The stock exchange in Sao Paulo: the region is returning to growth, the IMF says in its latest outlook (photo: Mauricio Lima/AFP)
Regional Economic Outlook
In its Regional Economic Outlook for the region, issued on October 23 in Sao Paulo, Brazil, the IMF said countries that took on board the hard lessons of previous global crises were better prepared to deal with this one.
“The question, now that the worst of the storm is behind us, is how to adjust policies to the new reality of a more sluggish global economy and still provide conditions for growth and poverty alleviation,” said Nicolás Eyzaguirre, director of the IMF’s Western Hemisphere Department.
The regional growth forecast in 2009 as a whole is -2 ½ percent, mainly reflecting contractions earlier in the year. But many countries have already started to recover, and the region is expected to post moderate growth of about 3 percent in 2010.
Phased recovery shapes policy challenges
The timing and path of recovery will vary among the region’s economies, depending on the nature of their international linkages, as well as their policy frameworks and track records, the IMF said. One key factor is the recent recovery of commodity prices—good news for the region’s large commodity exporters, but not for the commodity importing countries.
For the purpose of analyzing the regional scene, the report divides countries into four analytical groups: 1) countries that are net exporters of commodities and have full access to financial markets, including Brazil, Chile, Colombia, Mexico and Peru; 2) other commodity exporters; 3) commodity importers with large tourism sectors, primarily in the Caribbean; and 4) other countries that are net importers of commodities, including many that rely on remittances from workers abroad.
The outlook for the financially integrated commodity exporting countries is stronger. These countries had the most room to ease monetary and fiscal policies this year; stimulus that is supporting the recovery. A key issue now will be timing and sequencing a withdrawal of such policies. In general, fiscal stimulus should be withdrawn before monetary stimulus, according to the IMF. In addition, some of these countries may be facing strong capital inflows, which could pose challenges. In such cases, the withdrawal of stimulus may need to advance even more quickly, starting on the fiscal side, while enhanced exchange rate flexibility will limit one-sided bets on domestic currencies.
The recovery will be lukewarm for many commodity importing countries that depend on income from workers’ remittances and tourism, because those flows are linked to still weak employment conditions in the U.S. and other advanced economies. Many of these countries faced the crisis with high levels of debt and limited room for policy maneuver. Any room for stimulus should prudently be saved in case the global recovery stalls. The focus for countries with the least policy room should be on maintaining stability and alleviating hardship for the most vulnerable groups, the IMF said.
No quick return to fast growth
The legacies of the global crisis will have implications for the region. The IMF expects that growth of potential output over the next five years will be somewhat slower than in the years prior to the crisis. The loss will be more pronounced in the U.S. and other advanced economies, but will apply also to countries in Latin America and the Caribbean.
In the medium term, the IMF said the region’s policies will need to adjust to this new environment of lower growth. With government revenues growing more slowly, challenges will include replenishing fiscal buffers, prioritizing public expenditures, and promoting faster trend growth and poverty reduction in a tougher economic climate.
Better prepared, more room for action
The performance of Latin America and the Caribbean countries was better in this crisis than previous ones, according to the IMF, due to efforts made over the past decade to strengthen their economies.
The region’s resilience to withstand shocks generated outside its borders is a marked departure from past global crises: this time, the region was better prepared and so was able to avoid falling into its own crises of the financial system, public finances, and balance of payments.
Some key structural improvements are noteworthy. Flexible exchange rates acted as a shock absorber in several countries. Also, fiscal discipline had brought down public debt levels significantly in many cases. Finally, banks in the region relied on domestic deposits to fund domestic credit and had put in place prudent lending practices. Still, a revamping of financial regulation to better contain risks will be needed, in light of lessons learned from the advanced economies’ financial crises.
Given these new strengths, the better prepared countries in the region were able to put in place policies to help counter the effects of the external shocks. Central banks were able to lower rates, and a number of countries, by virtue of the fiscal discipline they had achieved during past years of booming government revenue, were able to raise government expenditure this year, providing a boost to their economies when needed most.
Comments on this article should be sent to imfsurvey@imf.org
