## Latin America and the Caribbean in 2016: Adjusting to a Harsher Reality

_IMF Blog, January 22, 2016_

## Source details

**Canonical URL:** [Latin America and the Caribbean in 2016: Adjusting to a Harsher Reality](https://www.imf.org/en/blogs/articles/2016/01/22/latin-america-and-the-caribbean-in-2016-adjusting-to-a-harsher-reality)

## Other formats

- [Markdown version](/en/blogs/articles/2016/01/22/latin-america-and-the-caribbean-in-2016-adjusting-to-a-harsher-reality/index.md)
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## Bibliographic details
- Authors: Alejandro Werner
- Published: January 22, 2016

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### Overview
- 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.

### Commodity shock and macroeconomic impact
- 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.

### South America: country-level findings
- Chile, Colombia, and Peru:
  - A relatively orderly adjustment is proceeding via large exchange rate depreciations, gradual fiscal consolidation, and accommodative monetary policies.
  - Foundations for growth remain: sound policy frameworks, credible institutions, healthy financial markets, and favorable foreign borrowing costs.
  - Potential growth is expected to be lower as transition to more diverse growth sources takes time.
- Bolivia:
  - Growth remains strong but faces risks from rising public debt and the current account deficit.
- Brazil:
  - 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.
  - Unemployment has risen sharply, and inflation is in double digits.
  - Political dysfunction delays adoption of a credible fiscal strategy, prompting rating downgrades and increased financing costs.
  - Exports are beginning to show signs of strength with a sharply depreciating real, but resolution of political and policy uncertainty is essential for recovery.
- Venezuela:
  - Longstanding policy distortions and fiscal imbalances were exacerbated by the collapse in oil prices.
  - Expected fall in output of "almost 18 percent over 2015 and 2016" (the third sharpest decline in the world).
  - Scarcity of hard currency has caused shortages of intermediate and essential goods, including food.
  - Inflation is expected to rise to "720 percent this year," from a world-high inflation of "about 275 percent in 2015."
- Argentina:
  - 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.
  - These steps improve medium-term growth prospects but the adjustment is likely to generate a mild recession in 2016.
- Ecuador:
  - Macroeconomic rigidities preclude a smoother adjustment to falling oil prices.
  - 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.

### Mexico, Central America, and the Caribbean
- Mexico:
  - Expected to continue to recover at a moderate pace, supported by healthy private domestic demand and spillovers from a strong U.S. economy.
  - Depreciation of the peso and lower electricity prices should boost manufacturing production and exports.
  - 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.
- Central America and the Dominican Republic:
  - Have benefited from the oil price decline, a stronger U.S. growth, and higher remittances.
  - Recent softening of world coffee and banana prices could reduce this positive impulse.
- Caribbean:
  - Tourism-based countries benefit from low energy costs and recovery in the U.S.
  - Commodity-intensive Caribbean countries face worsened outlooks from declining prices for oil, gold, and alumina.

### Risks and scenarios: what could go wrong?
- U.S. interest rate increases:
  - The increase in U.S. interest rates last December had limited impact, suggesting markets had largely priced in the decision.
  - 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.
- External vulnerabilities:
  - The region remains particularly vulnerable to a stronger-than-expected slowdown in China and to further declines in commodity prices.
- Regional contagion:
  - Further deterioration in Brazil could lead to sudden re-pricing of regional assets and reduced demand for exports among MERCOSUR trading partners.
- Private investment risks:
  - 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.

### Policy priorities and recommendations
- Monetary policy and exchange rates:
  - Large depreciations have raised domestic inflation, creating tensions even for well-established inflation targeting central banks.
  - 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.
  - Clear communication helped anchor inflation expectations; recent upticks have prompted modest rate hikes.
- External adjustment and buffers:
  - 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.
  - 2016 should be a time for policymakers "to err on the side of caution": allow adjustment to continue and preserve buffers.
- Structural and fiscal policies:
  - 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.

*Source: Alejandro Werner, January 22, 2016*

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## Content in this bundle

- **América Latina e Caribe em 2016: Ajuste a uma realidade mais dura**
  - [América Latina e Caribe em 2016: Ajuste a uma realidade mais dura (Markdown version)](/external/lang/portuguese/np/blog/2016/012216p.pdf.md){rel="alternate" type="text/markdown"}
  - [América Latina e Caribe em 2016: Ajuste a uma realidade mais dura (PDF)](/external/lang/portuguese/np/blog/2016/012216p.pdf){rel="external" type="application/pdf"}

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## References

- [Alejandro Werner](http://blogs.imf.org/bloggers/alejandro-werner/)
- [global recovery](http://www.imf.org/external/pubs/ft/survey/so/2016/RES011916A.htm)

_Source: https://www.imf.org/en/blogs/articles/2016/01/22/latin-america-and-the-caribbean-in-2016-adjusting-to-a-harsher-reality_