WESTERN HEMISPHERE DEPARTMENT PRESS BRIEFING
IMF News, October 13, 2023
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- Published: October 13, 2023
Regional economic overview: growth and inflation
- Growth slowed from 4.1 percent in 2022 to 2.3 percent this year and also in 2024.
- Inflation (excluding Argentina and Venezuela) is projected to decline from 7.8 percent in 2022 to 5 percent this year and to go to 3.6 percent next year.
- Most inflation-targeting economies in the region are expected to see inflation converge to their target ranges by late 2024.
- Medium‑term growth outlook: Latin America and the Caribbean expected to expand about 2.5 percent per year in the next several years, versus about four and a half percent per year on average for other emerging markets and developing economies.
Drivers of the slowdown and near-term outlook
- Causes of weaker activity:
- Effect of tighter policies to contain inflation.
- A weakening external environment: lower trading partners growth, tight external financing conditions, and lower commodity prices.
- Long‑term low growth in the region limits upside potential.
- Downside risks (regional and external):
- Lower growth of key trading partners.
- Tighter-for-longer monetary policy in advanced economies.
- Increased social tensions.
- Climate-related shocks, including El Nino.
- Upside channels:
- More benign global environment.
- Faster than anticipated decline in inflation enabling faster monetary easing.
- Significant growth potential in green minerals and energy sectors.
Monetary policy guidance
- Most central banks in the region are well placed to gradually ease monetary policy as price pressures recede.
- Prudent easing requires balancing:
- Risk 1: ensuring inflation remains on a durable downward path.
- Risk 2: avoiding maintaining overly tight policy longer than needed, which could prolong low growth.
- Key considerations for calibrating easing:
- Proper assessment of the impact of past tightening on inflation (monetary policy operates with lags).
- Heterogeneity across countries in disinflation, cyclical positions, and initial tightening magnitudes.
Fiscal policy, public debt, and revenue
- Despite timely withdrawal of Pandemic fiscal support, public debt in most countries of the region remains too high and is projected to remain high in the next few years above their peers.
- Fiscal policy priorities:
- Rebuild policy space used during the Pandemic and boost resilience against future shocks while protecting social spending.
- Significant fiscal discipline is required to deliver on rules, plans, and announcements.
- Growth-friendly revenue mobilization is needed given relatively low tax intakes in many countries.
Structural reforms and medium-term growth drivers
- Key structural constraints: lackluster productivity, low investment, informality, weak education and health outcomes, skills mismatch, limited access to finance, infrastructure gaps.
- Priority reform areas highlighted:
- Foster international trade (both within the region and with the rest of the world): region trades much less than comparable emerging markets; needs upgrades to infrastructure and customs logistics.
- Energy transition and investment frameworks to capture green minerals and energy opportunities.
- Security and crime reduction to raise investment and growth.
- Improve labor force participation (notably female labor participation) and deepen financial markets.
Country highlights and specific projections or points
- Brazil:
- IMF supports the government’s commitment to fiscal prudence and gradual, pragmatic monetary easing.
- Brazil has surprised with stronger growth driven by agriculture and reforms; further fiscal efforts will be needed down the road.
- Mexico:
- To take advantage of nearshoring: address low female labor participation, corruption, crime, rule of law, limited access to finance, infrastructure gaps in transport/water/energy, and formalization costs.
- Importance of human capital investments and shifting energy mix toward renewables; energy costs and Pemex operations are bottlenecks.
- Argentina:
- Faces very high and rising inflation and low reserve coverage in a delicate social context.
- Addressing challenges requires a strong, credible macroeconomic plan, decisively strengthened public finances, and political backing.
- IMF engagement with candidates’ economic teams to understand policy plans; dollarization is a sovereign choice but requires important preconditions and is not a substitute for sound macro policies.
- Ecuador:
- Growth markdowns (compared with April projections): from 2.9 to 1.4 for this year and from 2.8 to 1.8 for next year.
- Factors: lower-than-expected oil production, security and political uncertainty, weaker first-half performance, and exposure to El Nino (which affects Ecuador and Peru).
- Using international reserves for fiscal spending in a dollarized economy is problematic because reserves underpin confidence that deposits can be cashed.
- El Salvador:
- An IMF team initiated discussions on a new Fund program in early October; important progress was made but further work and engagement are needed; timing of any agreement is uncertain.
- Chile:
- Experienced a marked post‑COVID adjustment after large policy expansion during the Pandemic; correction in imbalances contributed to recent GDP weakness.
- Progress has been made in adjustment; detailed country-level policy discussion reserved for country teams.
- Dominican Republic:
- Growth projections cited: from 4.9 percent to 3 percent this year and 5.2 percent next year.
- Dominican Republic is noted as a relatively fast-growing country; recommended continued fiscal work and structural reforms.
- Caribbean priorities:
- Replenish fiscal buffers used during shocks.
- Continue structural reforms to lift medium-term growth.
- Build resilience to climate change: shift toward renewable energy, strengthen infrastructure against storms/hurricanes, and pursue green financing and green taxation reforms.
IMF facilities and precautionary instruments
- Precautionary facilities (including the FCL) serve as ex-ante insurance and can signal strong policy evaluation when granted.
- Recent reforms to precautionary instruments:
- Clarify/objectivize characteristics needed to access the FCL.
- Introduce the possibility of precautionary lines without an obligatory exit strategy, allowing an insurance facility that could remain in place indefinitely.
- The Caribbean Development Bank’s proposed recovery duration adjuster merits analysis; IMF notes vulnerability is not defined solely by income levels, but operationalization and concessional resource trade-offs require careful assessment.
Source: WESTERN HEMISPHERE DEPARTMENT PRESS BRIEFING, October 13, 2023.