expected to remain within the target tolerance interval in 2025 after allowed deductions.
- To put public debt on a firmly downward path and open space for priority investments, IMF staff recommends a sustained and ambitious fiscal effort.

### Country-specific developments and policy recommendations
- Bolivia — macroeconomic deterioration and urgent priorities:
  - Liquid international reserves are nearly depleted.
  - The boliviano has been trading at an average of nearly twice the official exchange rate in parallel markets, causing large import compression.
  - Inflation surged to 24 percent as of August 2025; food inflation reached 37 percent.
  - External pressures: external financing remains limited; gas exports fell 36 percent year-over-year, widening the trade deficit to 1.1 percent of yearly GDP in the first half of 2025.
  - GDP growth fell to 0.7 percent in 2024 and is expected to moderate further in 2025.
  - Fiscal imbalances: the 2025 deficit is projected above 10 percent of GDP, mostly financed by the central bank; debt nearing 100 percent of GDP.
  - Urgent steps recommended: a credible fiscal consolidation program, realignment of the exchange rate, and supply-side reforms to boost growth and support reserve accumulation.
- Chile — growth, inflation, and fiscal consolidation needs:
  - GDP growth expected: 2.5 percent in 2025; 2.0 percent in 2026.
  - Inflation is likely to converge toward the 3-percent target early in 2026 as electricity price effects dissipate.
  - Central government fiscal deficit projected to narrow to 2.1 percent of GDP in 2025 (authorities envisaged 1.5 percent of GDP); difference reflects uncertainty about implementation of corrective measures.
  - Medium-term fiscal requirement: additional fiscal efforts of about 1.5 percent of GDP are needed to reach a broadly balanced fiscal position by 2028.
- Colombia — growth, inflation path, and fiscal credibility:
  - Real GDP growth projected around 2½ percent in 2025; expected to decline somewhat in 2026 because of planned fiscal adjustment.
  - Inflation expected to gradually fall to about 4½ percent by the end of 2025 and reach the 3 percent target by early 2027, conditional on tight monetary policy and resumption of fiscal restraint.
  - Meeting the revised 2025 deficit target (7.1 percent of GDP) will require immediate spending cuts and reduction in budgetary backlogs.
  - The proposed fiscal plan over 2026–28 will require structural adjustment underpinned by fundamental reforms.
  - Policy recommendation: decisive and credible fiscal adjustment urgently needed to re-anchor expectations, lower borrowing costs, and improve the overall policy mix; monetary policy should remain tight with rate cuts proceeding at a backloaded pace.
- Ecuador — recovery and external buffer rebuilding:
  - Growth expected to reach 3.2 percent in 2025 despite recent weather-related oil production disruption.
  - Inflation low at 0.8 percent year-over-year as of August 2025.
  - Strong current account performance driven by high non-oil trade surplus and sizable remittance inflows is helping build external buffers and improve domestic financial liquidity.
  - Fiscal performance remains satisfactory and broadly in line with program targets; authorities continue measures to place public finances on a sustainable path while protecting vulnerable populations.
- Mexico — subdued activity and gradual normalization:
  - Economic activity slow since mid-2024 due to capacity constraints, fiscal tightening, and restrictive monetary stance; U.S. tariffs added uncertainty dampening consumption and investment.
  - Growth in 2025 has remained subdued; modest pickup anticipated for 2026 as fiscal and monetary drags ease.
  - Inflation projected to gradually converge to the target by the second half of 2026, accompanied by a gradual decline in the policy rate.
  - Fiscal recommendation: while medium-term fiscal consolidation is planned, a more front-loaded and ambitious deficit reduction is needed to put debt-to-GDP on a downward trajectory.
- Paraguay — strong momentum and fiscal consolidation:
  - Real GDP expected to expand 4.4 percent in 2025 and 3.7 percent in 2026.
  - Inflation contained and medium-term inflation expectations are firmly anchored around the central bank target.
  - Fiscal consolidation continuing: fiscal deficit would reach 1.9 percent of GDP in 2025 (down from 2.6 percent of GDP in 2024); 2026 draft budget envisages reduction to 1.5 percent of GDP to restore compliance with the Fiscal Responsibility Law.
  - Public debt remains relatively low at around 42 percent of GDP; risk spreads among the lowest in the region.
  - Increased issuance of local-currency-denominated bonds is helping de-dollarize public debt.
- Peru — moderating momentum and policy stance:
  - Economy expected to grow 2.9 percent in 2025 amid global policy uncertainty and pre-election tensions.
  - Headline inflation expected to remain firmly within the 1–3 percent target range; broadly neutral monetary policy stance adequate.
  - Fiscal deficit has fallen after increasing in 2024, but additional measures will be needed to meet the 2025 fiscal deficit target.
  - Medium-term needs: fiscal consolidation measures to ensure compliance with fiscal targets and keep public debt low and declining; structural reforms urgently needed to lift potential growth.
- Uruguay — steady growth and fiscal rule reform:
  - GDP growth supported by domestic demand and exports: 2.5 percent in 2025 and 2.4 percent in 2026.
  - Inflation projected to consolidate around the Central Bank’s target of 4.5 percent.
  - Monetary policy appropriately contractionary; recent policy rate declines justified by lower inflation and expectations.
  - Fiscal: nonfinancial public sector deficit expected to increase to 3.3 percent of GDP in 2025.
  - Institutional reforms: new five-year budget law and a new fiscal rule with expanded fiscal council mandate expected to reduce the deficit by 1.5 percent of GDP over 5 years and permit stabilization of the debt-to-GDP ratio in the medium term.
- Venezuela — pronounced crisis and hyperinflation risks:
  - Growth forecast to decelerate to 0.5 percent in 2025 amid mounting macroeconomic challenges.
  - Oil sector output around one million barrels per day but lower oil prices, larger price discounts, and logistical issues have weakened oil export proceeds, triggering generalized FX scarcity.
  - Fiscal deficit has widened, leading to larger monetary financing of the deficit.
  - Exchange rate and inflation dynamics: Bolivar expected to lose about 80 percent of its value in 2025; inflation expected to rise to about 549 percent.
  - Humanitarian impact: about 8 million people (25 percent of the population) have left the country since 2014.
- Argentina — structural reform agenda (Box 1.5 summary):
  - Since December 2023, the Milei administration implemented market-oriented reforms addressing trade barriers, financial and product market regulations, labor market rules, and governance.
  - Trade liberalization: numerous tariffs and non-tariff barriers reduced; a new investment regime (RIGI) secured commitments of over 15 billion dollars in FDI, primarily in energy and mining.
  - Financial deregulation: interest rate controls on loans and deposits removed; new financial instruments introduced; securities regulator shifted to market-friendly post-issuance oversight.
  - Product market deregulation: over 1,000 regulations repealed or amended across key sectors.
  - Labor market modernization: updates permit sectoral collective bargaining, simplified tax system for independent workers, extended trial periods for new hires.
  - State transformation: regulations issued to streamline public entities, close trust funds, convert state-owned enterprises to joint-stock companies ahead of privatization, modernize administrative processes, and implement civil service reform.
  - Ongoing agenda: “Zero Bureaucracy” initiative launched after expiration of delegated executive powers in July 2025; further labor and tax reforms seen as vital to address informality and boost productivity.
  - IMF expectation: if sustained and deepened, reforms could generate significant medium-term gains by opening the economy, improving regulatory and tax predictability, and streamlining procedures; these must be complemented by governance improvements and closing infrastructure and skills gaps.

*Source: Regional Economic Outlook — Western Hemisphere, October 2025 (chapter content provided).*

### 1. Navigating a Shifting Global Environment

### 1. Navigating a Shifting Global Environment

### Global Economy — A Shifting Global Environment
- The global economy is facing significant policy shifts and persistent shocks; uncertainty levels reached decade-highs.
- United States trade and immigration policy changes:
  - Tariffs: country- and product-specific tariffs on imports from about 70 countries; a 10-percent universal tariff for many countries; some exemptions.
  - These measures raised US import tariffs to levels not seen since 1930 and prompted some retaliatory measures.
  - Shift in immigration policies—particularly in the United States—likely to have a negative impact on net migration flows into those countries.
- Geopolitical conflicts continue to disrupt global trade and affect commodity markets.
- Key global markets in H1 2025:
  - Market volatility increased following trade policy announcements, but commodity prices and financial conditions remained broadly stable around end-2024 levels.
  - Equity and other asset prices fell initially, the US dollar depreciated, key commodity prices declined initially, then equity markets recovered and commodity prices remained broadly stable.
  - Global economic activity showed notable strength in the first half of 2025 amid accommodative financial conditions and some frontloading of trade.
- IMF staff GDP forecasts for major economies:
  - United States: GDP growth decelerates to 2 percent in 2025 and remains at 2.1 percent in 2026 (from 2.8 percent in 2024).
  - China: growth projected at 4.8 percent in 2025 (close to 5 percent in 2024) and decelerating to 4.2 percent in 2026.
  - Euro area: modest pickup to 1.2 percent in 2025 (from 0.9 in 2024) and around 1.1 percent in 2026.
- Global inflation is expected to decline amid cooling global demand and falling energy prices; for countries where tariffs represent a negative demand shock, inflationary pressures are expected to ease.

### Recent Economic Developments in Latin America and the Caribbean (LAC)
- Regional growth and buffers in H1 2025:
  - Growth in LAC was supported by structural and external factors: relatively low trade exposure of many economies to the United States, lower global tariff rates than originally announced, and the region’s lower tariff rates compared with other emerging market economies.
  - After initial volatility in spring 2025, sovereign spreads fell below end-2024 levels; regional currencies rebounded, bond yields declined and differentiated across countries, and commodity prices stabilized.
  - Empirical evidence points to lags in the effect of global uncertainty on growth in the region, and activity surprised to the upside in several countries early in the year.
  - Recent US dollar depreciation may be tempering shock effects by reducing inflationary pressures.
- Contributions to growth in H1 2025:
  - Export contribution increased as export volumes grew at par with global trends—solid copper and manufacturing exports (Chile, Mexico) and higher agricultural exports (Argentina, Brazil, Colombia, Uruguay).
  - Private consumption contributions declined in some large economies (Brazil, Mexico) but remained strong in Argentina, Colombia, Paraguay, Uruguay due to solid labor markets and consumer credit growth.
  - Corporate lending moderated; investment contribution to growth remains muted.
  - CAPDR (Central America, Panama, and the Dominican Republic) supported by a pickup in remittances; Caribbean growth solid from tourism, construction, and higher energy production in some countries.
- Inflation and disinflation dynamics:
  - Disinflation toward targets continues but at a slower pace since early 2024.
  - Country specifics:
    - Headline inflation broadly stable around the target in Peru and Paraguay.
    - Headline inflation continued to fall in Chile and Uruguay amid currency appreciations, tighter policies, and/or fading effects of past utility tariff hikes.
    - Inflation in Brazil and Mexico picked up in early 2025 because of still strong demand and/or residual exchange rate pass-through from previous depreciations.
    - After a decline in H1 2025, inflation edged up in Colombia.
    - Argentina continued to make progress in the context of its stabilization program.
  - Regional core inflation:
    - After declining rapidly from its 2022 peak, core goods and core services inflation rose slightly in the region in 2025, reflecting positive output gaps, increases in labor costs, and/or inflation expectations above target in some countries.
  - Imported inflation:
    - Pressures from imported inflation are gradually receding as currencies strengthened following 2024 depreciations.

### Policies — Fiscal, Monetary, and Structural Considerations
- Fiscal developments and public debt:
  - Most countries expected to strengthen fiscal positions in 2025, but public debt ratios continue to increase and have reached or surpassed pandemic peaks in some countries.
  - Region faces an unfavorable interest rate-growth differential; financing costs increase with debt.
  - Primary balance improvements reflect a combination of revenue upticks (including improvements in tax administration in Paraguay) and expenditure restraint.
  - Some countries are planning ambitious fiscal adjustments but face challenges identifying and enacting medium-term measures (Brazil, Mexico).
  - Others are targeting gradual deficit reductions and face uncertainties around revenue performance and legislative approval (Chile, Peru).
  - Assuming financing costs in line with long-term trends, primary balances needed to stabilize LA7 debt at current levels are, on average, about 1½ percentage points of GDP higher than the 2024 outcomes.
- Monetary policy calibration:
  - Monetary policy in LAC has responded to inflation developments, helping keep inflation contained amid fiscal consolidation delays.
  - Country actions:
    - Mexico continued its easing cycle that started in early 2024.
    - Chile, Colombia, Peru, Uruguay resumed easing after pausing and/or pivoting in early 2025.
    - Brazil pivoted toward tightening in early 2025.
    - Paraguay stayed on hold.
  - Monetary stance:
    - In some countries (Brazil, Colombia, Mexico), the monetary stance remains restrictive.
    - Timely monetary policy actions have helped keep inflation expectations close to targets.
    - A continued cautious approach to monetary policy is warranted given heightened uncertainty, inflation expectations that are stable but remain above target, and increased expectations regarding both the short-term policy rate path and the terminal rate compared to last year.
- Structural policy priorities:
  - Addressing fiscal challenges would support monetary policy implementation.
  - With lackluster medium-term growth prospects—partly reflecting persistent resource misallocation—structural reforms remain critical to foster productivity, enhance the business environment, and harness opportunities for further trade integration, including within the region.

*October 2025 • INTERNATIONAL MONETARY FUND*

### 5. LA7: Distribution of Two-Year Ahead Inflation Expectations

### 5. LA7: Distribution of Two-Year Ahead Inflation Expectations by Forecasters

### Key Projections and Aggregate Outlook
- Growth in LAC is projected at 2.4 percent in 2025 and 2.3 percent in 2026.
- Inflation in LAC (excluding Argentina and Venezuela) is expected to remain broadly stable at 4.3 percent in 2025 and to reach 3.5 percent in 2026.
- The medium-term growth outlook for LAC is projected at about 2½ percent annually.

### Country and Subregion Developments
- Growth drivers and near-term changes:
  - Growth in 2025 is expected to be lifted by a rebound in economies that tightened policies and/or experienced shocks in 2024 (Argentina, Ecuador, Jamaica).
  - Growth in LA7 is expected to decelerate, mainly driven by Brazil and Mexico.
  - For 2026, a slight moderation is projected mainly driven by a deceleration in most LA7 countries and Argentina, partly offset by a recovery in Mexico, along with the Dominican Republic, Ecuador, and several countries in the Caribbean.
- Country-specific notes:
  - Brazil: Positive output gap expected to narrow; growth projected to moderate in 2025 and 2026 amid tighter policies and the impact of tariffs; strong agriculture growth earlier in the year helps moderate the slowdown.
  - Mexico: Expected to decelerate in 2025 because of ongoing fiscal consolidation, still-restrictive monetary policy, and tariff-related uncertainty; activity should recover in 2026 with less restrictive macroeconomic policies.
  - Chile: Growth anticipated to moderate in 2025 and 2026; domestic demand expected to be main driver while net exports contribution narrows.
  - Peru and Uruguay: After a strong recovery in 2024, growth is expected to moderate in 2025 and 2026 despite stronger-than-anticipated domestic demand (Peru) and strong tourism and agriculture (Uruguay).
  - Paraguay: Growth momentum expected to continue in 2025 and moderate in 2026.
  - Colombia: Growth expected to pick up in 2025 amid strong private consumption and some fiscal easing but moderate in 2026.
  - Argentina: Domestic demand projected to support growth in 2025 despite tight macroeconomic policies; growth expected to moderate in 2026; projected to continue progress to curb inflation in the context of its stabilization program despite recent peso depreciation.
- Subregions:
  - CAPDR: Growth expected to decelerate in 2025 before picking up in 2026, particularly in the Dominican Republic. Inflation in CAPDR is expected to rise to 2.2 percent in 2025 and 3.3 percent in 2026.
  - Caribbean (excluding Guyana and Haiti): Expected to grow 1.9 percent in 2025 and 1.9 percent in 2026. External factors such as higher shipping and import costs are projected to lift inflation moderately in 2025 before dropping to 6.1 percent by the end of 2026.

### Output Gaps and Inflation Gaps
- Positive output gaps are expected to narrow in Brazil and Mexico and remain broadly balanced in Chile.
- Inflation gap is measured as the deviation of end-of-period inflation from the inflation target; data labels use ISO country codes in the source figure.

### Risks
- Risks to growth are tilted to the downside:
  - Global risks: slower-than-expected growth in major economies, heightened global policy uncertainty, tighter financial conditions, higher trade barriers and shipping costs.
  - Domestic risks: tighter-than-expected macroeconomic policies, more frequent or intense natural disasters.
  - Upside risks: potential trade diversion, stronger progress in long-standing reforms, higher commodity prices.
- Risks to inflation are more balanced:
  - Upside inflation risks: persistent services inflation, higher labor costs, delays in fiscal consolidation.
  - Downside inflation risks: stronger negative demand shock from trade policies and elevated uncertainty.
  - Exchange rate movements and commodity price fluctuations pose risks in both directions.

### Fiscal and Monetary Policy Assessment
- Fiscal:
  - Fiscal consolidation is deemed critical and cannot be further delayed given the uncertain external environment, high financing costs, and an unfavorable interest rate-growth differential in the region.
  - Fiscal policy has been expansionary amid tight monetary policy since 2022.
  - Structural primary balances for 2025 and 2026 are projected to be lower than anticipated in October 2024, pointing to fiscal consolidation delays.
  - Greater efforts needed to put debt on a downward path; fiscal targets need to be supported by concrete actions as some measures are yet to be identified.
  - Policy guidance: address spending inefficiencies, implement growth-friendly revenue mobilization, and anchor fiscal policy within credible multiyear frameworks underpinned by clear rules.
- Monetary:
  - Monetary policy should remain cautious and data-driven to bring inflation back to targets while avoiding undue pressures on activity.
  - Authorities should monitor global trade developments, financial conditions, inflation expectations, and fiscal policy stances.
  - Preserve and strengthen monetary policy frameworks, including central bank independence, capitalization, and governance.
  - Where feasible, exchange rates should be allowed to absorb shocks; the IMF’s Integrated Policy Framework can guide foreign exchange market interventions when warranted.

### Structural Challenges and Reform Priorities
- Productivity and investment:
  - The region faces low potential growth driven by slowing labor force growth, low public investment, stagnant total factor productivity, and persistent resource misallocation.
  - Addressing resource misallocation and firm-level frictions (size-based policies, financial constraints, limited competition) is critical to boost productivity.
  - Removing policy distortions (subsidies, differential tax treatment) could strengthen incentives for firm growth.
- Trade integration:
  - Low trade integration, including intra-regional trade, constrains growth; intra-regional trade is between 40 and 50 percent lower than in comparable regions.
  - Opportunities: deepen global integration, foster trade diversification, improve transport- and customs-related infrastructure, streamline regulatory frameworks, and reach trade agreements.
- Governance and stability:
  - Stronger governance, less volatile inflation, and lower debt help mitigate the negative impact of uncertainty and foster growth.
  - Improving security and addressing crime, including curtailing money laundering and combating financing of terrorism, would help boost investment, productivity, and long-term growth.

*Source: Regional Economic Outlook — Western Hemisphere, October 2025 (chapter content provided).*

### Box 1.1. (continued)

### Box 1.1. (continued)

### Trade and Effect of Uncertainty on LAC Economic Activity and Financial Conditions — Overview
- Box Figure 1.1.1 presents six panels addressing trade structure and the macro-financial effects of uncertainty for Latin America and the Caribbean (LAC):
  - 1. Goods Exports by Destination (Average 2018–24 excluding 2020; percent)
  - 2. Forward and Backward GVC Participation (Average 2015–18; percent of gross exports)
  - 3. Commodity Exports (Average 2018–24; percent)
  - 4. Response of Real GDP Growth to a One-Standard-Deviation Increase in Uncertainty (Percent)
  - 5. Response of Sovereign Spread to a One-Standard-Deviation Increase in Uncertainty (Percent)
  - 6. The United States and China’s Imports by Origin: LA8 Top Export Products, 2022–24 (Percentage of goods imports)

- Graphical notations and statistical markers shown in the figure:
  - "Point est  imate"
  - "90 percent confidence interval"
  - "Forward" and "Backward" (in reference to GVC participation)
  - "Share of commodity to total goods exports" and "Commodity exports-to-GDP (right scale)"

### Key Trade Structure Metrics (as presented)
- Goods export destination breakdown labeled by ISO country codes, including: ARG, BRA, CHL, COL, MEX, PER, CHN, PRY, URY, USA, ROW, EMDE Asia, Advanced Asia, EMDE Europe, China, Rest of the world, Advanced Europe, LAC.
- Forward participation definition: "Forward participation refers to the export of inputs used in the importing country’s exports."
- Backward participation definition: "Backward participation refers to the use of imported inputs in exports."
- Commodity exports definition: "Commodity exports include SITC Rev. 4 codes 0–4 for traditional (non-manufactured) commodities."
- LA8 definition and note on top export products:
  - LA8 = Latin America 8 (Argentina, Brazil, Chile, Colombia, Mexico, Paraguay, Peru, Uruguay).
  - "Country aggregates are calculated as the total nominal imports in US dollars at the HS4-digit level."
  - "Selected LA8 top export products are HS4-digit items accounting for more than 10 percent of exports to the United States and China."
  - "Carbonates include percarbonates."

### Macroeconomic Responses to Uncertainty (figure captions and scales)
- Response measures shown as percent changes to a one-standard-deviation increase in uncertainty:
  - Real GDP growth (Percent)
  - Sovereign spread (Percent)
- Time-series axis labeling appears as "0 1 2 3 4 Ye a r" and includes regional series such as EMDE Asia, EMDE Europe, LAC South America, MEX, CAPDR, CARIB, DOM, CRI, NIC, GTM, CHL, SLV, ECU, PAN, PRY, URY, COL, BOL, BRA, PER, HND, ARG.
- Example visual numeric scales in panels include 0–100 (percent), and negative to positive ranges (for GDP growth and spreads), e.g., −2.0, −1.5, −1.2, −1.0, −0.9, −0.6, −0.5, −0.3, 0, 0.3, 0.5, 1.0, 1.5, 2.0.

### Composition of LA8 Top Exports to US and China (visual list of items)
- Listed LA8 export product categories (shown in both US and China import panels):
  - Crude petroleum oils
  - Copper ores
  - Iron ores
  - Soybeans
  - Coffee
  - Frozen meat
  - Vehicle parts
  - Goods transp. vehicles
  - Personal vehicles
  - Refined copper
  - Carbonates

### Data Sources and Notes (as provided)
- Sources cited in the figure: EORA Global Supply Chain database; IMF, Direction of Trade Statistics database; IMF, World Economic Outlook database; Trade Data Monitor; UN Comtrade (SITC Rev. 4); World Bank, World Integrated Trade Solution; and IMF staff calculations.
- Notes reproduced verbatim:
  - "Data labels in the figure use International Organization for Standardization (ISO) country codes."
  - "CAPDR = Central America, Panama, and the Dominican Republic; CARIB = Caribbean; EMDE = emerging market and developing economies; GVC = global value chains; LAC = Latin America and the Caribbean; LA8 = Latin America 8 (Argentina, Brazil, Chile, Colombia, Mexico, Paraguay, Peru, Uruguay); ROW = rest of the world; transp. = transport."

*Source: Box 1.1. (continued), ch1 — International Monetary Fund (figures and notes as provided).*

### 4.9 percent for the end of 2025, above the target tolerance interval, while inflation expectations remain

### ch1 - 4.9 percent for the end of 2025, above the target tolerance interval, while inflation expectations remain

### Regional policy stance and projections
- Continued monetary restraint remains appropriate given inflation dynamics; staff expects inflation to gradually converge to the 3 percent target by the end of 2027.
- At about 0.6 percent of GDP, the primary fiscal deficit is expected to remain within the target tolerance interval in 2025 after allowed deductions.
- To put public debt on a firmly downward path and open space for priority investments, IMF staff recommends a sustained and ambitious fiscal effort.

### Bolivia — macroeconomic deterioration and urgent priorities
- Liquid international reserves are nearly depleted.
- The boliviano has been trading at an average of nearly twice the official exchange rate in parallel markets, causing large import compression.
- Inflation surged to 24 percent as of August 2025; food inflation reached 37 percent.
- External pressures: external financing remains limited; gas exports fell 36 percent year-over-year, widening the trade deficit to 1.1 percent of yearly GDP in the first half of 2025.
- GDP growth fell to 0.7 percent in 2024 and is expected to moderate further in 2025.
- Fiscal imbalances: the 2025 deficit is projected above 10 percent of GDP, mostly financed by the central bank; debt nearing 100 percent of GDP.
- Urgent steps recommended: a credible fiscal consolidation program, realignment of the exchange rate, and supply-side reforms to boost growth and support reserve accumulation.

### Chile — growth, inflation, and fiscal consolidation needs
- GDP growth expected: 2.5 percent in 2025; 2.0 percent in 2026.
- Inflation is likely to converge toward the 3-percent target early in 2026 as electricity price effects dissipate.
- Central government fiscal deficit projected to narrow to 2.1 percent of GDP in 2025 (authorities envisaged 1.5 percent of GDP); difference reflects uncertainty about implementation of corrective measures.
- Medium-term fiscal requirement: additional fiscal efforts of about 1.5 percent of GDP are needed to reach a broadly balanced fiscal position by 2028.

### Colombia — growth, inflation path, and fiscal credibility
- Real GDP growth projected around 2½ percent in 2025; expected to decline somewhat in 2026 because of planned fiscal adjustment.
- Inflation expected to gradually fall to about 4½ percent by the end of 2025 and reach the 3 percent target by early 2027, conditional on tight monetary policy and resumption of fiscal restraint.
- Meeting the revised 2025 deficit target (7.1 percent of GDP) will require immediate spending cuts and reduction in budgetary backlogs.
- The proposed fiscal plan over 2026–28 will require structural adjustment underpinned by fundamental reforms.
- Policy recommendation: decisive and credible fiscal adjustment urgently needed to re-anchor expectations, lower borrowing costs, and improve the overall policy mix; monetary policy should remain tight with rate cuts proceeding at a backloaded pace.

### Ecuador — recovery and external buffer rebuilding
- Growth expected to reach 3.2 percent in 2025 despite recent weather-related oil production disruption.
- Inflation low at 0.8 percent year-over-year as of August 2025.
- Strong current account performance driven by high non-oil trade surplus and sizable remittance inflows is helping build external buffers and improve domestic financial liquidity.
- Fiscal performance remains satisfactory and broadly in line with program targets; authorities continue measures to place public finances on a sustainable path while protecting vulnerable populations.

### Mexico — subdued activity and gradual normalization
- Economic activity slow since mid-2024 due to capacity constraints, fiscal tightening, and restrictive monetary stance; U.S. tariffs added uncertainty dampening consumption and investment.
- Growth in 2025 has remained subdued; modest pickup anticipated for 2026 as fiscal and monetary drags ease.
- Inflation projected to gradually converge to the target by the second half of 2026, accompanied by a gradual decline in the policy rate.
- Fiscal recommendation: while medium-term fiscal consolidation is planned, a more front-loaded and ambitious deficit reduction is needed to put debt-to-GDP on a downward trajectory.

### Paraguay — strong momentum and fiscal consolidation
- Real GDP expected to expand 4.4 percent in 2025 and 3.7 percent in 2026.
- Inflation contained and medium-term inflation expectations are firmly anchored around the central bank target.
- Fiscal consolidation continuing: fiscal deficit would reach 1.9 percent of GDP in 2025 (down from 2.6 percent of GDP in 2024); 2026 draft budget envisages reduction to 1.5 percent of GDP to restore compliance with the Fiscal Responsibility Law.
- Public debt remains relatively low at around 42 percent of GDP; risk spreads among the lowest in the region.
- Increased issuance of local-currency-denominated bonds is helping de-dollarize public debt.

### Peru — moderating momentum and policy stance
- Economy expected to grow 2.9 percent in 2025 amid global policy uncertainty and pre-election tensions.
- Headline inflation expected to remain firmly within the 1–3 percent target range; broadly neutral monetary policy stance adequate.
- Fiscal deficit has fallen after increasing in 2024, but additional measures will be needed to meet the 2025 fiscal deficit target.
- Medium-term needs: fiscal consolidation measures to ensure compliance with fiscal targets and keep public debt low and declining; structural reforms urgently needed to lift potential growth.

### Uruguay — steady growth and fiscal rule reform
- GDP growth supported by domestic demand and exports: 2.5 percent in 2025 and 2.4 percent in 2026.
- Inflation projected to consolidate around the Central Bank’s target of 4.5 percent.
- Monetary policy appropriately contractionary; recent policy rate declines justified by lower inflation and expectations.
- Fiscal: nonfinancial public sector deficit expected to increase to 3.3 percent of GDP in 2025.
- Institutional reforms: new five-year budget law and a new fiscal rule with expanded fiscal council mandate expected to reduce the deficit by 1.5 percent of GDP over 5 years and permit stabilization of the debt-to-GDP ratio in the medium term.

### Venezuela — pronounced crisis and hyperinflation risks
- Growth forecast to decelerate to 0.5 percent in 2025 amid mounting macroeconomic challenges.
- Oil sector output around one million barrels per day but lower oil prices, larger price discounts, and logistical issues have weakened oil export proceeds, triggering generalized FX scarcity.
- Fiscal deficit has widened, leading to larger monetary financing of the deficit.
- Exchange rate and inflation dynamics: Bolivar expected to lose about 80 percent of its value in 2025; inflation expected to rise to about 549 percent.
- Humanitarian impact: about 8 million people (25 percent of the population) have left the country since 2014.

### Argentina — structural reform agenda (Box 1.5 summary)
- Since December 2023, the Milei administration implemented market-oriented reforms addressing trade barriers, financial and product market regulations, labor market rules, and governance.
- Trade liberalization: numerous tariffs and non-tariff barriers reduced; a new investment regime (RIGI) secured commitments of over 15 billion dollars in FDI, primarily in energy and mining.
- Financial deregulation: interest rate controls on loans and deposits removed; new financial instruments introduced; securities regulator shifted to market-friendly post-issuance oversight.
- Product market deregulation: over 1,000 regulations repealed or amended across key sectors.
- Labor market modernization: updates permit sectoral collective bargaining, simplified tax system for independent workers, extended trial periods for new hires.
- State transformation: regulations issued to streamline public entities, close trust funds, convert state-owned enterprises to joint-stock companies ahead of privatization, modernize administrative processes, and implement civil service reform.
- Ongoing agenda: “Zero Bureaucracy” initiative launched after expiration of delegated executive powers in July 2025; further labor and tax reforms seen as vital to address informality and boost productivity.
- IMF expectation: if sustained and deepened, reforms could generate significant medium-term gains by opening the economy, improving regulatory and tax predictability, and streamlining procedures; these must be complemented by governance improvements and closing infrastructure and skills gaps.

*Source: Regional Economic Outlook—Western Hemisphere, International Monetary Fund • October 2025.*

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_Source: https://www.imf.org/-/media/files/publications/reo/whd/2025/october/english/ch1.pdf_