Navigating Through Global Cross Currents: Latest Outlook for Latin America and the Caribbean
IMF Blog, January 23, 2017
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- Authors: Alejandro Werner
- Published: January 23, 2017
Global drivers and shifts
- Anticipated shift in the U.S. policy mix: fiscal policy likely to become expansionary, while monetary policy is expected to tighten faster than previously expected because of stronger demand and inflation pressures.
- U.S. growth projections: "growth is projected to rise to 2.3 percent in 2017 and 2.5 percent in 2018" — a "cumulative increase in GDP of ½ percentage point relative to the October forecast."
- Consequences: increase in global long-term interest rates, a stronger dollar in real effective terms, and a moderation of capital flows to Latin America.
- Improved outlook for other advanced economies and China for 2017–18, reflecting stronger activity in H2 2016 and projected policy stimulus.
- Some recovery in commodity prices (especially metal and oil) driven by Chinese infrastructure and real estate investment, expected U.S. fiscal easing, and agreement among major petroleum producers to cut supply.
- Caveat: "commodity prices are still expected to remain low relative to their historical standards."
Regional aggregate outlook
- Regional growth projections:
- Contraction of 0.7 percent in 2016.
- Expansion by 1.2 percent in 2017.
- Expansion by 2.1 percent in 2018.
- The projected recovery is weaker than the October forecast due to persistent weakness in some of the largest economies even as others see moderate growth.
- Policy responses observed: easing monetary policy where appropriate, using available space to calibrate fiscal adjustment, and pursuing supply-side reforms.
South America — country specifics
- Brazil:
- Real GDP growth in 2017 is expected to turn positive and reach 0.2 percent.
- Continued drag from elevated unemployment and high private sector debt.
- Policy actions: measures to help highly indebted companies; reforms to reduce red tape and cost of doing business; constitutional amendment to cap central government noninterest spending in real terms approved; draft pension reform submitted to Congress; state-level adjustment and reform programs expected.
- Inflation declined rapidly and "at end-2016 was below the upper limit of the tolerance band."
- Central bank "accelerated significantly the pace of monetary policy easing" citing weaker growth, faster disinflation, and progress with fiscal reform.
- Argentina:
- Revised GDP growth projections: "-2.4" for 2016 and "2.2 percent" for 2017.
- Recovery drivers: higher real wages boosting consumption, stronger external demand supporting exports, and accelerating public investment.
- Policy notes: successful tax amnesty expected to help domestic demand and fiscal targets; inflation expected to fall significantly but remain slightly above the central bank’s target in 2017.
- Emphasis on continuing macroeconomic adjustment and strengthening institutional framework; supply-side reform agenda essential.
- Colombia:
- Economic activity weaker than previously anticipated, "growing by 0.3 percentage points lower in 2016 than projected earlier."
- Timely monetary and fiscal tightening helped narrow the current account deficit.
- Medium-term growth supported by the recently signed peace agreement and a structural tax reform to create space for infrastructure and social spending.
- Chile:
- Growth projected at "2.1 percent in 2017," after "1.6 percent in 2016."
- Drivers: higher external demand, stronger outlook for copper prices, and significant monetary easing.
- Risks: uncertain regional outlook, higher interest rates abroad, and low domestic confidence.
- Peru:
- Growth expected to reach "4.3 percent in 2017" due to expanding copper production, higher copper prices, rebound in public spending, and robust private consumption.
- With the output gap closing, focus should shift to gradual fiscal consolidation while preserving public infrastructure spending and growth-friendly structural reforms (decreasing informality, raising education levels, deepening capital markets, reducing red tape).
- Ecuador:
- Economic outlook improved because of better access to international capital markets prompted by recovery in oil prices.
- Venezuela:
- "Remains in a deep economic crisis on a path to hyperinflation" driven by a large fiscal deficit that has been monetized, extensive distortions, and severe import restrictions.
- "Economic activity is projected to contract sharply in 2017, while inflation is expected to accelerate further."
Mexico, Central America, and the Caribbean
- Mexico:
- Moderate growth but entering difficult terrain; outlook clouded by uncertainty about U.S. trade policy and tighter financial conditions.
- Policy prescription: "to maintain market confidence and put public debt firmly on a downward path, it is important to persevere with fiscal consolidation."
- Inflation rising after sharp peso depreciation and higher energy prices; tightening of monetary policy should help keep inflation expectations under control; further tightening only if needed to prevent second-round effects.
- Central America and the Dominican Republic:
- Economic activity supported by faster U.S. growth.
- Risks from higher global interest rates and appreciation of the dollar, particularly for countries where exchange rates do not depreciate relative to the U.S. dollar.
- Inflation "is low, at 2¼ percent," and external positions are robust given still low commodity prices and strong remittances in some countries.
- Caribbean:
- Prospects improving with moderate growth projected for 2017.
- Tourism-dependent economies benefit from higher U.S. growth; commodity exporters benefit from somewhat higher commodity prices.
- Risks include withdrawal of correspondent banking relationships and U.S. policy uncertainty.
Policy recommendations and resilience measures
- Exchange rate policy:
- "Exchange rate flexibility has served the region well and should remain the first line of defense against shocks."
- Well-established monetary policy frameworks are suited to limit exchange rate pass-through to consumer prices.
- Financial sector and corporate balance sheets:
- Strong risk management practices and policies facilitating corporate balance sheet repair are critical to reduce vulnerabilities from tighter global financial conditions and sharp currency movements.
- Fiscal policy:
- Countries should "continue to use available space to calibrate fiscal adjustment," recognizing commodity prices are expected to remain low relative to historical levels.
- The pace of adjustment should depend on debt levels and market pressures.
- Structural reforms:
- Beyond macro adjustment, priority reforms include decreasing informality and red tape, boosting infrastructure quality, improving education and rule of law — essential to support medium-term growth.
Alejandro Werner, January 23, 2017 — Navigating Through Global Cross Currents: Latest Outlook for Latin America and the Caribbean
Content in this bundle
- Navegar as contracorrentes mundiais: Perspectivas mais recentes para a América Latina e Caribe