Unlocking Latin America’s Huge Potential


2014MDNEW_04By Christine Lagarde

(version in Español and Português)

I am looking forward to being in Peru this week to discuss economic and social developments with the government and a wide range of stakeholders—and also to follow up on the preparations for the next IMF–World Bank Annual Meetings, which will be held in Lima in October 2015. Later this week, I will participate in the Santiago Conference in Chile, where I will meet policymakers and influential representatives from Latin America and the Caribbean to discuss economic approaches to strengthen the entire region.

As I travel to the land of the Andes, I am reminded of the natural beauty of the region, the richness of its culture, and its incredible diversity. Despite its current challenges—growth continues to slow, as global economic and financial conditions are shifting and economies run up against capacity limits—I remain decidedly optimistic about the region’s potential to raise living standards while protecting its unique heritage and precious environment.

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Mind the Dragon: Latin America’s Exposure to China


By Bertrand Gruss and Fabiano Rodrigues Bastos 

(version in Español and Português)

China is still a distant and exotic country in the mind of many people in Latin America. Yet, with the Asian giant rapidly expanding its ties with the region (the share of exports going to China is now ten times larger than in 2000), their economic fates seem to be increasingly connected. And in fact, a sharper slowdown in China now represents one of the key risks Latin Americans should be worried about—and prepare for. So, what is at stake? How much do shocks to China matter for economies in Latin America?

In an earlier study presented in our April 2014 Regional Economic Outlook, we analyzed growth spillovers in a large model of the global economy, focusing on the link through commodity prices. Here, we complement that analysis by using a simple yet novel approach that exploits the reaction of financial markets to the release of economic data. We find that growth surprises in China have a significant effect on market views about Latin American economies.

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Banking on the Government


By Jesus Gonzalez-Garcia and Francesco Grigoli

(Version in Español)

Government ownership of banks is still common around the world, despite the large number of privatizations that took place over the past four decades as governments reduced their role in the economy. On average, state-owned banks hold 21 percent of the assets of the banking system worldwide. In Latin American and Caribbean countries, the public banks’ share is about 15 percent, with some of them showing very large shares, for instance, Argentina, Brazil, Uruguay, and Costa Rica are all over 40 percent (see Figure 1).

State-owned banks play an important role in the financial system. They fulfill functions that are not performed by private banks, provide financing for projects that benefit the rest of the economy, and provide countercyclical lending (lending more when the economy is weak). But public banks usually respond to the needs of governments owing to the state’s obvious involvement in their administration. As a result, government’s participation in the banking system may weaken fiscal discipline by allowing the public sector to access financing that they would not obtain from other sources.

In our recent study, we use a panel dataset for 123 countries to test whether a larger presence of state-owned banks in the banking system is associated with more credit to the public sector, larger fiscal deficits, higher public debt ratios, and the crowding out of credit to the private sector. 

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U.S. Monetary Policy and Its Effects on Latin America


Alejandro WernerBy Alejandro Werner

(Version in Español and Português)

Some basic realities seem to be getting lost in the debate over the Fed’s “exit” from unconventional monetary policy and its impact on Latin America.

First, the still-loose stance makes sense. U.S. inflation is too low, the output gap too large, and the labor market too weak. And even during tapering, the Fed’s stance will remain highly loose. The 10-year Treasury rate, adjusted for core inflation, is about 230 basis points below its 30-year average and the inflation-adjusted Fed funds rate is 320 basis points below. These rates are likely to remain below their 30-year average for at least the next two to three years.

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Unleashing Brazil’s Growth


By Martin Kaufman and Mercedes García-Escribano

(Version in Español and Português)

Since the early 2000s, Brazil’s economy has grown at a robust clip, with growth in 2010 reaching 7.5 percent—its strongest in a quarter of a century. A key pillar of its hard-won economic success has been sound economic policies and the adoption of far-reaching social programs, which resulted in a substantial decline in poverty.

In the last couple of years Brazil’s growth slowed down. Although other emerging market economies experienced a similar slowdown, the growth outturns in Brazil were particularly disappointing. And the measures taken to stimulate the economy did not produce a sustained recovery. This is because unleashing sustained growth in Brazil requires measures geared not at stimulating domestic demand but at changing the composition of demand towards investment and at increasing productivity.

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Cloudy With a Chance of Rain—Outlook for Latin America and the Caribbean


Alejandro WernerBy Alejandro Werner

(Version in Español & Português)

For many Latin American and Caribbean economies, clouds have appeared on the economic horizon. As the global growth momentum shifts from the emerging to the advanced economies, the strength of domestic economic policies will be crucial for how countries can cope with the combination of lower commodity prices and tighter external financing conditions.

Lower commodity prices have already started to affect the region’s commodity exporters. Even though prices remain high by historical standards, countries can no longer count on the tailwind from ever-improving terms of trade, which had propelled economic activity over the past decade.

Meanwhile, longer-term U.S. interest rates have started to rise, with knock-on effects for emerging markets. Across all of the financially integrated economies of Latin America, bond yields have increased, equity prices have fallen, and currencies have depreciated since May, when the U.S. Fed first mentioned the possibility of tapering its bond purchases later this year. Financial conditions remain fairly benign for now, but the strong tailwind from ultra-low external financing costs may also be gone for good.

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On A Roll: Sustaining Strong Growth in Latin America


By Sebastián Sosa, Evridiki Tsounta, and Hye Sun Kim

(Versions in Español and Português)

Latin America has enjoyed strong growth during the last decade, with annual growth averaging 4½ percent compared with 2¾ in the 1980s and 1990s. What is behind this remarkable economic performance and will this growth be sustainable in the years ahead?

Our recent study (see also our working paper) looks at the supply-side drivers of growth for a large group of Latin American countries, to identify what’s behind the recent strong output performance.

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