Western Hemisphere

Managing Transitions and Risks

April 2016

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Western Hemisphere Regional Economic Outlook

With the global economy still struggling, many countries in Latin America and the Caribbean are facing a harsher world than they did just a few years ago. The growth outlook is weaker in advanced and emerging economies alike, while the gradual slowdown and rebalancing of economic activity in China is likely to keep commodity prices lower for longer. Meanwhile, favorable external financial conditions over the past several years have become more volatile, and risks of a sudden tightening are on the rise.
Against this backdrop, economic activity in Latin America and the Caribbean has been revised downward, compared with our January update and is likely to contract for a second consecutive year in 2016. But the growth outlook varies substantially within the region. While external conditions have placed a large drag on all commodity exporters, countries expected to post negative growth will do so mainly because of domestic imbalances and rigidities at home, and, in certain cases, temporary impact of policies designed to transition away from earlier distortions.
But the news isn't all bad. In the rest of the region—and particularly where policy frameworks have been strengthened over the past two decades—a relatively smooth adjustment continues. Given these broad contours, growth stories vary between the south and north.


Front Matter

Chapter 1: Global Economy in Transition and Outlook for the United States and Canada
As the world economy undergoes key transitions, the pace of global activity has slowed amid higher financial market volatility. In advanced economies, a modest recovery continues, but unevenly. An expanding U.S. economy, led by consumption and job creation, has enabled interest rate lift-off toward gradual monetary normalization. This transition suggests diverging influences from major central banks over global financial conditions and appreciation pressures on the U.S. dollar. In emerging market economies, growth continues to slow, led by China as it rebalances and by continued stress in several large economies in recession. Financial conditions have tended to tighten and uncertainty has risen amid concerns of slower growth and lack of policy space. Alongside this, commodity prices remain weak—notably, in oil markets where a supply glut has led to appreciably lower prices since last year. Consequently, Canada’s economy is likely to see continued sluggish growth before gradually strengthening as it navigates lower oil prices. The main global risks stem from these ongoing transitions and could derail growth if not managed well. Policy priorities include managing vulnerabilities and rebuilding resilience to transition risks while supporting near-term growth, and enhancing productivity and potential growth through crucial structural reforms. Read more...

  • Global Transitions
  • The United States: Consumption as Engine of Growth
  • Canada: Navigating Lower Oil Prices

Chapter 2: Latin America and the Caribbean: Managing Transitions
As the global recovery continues to struggle to gain its footing, growth in Latin America and the Caribbean is expected to be negative for the second consecutive year in 2016. The regional recession masks the fact that most countries continue to grow, modestly but surely, with the contraction driven by developments in a few others. While the external environment has had a differentiated impact on the region—with South America heavily affected by the decline in commodity prices and Mexico, Central America, and the Caribbean benefiting from the U.S. recovery and, in most cases, lower oil prices—disparities in growth performance also reflect domestic factors. Countries with sound domestic fundamentals continue to adjust relatively smoothly, but domestic imbalances and rigidities have heavily amplified the effects of external shocks in others. In managing the transition to persistently lower commodity prices, policies should focus on preserving buffers and boosting long-term growth. Read more...

  • Diverse Growth Outcomes and Subdued Outlook
  • South America
  • Mexico, Central America, and the Dominican Republic
  • The Caribbean
  • Annex 2.1. Disclaimer

Chapter 3: Understanding Corporate Vulnerabilities in Latin America
Firms in Latin America are facing tighter financial market conditions at the global level amid lower potential growth and challenging macroeconomic adjustments at home. This chapter quantifies the impact of company-specific, country-specific, and global factors in driving nonfinancial corporate risk. The analysis suggests that all three factors play a role, albeit to varying degrees and with different implications across countries in the region. Overall, macroeconomic domestic factors, such as the pace of currency depreciation and higher sovereign spreads, have contributed to an increase in corporate risk since 2011, underscoring the importance of robust policy frameworks. The analysis also finds that external conditions—in particular measures of global risk aversion (such as the Chicago Board Options Exchange Volatility Index, VIX)—constitute a dominant driver of corporate risk. Thus, a sustained reversal of the still benign global market conditions could place significant added pressure on firms in the region. Finally, weak firm fundamentals, such as high leverage and low profitability, are also associated with elevated corporate risks. All things considered, solid macroeconomic policy frameworks must be complemented by appropriate monitoring of systemic risks in the corporate sector and, when needed, by policies that facilitate corporate balance sheet repair that will help limit financial spillovers from corporate woes in the coming years. Read more...

  • Setting the Stage
  • Data and Empirical Strategy
  • Results
  • Policy Takeaways
  • Annex 3.1. Descriptive Statistics and Econometric Results

Chapter 4: Exchange Rate Pass-Through in Latin America
Recent currency depreciations are expected to create inflation pressure across Latin America, though more modest than in the past. Improvements in monetary frameworks over the past two decades have led to substantial and generalized declines in exchange rate pass-through to consumer prices. In countries with credible monetary policy frameworks, policymakers have space to allow relative prices to adjust through exchange rate depreciation without compromising inflation objectives, as long as medium-term inflation expectations remain well anchored. Greater vigilance is warranted in economies that show evidence of sizable second-round effects. Read more...

  • Exchange Rates and Consumer Prices: Historical Relationships
  • Recent Inflation through the Lens of Pass-Through Estimates
  • Conclusion and Policy Implications
  • Annex 4.1. Technical Details

Chapter 5: Infrastructure in Latin America and the Caribbean
Inadequate infrastructure has been widely viewed as one of the principal barriers to growth and development in Latin America and the Caribbean (LAC). Despite the fact that the region’s infrastructure network has been upgraded over the past decade and is broadly comparable with those in other emerging market economies, infrastructure quality across individual countries often compares poorly with their export rivals and, more importantly, considerable catch-up is still required relative to advanced economies. The improvement in infrastructure quality over the past decade reflected both an increase in public investment, facilitated by the commodity boom, and greenfield investment by the private sector, notably in sectors where regulatory impediments had been alleviated. Deepening domestic capital markets helped finance an increasing fraction of private investment in local currency. For most LAC countries, the efficiency of public investment remains below that achieved by advanced economies, notwithstanding improvements in fiscal institutions. Reasonably sound frameworks for public-private partnerships in some large economies should be replicated by others to crowd-in greater private participation. Read more...

  • Stock and Quality of Infrastructure: Where Does LAC Stand?
  • Evolution of Infrastructure Investment
  • Infrastructure Financing
  • Investment Efficiency
  • Public Investment Management
  • Institutional and Regulatory Frameworks for Public-Private Partnerships
  • Conclusions
  • Annex 5.1. Determinants of Infrastructure: The Role of Fiscal Policy and Private Participation

List of Country Abbreviations


New Publications from the Western Hemisphere Department