## Uncertain Times, Difficult Choices

_IMF Blog, September 28, 2015_

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## Bibliographic details
- Authors: Vitor Gaspar, Alejandro Werner
- Published: September 28, 2015

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### Overview
- Authors: Vitor Gaspar, Alejandro Werner
- Date: September 28, 2015
- Scope: Analysis of macroeconomic slowdown and fiscal challenges in Latin America, with focus on six larger, financially-integrated economies—Brazil, Chile, Colombia, Mexico, Peru, and Uruguay.
- Central question: How should fiscal policy balance smoothing the adjustment and strengthening credibility amid a sharp external shock and constrained policy space?

### Commodities and the External Shock
- Primary driver: Sharp decline in commodity prices and China’s growth slowdown and rebalancing.
- Consequences:
  - Significant deterioration in Latin America’s terms of trade not expected to recover any time soon.
  - Tighter financial conditions associated with U.S. monetary policy normalization.
  - Sharp decline in Latin currencies, capital flows and equity prices, and an increase in interest rate spreads.
- Historical buffer effects:
  - In Chile, windfall gains to income owing to stronger terms of trade from the boom in commodity prices amounted to about 185 percentage points of GDP in cumulative terms over 2003-12.
  - In Chile, discretionary stimulus during adverse macroeconomic shocks included a 4 percentage points of GDP fall in the cyclically-adjusted balance over the period 2007-09, providing a significant cushion to the economy.
- Outlook: Medium-term growth prospects have been marked down, with the region experiencing the slowest growth rates in a decade.

### Domestic Impediments and Fiscal Impact
- Domestic factors exacerbating the shock:
  - Political imbroglio and low confidence.
  - Rising household and corporate leverage.
  - Structural rigidities, including limited economic diversification and lagging trade performance.
  - Relatively low levels of investment and weak productivity growth.
- Fiscal developments:
  - After a short rebound following the global financial crisis, budget balances began to deteriorate as government spending in the six larger economies increased by an average of 3 percentage points of GDP while commodity prices were still relatively high.
  - The fall in commodity prices and slowdown in growth have led to a fall in fiscal revenues, accelerating fiscal deterioration.
  - Current outlays—such as pensions, social protection, and health—have increased in all countries except Peru and, to a lesser extent, Colombia, complicating retrenchment.
  - Fiscal risks from state owned enterprises and the financial sector add to vulnerability.

### Policy Choices and the Role of Fiscal Policy
- Given the magnitude and persistence of the shock, adjustment is unavoidable, though many of the six larger countries will see negative output gaps in the short run.
- Suggested primary role of fiscal policy: anchor expectations and facilitate adjustment rather than act as large-scale cyclical stimulus.
- Country-specific guidance:
  - Brazil: urgent need to put debt ratios on a downward path.
  - Uruguay: strengthen the fiscal position over the medium term to reinforce fiscal sustainability.
  - Colombia and Mexico: fiscal tightening required to accommodate lower-than-expected revenues owing to weaker oil prices and slower potential growth.
  - Chile and Peru: more room for gradual adjustment given public debt levels well below that of other emerging markets, but vulnerability to commodity price shocks argues for eventual adjustment to lower metal prices.
- Determinants of consolidation size, timing, and pace: prospective debt dynamics, macroeconomic outlook, and market conditions.

### Anchoring Policies and Structural Fiscal Reforms
- Confidence and credibility determine fiscal latitude; maintaining or re-establishing fiscal anchors is imperative.
- Fundamental objective: ensure a solid financial position for the general government.
- Compliance with national fiscal rules and procedures is key; experience since 2009 shows medium-term fiscal objectives were frequently revised and rules bent in some cases.
- Markets are discriminating between countries with a long-track record of credibility and those with accumulated policy and political risks.
- Structural policy priorities:
  - Diversify the revenue base for commodity producers (Chile, Colombia, Mexico, and Peru) and avoid overemphasis of government spending on the resource sector.
  - Bolster public investment management and strengthen expenditure policies to ensure efficiency and effectiveness of government spending, thereby creating fiscal space and generating growth dividends.
  - Build fiscal frameworks that create sufficient precautionary buffers to deal with uncertainty (noting further discussion in the forthcoming Fiscal Monitor, October 2015).

### Key Statistics and Exact Figures from the Source
- Six larger, financially-integrated economies: Brazil, Chile, Colombia, Mexico, Peru, and Uruguay.
- Chile windfall cumulative gains: about 185 percentage points of GDP over 2003-12.
- Chile discretionary stimulus: 4 percentage points of GDP fall in the cyclically-adjusted balance over 2007-09.
- Average increase in government spending after the crisis across the six economies: 3 percentage points of GDP.
- Date of publication: September 28, 2015.

*Source: Uncertain Times, Difficult Choices — Vitor Gaspar and Alejandro Werner, September 28, 2015.*

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## Content in this bundle

- **Tempos incertos, escolhas difíceis; Vitor Gaspar e Alejandro Werner; 28 de setembro de 2015**
  - [Tempos incertos, escolhas difíceis; Vitor Gaspar e Alejandro Werner; 28 de setembro de 2015 (Markdown version)](/external/lang/portuguese/np/blog/2015/092815p.pdf.md){rel="alternate" type="text/markdown"}
  - [Tempos incertos, escolhas difíceis; Vitor Gaspar e Alejandro Werner; 28 de setembro de 2015 (PDF)](/external/lang/portuguese/np/blog/2015/092815p.pdf){rel="external" type="application/pdf"}
- **Staff Discussion Note**
  - [Staff Discussion Note (Markdown version)](/external/pubs/ft/sdn/2015/sdn1506.pdf.md){rel="alternate" type="text/markdown"}
  - [Staff Discussion Note (PDF)](/external/pubs/ft/sdn/2015/sdn1506.pdf){rel="external" type="application/pdf"}

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_Source: https://www.imf.org/en/blogs/articles/2015/09/28/uncertain-times-difficult-choices_