{
  "title": "In Transition: The Outlook for Latin America and the Caribbean",
  "publication": "IMF Blog, July 20, 2016",
  "sourceUrl": "https://www.imf.org/en/blogs/articles/2016/07/20/in-transition-the-outlook-for-latin-america-and-the-caribbean",
  "canonical": "https://www.imf.org/en/blogs/articles/2016/07/20/in-transition-the-outlook-for-latin-america-and-the-caribbean",
  "overlayPath": "/en/blogs/articles/2016/07/20/in-transition-the-outlook-for-latin-america-and-the-caribbean/index.md",
  "summary": "Commodity prices recovered since their February 2016 trough but are still expected to remain low for the foreseeable future.",
  "sections": [
    {
      "heading": "Regional outlook and recent developments",
      "content": "- Commodity prices recovered since their February 2016 trough but are still expected to remain low for the foreseeable future.\n- Large exchange rate depreciations in some of the largest economies have slowed or reversed.\n- The U.K. referendum on Brexit led to a sharp increase in volatility in global financial markets, especially in equity prices and exchange rates.\n- 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).\n- 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.\n- Growth outlook revisions:\n  - 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.\n  - 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).\n  - A modest rebound to 1.6 percent growth is expected in 2017.\n- Risk note: frequent bouts of increased financial market volatility could amplify corporate sector vulnerabilities, given increased debt burdens and lower profitability."
    },
    {
      "heading": "Mixed growth performance across subregions",
      "content": "- South America: interplay between trade and domestic factors\n  - Chile:\n    - Growth outlook revised slightly up to 1.7 percent in 2016.\n    - Investment outlook remains weak due to lower and uncertain copper prices, weak external demand, and uncertainties tied to an incomplete reform agenda.\n    - Monetary accommodation and a credible fiscal framework have helped smooth impacts.\n  - Peru:\n    - Growth supported by increased production in primary sectors as long-planned mining projects came online.\n    - Growth expected at 3.7 percent in 2016 and 4.1 percent in 2017.\n    - Policy priorities: continuing education reforms, increasing labor market flexibility, reducing red tape, and rationalizing fiscal decentralization.\n  - Colombia:\n    - Coordinated fiscal and monetary tightening to contain current account deficit and inflationary effects from weather-related and exchange rate shocks.\n    - Advances in the peace process could boost market confidence and spur growth.\n    - Infrastructure agenda is on track to support medium-term growth.\n  - Brazil:\n    - GDP continued to contract in Q1, but by less than expected; 2016 contraction will be less sharp than previously envisaged.\n    - Economy expected to hit bottom in 2016; 2017 should see some positive growth.\n    - Elevated unemployment will weigh on domestic demand.\n    - Interim government outlined a gradual deficit reduction strategy; implementation challenges remain.\n  - Argentina:\n    - Transition to a more coherent and credible macroeconomic policy framework continues.\n    - 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.\n    - Economic activity likely to begin recovering toward the end of 2016 as inflation moderates, spending is boosted, and interest rates are lowered.\n    - Easier monetary and fiscal stance expected to support growth in 2017 but will complicate meeting inflation and fiscal targets announced earlier in 2016.\n  - Ecuador:\n    - Economy affected by the April earthquake, low oil prices, a strong U.S. dollar, and tight financing conditions.\n    - 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).\n    - Financing provided by the IMF under the Rapid Financing Instrument should help meet balance of payments needs from earthquake damages.\n  - Uruguay:\n    - Growth has come to a virtual halt.\n    - Inflation well above the target range and rising public debt leave little room for countercyclical policies.\n    - Priority reforms: improve secondary education quality and enrollment, upgrade infrastructure, and enhance labor market efficiency to better tie wages to productivity.\n  - Venezuela:\n    - Economic condition continues to deteriorate due to unaddressed policy distortions and fiscal imbalances.\n    - Economic activity expected to contract by 10 percent in 2016.\n    - Inflation expected to exceed 700 percent in 2016—the worst growth and inflation performance in the world.\n\n- Mexico, Central America, and the Caribbean: benefiting from the U.S. recovery\n  - Mexico:\n    - Expected to continue growing at a moderate pace.\n    - A relatively weak performance of U.S. industrial production would increase risks.\n    - Importance of planned fiscal consolidation and restructuring of Pemex to maintain market confidence.\n    - 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.\n  - Central America and the Dominican Republic:\n    - Benefiting from low oil prices, stronger U.S. growth, and higher remittances, despite a small downward revision related to the U.S. outlook.\n    - 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.\n  - Caribbean:\n    - Tourism-based countries benefiting from the U.S. recovery, though risks are increasing from Zika, withdrawal of global banks, and Brexit.\n    - Commodity-based Caribbean economies remain weighed down by still low commodity prices.\n    - Key policy objectives: address fiscal vulnerabilities, strengthen the financial sector, and boost long-run growth."
    },
    {
      "heading": "Policy recommendations to stabilize and boost growth",
      "content": "- Exchange rate and monetary policy\n  - Exchange rate flexibility remains the first line of defense against sizable terms-of-trade shocks and increased global financial volatility.\n  - In countries with well-established inflation-targeting frameworks, large exchange rate depreciations have had a relatively limited pass-through to domestic inflation.\n  - Clear central bank communication is critical to keep inflation expectations well anchored.\n\n- Fiscal policy and buffers\n  - Fiscal space is limited across most countries, particularly commodity exporters, given low commodity prices and recent volatility.\n  - Preserving policy buffers is vital in case further risks materialize.\n  - A faster pace of fiscal adjustment is warranted for countries with large debt burdens and sizable market pressures.\n  - Countries benefiting from a positive external environment and decent growth should use this period to strengthen their fiscal positions.\n\n- Structural reforms to raise potential growth\n  - Now is the right time to address bottlenecks to reinvigorate potential growth.\n  - Priority areas: improving education and infrastructure, and strengthening the rule of law to support growth and increase resilience to shocks.\n\nAuthor: Alejandro Werner — July 20, 2016\n\n---\n\n\n References\n\n- broader slowdown in the rest of the world\n- the withdrawal of global banks\n\nSource: https://www.imf.org/en/blogs/articles/2016/07/20/in-transition-the-outlook-for-latin-america-and-the-caribbean"
    }
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    "Authors: Alejandro Werner",
    "Published: July 20, 2016",
    "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:",
    "Risk note: frequent bouts of increased financial market volatility could amplify corporate sector vulnerabilities, given increased debt burdens and lower profitability.",
    "South America: interplay between trade and domestic factors",
    "Mexico, Central America, and the Caribbean: benefiting from the U.S. recovery",
    "Exchange rate and monetary policy",
    "Fiscal policy and buffers",
    "Structural reforms to raise potential growth",
    "[broader slowdown in the rest of the world](https://blogs.imf.org/2016/07/19/a-spanner-in-the-works-an-update-to-the-world-economic-outlook/)",
    "[the withdrawal of global banks](https://blogs.imf.org/2016/06/30/what-happens-when-banks-stop-doing-business-with-some-countries/)"
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