## Coping with Challenging Times—Outlook for Latin America and the Caribbean

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**Canonical URL:** [Coping with Challenging Times—Outlook for Latin America and the Caribbean](https://www.imf.org/-/media/websites/imf/imported-flagship-issues/external/np/blog/dialogo/_101014pdf.pdf)

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### Overview and Growth Projections
- Regional growth this year is now forecast at just 1.3 percent — the lowest rate in 12 years, with the exception of 2009, when the global financial crisis hit.
- For next year, growth is anticipated to rebound to 2.2 percent.
- These projections contrast with regional growth of above 5 percent, as observed in 2010–11.
- Economic activity has been losing steam since the peak of the commodity-led boom in 2011; the extent of the slowdown over the past three years has been larger than anticipated, with activity stagnating or contracting in several large economies during the first half of this year.

### Regional Dynamics
- South America has decelerated the most in recent quarters.
- Growth in Central America and the Caribbean is relatively steady.
- Mexico is finally picking up pace.
- External and domestic influences explaining the pattern:
  - The weakness in global commodity markets has clouded the outlook especially for South America, which depends significantly on commodity exports.
  - The much-anticipated recovery in the U.S. economy appears to be finally taking hold but its positive impulse is mostly concentrated on Mexico and a few other close trading partners in Central America and the Caribbean.
  - The expected rise in U.S. policy rates is likely to bring higher external funding costs and greater volatility in financial markets for the region at large.
  - Domestic factors include uncertainty about the direction and impact of economic policies; Mexico’s broad reform package initially generated uncertainty but is very likely to boost growth over the medium term.
  - Countries where reform momentum has stalled, or where misguided policies have ratcheted up distortions and macroeconomic imbalances, face worse prospects, with Venezuela cited as an alarming example.

### Policy Priorities and Recommendations
- Overarching priority: enable strong and sustainable growth without jeopardizing macroeconomic stability.
- Structural supply-side bottlenecks are prominent across most of the region, including deficient infrastructure and low human capital.
- Economic slack is limited, evidenced by still-tight labor markets, above-target inflation, and persistent deficits in the external current account.
- Recommended focus areas:
  - Address the long-standing problem of "low saving, low investment, low productivity" that was masked by the commodity-related boom and has re-emerged as a serious brake on growth.
  - Improve deficient physical infrastructure.
  - Create a better and more competitive environment for businesses to invest.
  - Enhance the performance of education systems so the gains from human capital are more widely spread.
- Demand-side policy guidance:
  - Remain anchored in a commitment to sound public finances, low inflation, and macroeconomic stability.
  - Avoid fiscal stimulus where output is close to potential or fiscal buffers have already eroded significantly in recent years.
  - Use flexible exchange rates and—where inflation targets are credible—monetary policy to deal with adverse shocks.
  - In countries with persistent macroeconomic imbalances, notably in the Caribbean but also in parts of Latin America, maintain strict policy discipline to avoid disorderly dynamics.

### Conclusion
- The end of the commodity-driven bonanza has left the region with slower growth, tighter supply constraints, weaker fiscal balances, and less favorable external conditions.
- These challenges increase the need for much greater domestic policy efforts to restore strong and sustainable growth than were required during the "good years."
- With the right focus on structural reforms to boost productivity and investment, the region can rise to the challenge.

*By Alejandro Werner, October 10, 2014*

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_Source: https://www.imf.org/-/media/websites/imf/imported-flagship-issues/external/np/blog/dialogo/_101014pdf.pdf_