IMF Survey : Latin America’s Economic Slowdown Continues

IMF News, April 27, 2016

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Growth in Latin America and the Caribbean has been marked down further and is likely to contract for the second consecutive year in 2016.
The IMF’s Regional Economic Outlook for the Western Hemisphere (released on April 27 in Mexico City) projects the region is set to contract by 0.5 percent in 2016—marking two consecutive years of negative growth for the first time since the Latin American debt crisis of 1982–83.
The report projects the region to bounce back to 1.5 percent growth in 2017.
The deceleration reflects: weak external demand; further declines in commodity prices; volatile financial conditions; and, for some economies, important domestic imbalances and rigidities.
Many countries have experienced large exchange rate depreciations driven by deteriorating terms of trade and external demand.

Brazil: growth contracting by 3.8 percent in 2016—the same rate as in 2015—due to economic and political problems.
Chile: growth expected to slow to 1.5 percent in 2016, reflecting subdued confidence and sluggish investment in the mining sector.
Argentina: faces an output contraction of about 1 percent in 2016, though medium-term growth prospects have improved due to ongoing transition to remove domestic imbalances and distortions and correct relative prices.
Venezuela: faces an output contraction of about 8 percent in 2016.
Peru: growth expected to rise to 3¾ percent in 2016, primarily boosted by ongoing mining investment.
Mexico: expected to grow at a moderate 2.4 percent in 2016, supported by the continued recovery in the United States.
Central America: output growth for the region projected at 4¼ percent in 2016, benefiting from low oil prices and solid U.S. growth.
Caribbean: tourism-based countries have favorable growth prospects; commodity-based economies in the Caribbean face deteriorating growth prospects.
Note on distribution: while many countries continue to grow modestly, a small number of economies—representing about half of the region’s economy—face recession largely as a result of domestic factors.

Exposure to China: Latin America remains particularly vulnerable to a stronger-than-expected slowdown in China—the destination for 15 percent to 25 percent of exports from Brazil, Chile, Peru, Uruguay, and Venezuela.
Further declines in commodity prices would amplify risks and increase corporate vulnerabilities.
A further deterioration in Brazil could lead to: a sudden repricing of regional assets; reduced demand for exports among trading partners in the region; and an increase in perceived risk.
Financial risks: slower-than-projected investment recovery could occur if tighter financial conditions and lower growth prospects lead to balance sheet adjustments among companies increasingly indebted in foreign currency.
Corporate vulnerabilities have risen since 2011 due to lower growth and changing financial market conditions; rapid currency depreciation, higher sovereign spreads, and weaker firm fundamentals add to higher corporate risks.

Policy objective: design policies and economic reforms to manage the transition to a lower-growth, lower-commodity-price environment and to boost potential output.
Fiscal policy: macroeconomic policy space is limited; fiscal space is constrained by high debt, slower growth, and lower commodity revenues—where further accommodation might be warranted, limitations apply.
Exchange rates and monetary policy:
- Exchange rate flexibility is critical to help economies adjust to persistently lower commodity prices.
- Where central banks enjoy strong credibility and exchange rate pass-through to inflation is limited, monetary policy can remain accommodative if needed to support demand.
- Monetary policy should be geared toward preserving central bank credibility if medium-term inflation expectations are rising.
Financial sector and corporate risks: strengthen policy frameworks and monitoring of risks to address rising corporate vulnerabilities and firm-level weaknesses.

Factors expected to keep growth below historical trends: inadequate infrastructure networks; shortcomings in quality education; relatively low export diversity; and lower commodity prices.
Structural policies aimed at resolving these bottlenecks could help raise potential output.
The Regional Economic Outlook includes three analytical chapters focusing on:
- assessing corporate vulnerabilities in Latin America;
- analyzing the degree of exchange rate pass-through in the region;
- evaluating infrastructure investment in Latin America and the Caribbean.

Source: IMF Survey : Latin America’s Economic Slowdown Continues (April 27, 2016).