## Tailwinds or Headwinds? Adjusting the Economic Sails in Latin America

_IMF Blog, October 5, 2011_

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## Bibliographic details
- Authors: Nicols Eyzaguirre
- Published: October 5, 2011

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### Context and timing
- Author: Nicolás Eyzaguirre
- Date: October 5, 2011
- Focus: Latin America (analysis drawn from the Regional Economic Outlook for Western Hemisphere)
- Outlook horizon referenced: the next six to eighteen months

### Current global environment and implications
- Global uncertainty described as "virtually unprecedented."
- Possible global scenarios affecting Latin America:
  - Headwinds: greater stress in the global economy and markets resulting from unresolved problems in advanced economies.
  - Tailwinds: renewed confidence and stronger global demand if advanced countries' problems are tackled.
  - Volatile gusts: weak growth and continued uncertainty producing unstable outcomes similar to current conditions.

### Strengths in Latin America noted
- Inflation is generally under control in most countries.
- Government budgets are in reasonably good shape.
- Financial systems are stronger than in past decades.
- Exposure to the vagaries of international finance is lower.
- Exchange rates are allowed to move more to absorb shocks.

### Historical performance and risk of overheating
- In 2008–09 global crisis, Latin America was hit but subsequently bounced back strongly.
- The post-crisis recovery benefited from the dual tailwinds of buoyant commodity prices and easy external finance.
- Prior to the fading of tailwinds, some countries experienced overheating symptoms: growing inflation, widening current account deficits, and strong credit growth.

### Recent shifts in external conditions
- Tailwinds are fading: commodity prices remain high but have come down and could fall further if world demand falters.
- International financial markets remain volatile with unusually fluid day-to-day sentiment.
- If global uncertainties are resolved, tailwinds could return strongly; if not, headwinds could intensify.

### Headwinds scenario — transmission channels and risks
- Collapse in confidence could trigger intense volatility in global financial markets.
- Another recession in advanced countries would:
  - Slow growth in Asian emerging markets.
  - Reduce demand supporting commodity prices.
  - Deliver a heavy blow to Latin America, particularly commodity exporters.
- Potential consequences for the region:
  - Capital flows could dry up, squeezing domestic credit markets.
  - Growth could slow abruptly as foreign demand and commodity prices fall.
  - Currencies and financial conditions could come under pressure.
  - Investors, if spooked by troubles elsewhere, would scrutinize fundamentals and potentially pull out.

### Tailwinds scenario — implications if global outlook improves
- Early resolution to global uncertainties could:
  - Stoke confidence and renew capital inflows to the region.
  - Be accompanied by easy monetary policies in advanced economies, further propelling capital flows.
  - Cause commodity prices to soar as global demand revives, particularly in emerging Asia.
- Risk: renewed dual tailwinds could lead to overheating pressures again.

### Policy recommendations — navigating shifting winds
- Fiscal policy:
  - Stay the course of gradual fiscal consolidation until global prospects are clearer.
  - Resist the temptation to ramp up government spending now to preserve fiscal buffers for a potential global downturn and to maintain fiscal credibility.
- Monetary policy:
  - Be nimble; use monetary easing first to counter a downturn when it appears.
  - Central banks with strong inflation control records and well-anchored inflation expectations can pause now and even cut rates if risks materialize.
  - If uncertainties settle and tailwinds return, central banks may need to resume tightening.
- Financial sector vigilance and prudential policy:
  - Monitor stress in financial institutions and corporations, particularly liquidity strains.
  - Keep watch for liquidity strains that can spread virulently to emerging markets, as in 2008–09.
  - If external finance remains cheap and domestic credit is frothy, implement tighter prudential policies to protect financial sectors.

### Overall guidance
- Countries should stand ready to deal with both headwinds and stronger tailwinds.
- With the right policies, Latin America can influence its future regardless of which external winds prevail.

*Source: Tailwinds or Headwinds? Adjusting the Economic Sails in Latin America, Nicolás Eyzaguirre, October 5, 2011.*

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## Content in this bundle

- **Wreo1011c2**
  - [Wreo1011c2 (Markdown version)](/external/pubs/ft/reo/2011/whd/eng/pdf/wreo1011c2.pdf.md){rel="alternate" type="text/markdown"}
  - [Wreo1011c2 (PDF)](/external/pubs/ft/reo/2011/whd/eng/pdf/wreo1011c2.pdf){rel="external" type="application/pdf"}
- **Wreo1011c3**
  - [Wreo1011c3 (Markdown version)](/external/pubs/ft/reo/2011/whd/eng/pdf/wreo1011c3.pdf.md){rel="alternate" type="text/markdown"}
  - [Wreo1011c3 (PDF)](/external/pubs/ft/reo/2011/whd/eng/pdf/wreo1011c3.pdf){rel="external" type="application/pdf"}

---

## References

- [Regional Economic Outlook for Western Hemisphere](http://www.imf.org/external/pubs/ft/reo/2011/whd/eng/wreo1011.htm)
- [https://www.imf.org/wp-content/uploads/2011/10/whd-fall-2011-reo_chart1.jpg](https://www.imf.org/wp-content/uploads/2011/10/whd-fall-2011-reo_chart1.jpg)
- [dangerous new phase](http://blogs.imf.org/2011/09/20/strong-policy-action-the-essence-of-restoring-global-economic-hope/)
- [https://www.imf.org/wp-content/uploads/2011/10/whd-fall-2011-reo_chart21.jpg](https://www.imf.org/wp-content/uploads/2011/10/whd-fall-2011-reo_chart21.jpg)

_Source: https://www.imf.org/en/blogs/articles/2011/10/05/adjusting-the-economic-sails-in-latin-america_