In Transition: The Outlook for Latin America and the Caribbean
IMF Blog, July 20, 2016
Source details
- Canonical URL
- In Transition: The Outlook for Latin America and the Caribbean
Other formats
Bibliographic details
- Authors: Alejandro Werner
- Published: July 20, 2016
Regional outlook and recent developments
- Commodity prices recovered since their February 2016 trough but are still expected to remain low for the foreseeable future.
- Large exchange rate depreciations in some of the largest economies have slowed or reversed.
- The U.K. referendum on Brexit led to a sharp increase in volatility in global financial markets, especially in equity prices and exchange rates.
- Direct trade exposures of countries in Latin America and the Caribbean to the U.K. are small (on average about 1 percent of total exports).
- A more gradual pace of monetary normalization in the United States, with compressed U.S. term premium, should help contain funding cost pressures for both the public and private sector.
- Growth outlook revisions:
- Growth outlook for the region for 2016 and 2017 revised up modestly—by 0.1 percentage points both years relative to the April 2016 forecasts.
- Regional activity is expected to contract by -0.4 percent in 2016 (slightly better than the -0.5 percent envisaged in the April 2016 projections).
- A modest rebound to 1.6 percent growth is expected in 2017.
- Risk note: frequent bouts of increased financial market volatility could amplify corporate sector vulnerabilities, given increased debt burdens and lower profitability.
Mixed growth performance across subregions
- South America: interplay between trade and domestic factors
- Chile:
- Growth outlook revised slightly up to 1.7 percent in 2016.
- Investment outlook remains weak due to lower and uncertain copper prices, weak external demand, and uncertainties tied to an incomplete reform agenda.
- Monetary accommodation and a credible fiscal framework have helped smooth impacts.
- Peru:
- Growth supported by increased production in primary sectors as long-planned mining projects came online.
- Growth expected at 3.7 percent in 2016 and 4.1 percent in 2017.
- Policy priorities: continuing education reforms, increasing labor market flexibility, reducing red tape, and rationalizing fiscal decentralization.
- Colombia:
- Coordinated fiscal and monetary tightening to contain current account deficit and inflationary effects from weather-related and exchange rate shocks.
- Advances in the peace process could boost market confidence and spur growth.
- Infrastructure agenda is on track to support medium-term growth.
- Brazil:
- GDP continued to contract in Q1, but by less than expected; 2016 contraction will be less sharp than previously envisaged.
- Economy expected to hit bottom in 2016; 2017 should see some positive growth.
- Elevated unemployment will weigh on domestic demand.
- Interim government outlined a gradual deficit reduction strategy; implementation challenges remain.
- Argentina:
- Transition to a more coherent and credible macroeconomic policy framework continues.
- Near-term activity suffered more than previously expected due to relative price adjustment (exchange rate depreciation and utility tariff increases) that accelerated inflation and hurt private consumption.
- Economic activity likely to begin recovering toward the end of 2016 as inflation moderates, spending is boosted, and interest rates are lowered.
- Easier monetary and fiscal stance expected to support growth in 2017 but will complicate meeting inflation and fiscal targets announced earlier in 2016.
- Ecuador:
- Economy affected by the April earthquake, low oil prices, a strong U.S. dollar, and tight financing conditions.
- Expected to contract in 2016 but at a milder pace than projected earlier due to relative recovery in oil prices and more external financing (mainly from China).
- Financing provided by the IMF under the Rapid Financing Instrument should help meet balance of payments needs from earthquake damages.
- Uruguay:
- Growth has come to a virtual halt.
- Inflation well above the target range and rising public debt leave little room for countercyclical policies.
- Priority reforms: improve secondary education quality and enrollment, upgrade infrastructure, and enhance labor market efficiency to better tie wages to productivity.
- Venezuela:
- Economic condition continues to deteriorate due to unaddressed policy distortions and fiscal imbalances.
- Economic activity expected to contract by 10 percent in 2016.
- Inflation expected to exceed 700 percent in 2016—the worst growth and inflation performance in the world.
- Mexico, Central America, and the Caribbean: benefiting from the U.S. recovery
- Mexico:
- Expected to continue growing at a moderate pace.
- A relatively weak performance of U.S. industrial production would increase risks.
- Importance of planned fiscal consolidation and restructuring of Pemex to maintain market confidence.
- Central bank increased policy rates recently to keep inflation close to target; with fiscal consolidation and well-anchored inflation expectations, maintaining a relatively accommodative monetary stance is important.
- Central America and the Dominican Republic:
- Benefiting from low oil prices, stronger U.S. growth, and higher remittances, despite a small downward revision related to the U.S. outlook.
- Recommended uses of favorable external conditions: strengthen fiscal positions (Costa Rica, El Salvador), protect financial stability (Honduras, Panama), and adopt reforms to boost potential growth.
- Caribbean:
- Tourism-based countries benefiting from the U.S. recovery, though risks are increasing from Zika, withdrawal of global banks, and Brexit.
- Commodity-based Caribbean economies remain weighed down by still low commodity prices.
- Key policy objectives: address fiscal vulnerabilities, strengthen the financial sector, and boost long-run growth.
Policy recommendations to stabilize and boost growth
- Exchange rate and monetary policy
- Exchange rate flexibility remains the first line of defense against sizable terms-of-trade shocks and increased global financial volatility.
- In countries with well-established inflation-targeting frameworks, large exchange rate depreciations have had a relatively limited pass-through to domestic inflation.
- Clear central bank communication is critical to keep inflation expectations well anchored.
- Fiscal policy and buffers
- Fiscal space is limited across most countries, particularly commodity exporters, given low commodity prices and recent volatility.
- Preserving policy buffers is vital in case further risks materialize.
- A faster pace of fiscal adjustment is warranted for countries with large debt burdens and sizable market pressures.
- Countries benefiting from a positive external environment and decent growth should use this period to strengthen their fiscal positions.
- Structural reforms to raise potential growth
- Now is the right time to address bottlenecks to reinvigorate potential growth.
- Priority areas: improving education and infrastructure, and strengthening the rule of law to support growth and increase resilience to shocks.
Author: Alejandro Werner — July 20, 2016