{
  "title": "Latin America and the Caribbean in 2016: Adjusting to a Harsher Reality",
  "publication": "IMF Blog, January 22, 2016",
  "sourceUrl": "https://www.imf.org/en/blogs/articles/2016/01/22/latin-america-and-the-caribbean-in-2016-adjusting-to-a-harsher-reality",
  "canonical": "https://www.imf.org/en/blogs/articles/2016/01/22/latin-america-and-the-caribbean-in-2016-adjusting-to-a-harsher-reality",
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  "summary": "Growth in 2016 is expected to be negative for the second consecutive year—the first time since the debt crisis of 1982–83.",
  "sections": [
    {
      "heading": "Overview",
      "content": "- Growth in 2016 is expected to be negative for the second consecutive year—the first time since the debt crisis of 1982–83.\n- The regional recession masks that most countries continue to grow modestly; country-specific outcomes are determined by the interplay between external shocks and domestic fundamentals.\n- The negative growth projection for the region is driven by four countries: Argentina, Brazil, Ecuador, and Venezuela.\n- Overall, over the medium term, growth is expected to remain tepid, highlighting the importance of resolving domestic challenges."
    },
    {
      "heading": "Commodity shock and macroeconomic impact",
      "content": "- The sizeable decline in commodity prices is \"about 30 to 50 percent relative to its peak depending on the country.\"\n- Export revenue losses are estimated at around \"$200 billion for the 7 listed economies.\"\n- The sizes of the terms of trade shocks relative to the sizes of these economies are \"less than 1 percent of GDP for Argentina, Brazil, and Mexico in 2015 and 2016\"—insufficient alone to explain the severity of contractions in some cases.\n- The decline in commodity prices, combined with macroeconomic imbalances and microeconomic distortions, has led to sharp declines in private investment in affected countries."
    },
    {
      "heading": "South America: country-level findings",
      "content": "- Chile, Colombia, and Peru:\n  - A relatively orderly adjustment is proceeding via large exchange rate depreciations, gradual fiscal consolidation, and accommodative monetary policies.\n  - Foundations for growth remain: sound policy frameworks, credible institutions, healthy financial markets, and favorable foreign borrowing costs.\n  - Potential growth is expected to be lower as transition to more diverse growth sources takes time.\n- Bolivia:\n  - Growth remains strong but faces risks from rising public debt and the current account deficit.\n- Brazil:\n  - Following a sharp contraction of \"3.8 percent in 2015,\" output is expected to fall a further \"3.5 percent in 2016\"—the largest total contraction since 1981–83.\n  - Unemployment has risen sharply, and inflation is in double digits.\n  - Political dysfunction delays adoption of a credible fiscal strategy, prompting rating downgrades and increased financing costs.\n  - Exports are beginning to show signs of strength with a sharply depreciating real, but resolution of political and policy uncertainty is essential for recovery.\n- Venezuela:\n  - Longstanding policy distortions and fiscal imbalances were exacerbated by the collapse in oil prices.\n  - Expected fall in output of \"almost 18 percent over 2015 and 2016\" (the third sharpest decline in the world).\n  - Scarcity of hard currency has caused shortages of intermediate and essential goods, including food.\n  - Inflation is expected to rise to \"720 percent this year,\" from a world-high inflation of \"about 275 percent in 2015.\"\n- Argentina:\n  - The new government has begun transitions: eliminating restrictions on the foreign exchange market, removing several constraints on international trade, announcing main guidelines of the macroeconomic framework, and partially removing energy subsidies.\n  - These steps improve medium-term growth prospects but the adjustment is likely to generate a mild recession in 2016.\n- Ecuador:\n  - Macroeconomic rigidities preclude a smoother adjustment to falling oil prices.\n  - With continued decline in oil prices, real exchange rate appreciation, fiscal consolidation measures in 2015 and 2016, tight financing conditions, and the dollarization regime, a recession is anticipated in 2016."
    },
    {
      "heading": "Mexico, Central America, and the Caribbean",
      "content": "- Mexico:\n  - Expected to continue to recover at a moderate pace, supported by healthy private domestic demand and spillovers from a strong U.S. economy.\n  - Depreciation of the peso and lower electricity prices should boost manufacturing production and exports.\n  - The recent decline in oil prices will have only a limited effect on public finances in 2016 as oil price risk has been hedged for that year; persistent low oil prices would increase the fiscal consolidation burden in the medium term.\n- Central America and the Dominican Republic:\n  - Have benefited from the oil price decline, a stronger U.S. growth, and higher remittances.\n  - Recent softening of world coffee and banana prices could reduce this positive impulse.\n- Caribbean:\n  - Tourism-based countries benefit from low energy costs and recovery in the U.S.\n  - Commodity-intensive Caribbean countries face worsened outlooks from declining prices for oil, gold, and alumina."
    },
    {
      "heading": "Risks and scenarios: what could go wrong?",
      "content": "- U.S. interest rate increases:\n  - The increase in U.S. interest rates last December had limited impact, suggesting markets had largely priced in the decision.\n  - Remaining risks relate to the expected path of interest rates; uncertainty or sudden revisions could increase the term premium and cause spillovers to long-term interest rates in the region.\n- External vulnerabilities:\n  - The region remains particularly vulnerable to a stronger-than-expected slowdown in China and to further declines in commodity prices.\n- Regional contagion:\n  - Further deterioration in Brazil could lead to sudden re-pricing of regional assets and reduced demand for exports among MERCOSUR trading partners.\n- Private investment risks:\n  - The recovery in investment could be delayed due to high corporate leverage; with medium-term growth expected to remain low, corporations may need to adjust balance sheets, weakening private investment prospects."
    },
    {
      "heading": "Policy priorities and recommendations",
      "content": "- Monetary policy and exchange rates:\n  - Large depreciations have raised domestic inflation, creating tensions even for well-established inflation targeting central banks.\n  - Central banks have often kept monetary conditions loose to support weak domestic demand, but persistent depreciations have kept inflation above targets for prolonged periods, except in Mexico.\n  - Clear communication helped anchor inflation expectations; recent upticks have prompted modest rate hikes.\n- External adjustment and buffers:\n  - Current accounts are in deficit throughout the region; further external adjustment will likely be needed, putting pressure on exchange rates and complicating central bank policy, especially in the absence of aggregate demand pressures.\n  - 2016 should be a time for policymakers \"to err on the side of caution\": allow adjustment to continue and preserve buffers.\n- Structural and fiscal policies:\n  - The regional outlook will improve only when domestic challenges in contracting economies are resolved, including addressing macroeconomic imbalances and microeconomic distortions that suppress private investment.\n\nSource: Alejandro Werner, January 22, 2016\n\n---\n\n Content in this bundle\n\n- América Latina e Caribe em 2016: Ajuste a uma realidade mais dura\n  - América Latina e Caribe em 2016: Ajuste a uma realidade mais dura (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - América Latina e Caribe em 2016: Ajuste a uma realidade mais dura (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\n References\n\n- Alejandro Werner\n- global recovery\n\nSource: https://www.imf.org/en/blogs/articles/2016/01/22/latin-america-and-the-caribbean-in-2016-adjusting-to-a-harsher-reality"
    }
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    "Authors: Alejandro Werner",
    "Published: January 22, 2016",
    "Growth in 2016 is expected to be negative for the second consecutive year—the first time since the debt crisis of 1982–83.",
    "The regional recession masks that most countries continue to grow modestly; country-specific outcomes are determined by the interplay between external shocks and domestic fundamentals.",
    "The negative growth projection for the region is driven by four countries: Argentina, Brazil, Ecuador, and Venezuela.",
    "Overall, over the medium term, growth is expected to remain tepid, highlighting the importance of resolving domestic challenges.",
    "The sizeable decline in commodity prices is \"about 30 to 50 percent relative to its peak depending on the country.\"",
    "Export revenue losses are estimated at around \"$200 billion for the 7 listed economies.\"",
    "The sizes of the terms of trade shocks relative to the sizes of these economies are \"less than 1 percent of GDP for Argentina, Brazil, and Mexico in 2015 and 2016\"—insufficient alone to explain the severity of contractions in some cases.",
    "The decline in commodity prices, combined with macroeconomic imbalances and microeconomic distortions, has led to sharp declines in private investment in affected countries.",
    "Chile, Colombia, and Peru:",
    "Bolivia:",
    "Brazil:",
    "Venezuela:",
    "Argentina:",
    "Ecuador:",
    "Mexico:",
    "Central America and the Dominican Republic:",
    "Caribbean:",
    "U.S. interest rate increases:",
    "External vulnerabilities:",
    "Regional contagion:",
    "Private investment risks:",
    "Monetary policy and exchange rates:",
    "External adjustment and buffers:",
    "Structural and fiscal policies:",
    "**América Latina e Caribe em 2016: Ajuste a uma realidade mais dura**",
    "[Alejandro Werner](http://blogs.imf.org/bloggers/alejandro-werner/)",
    "[global recovery](http://www.imf.org/external/pubs/ft/survey/so/2016/RES011916A.htm)"
  ],
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