Reduced Speed, Rising Challenges: IMF Outlook for Latin America and the Caribbean


Alejandro WernerBy Alejandro Werner

(Version in Español and Português)

The prospects for global growth have brightened in recent months, led by a stronger recovery in the advanced economies. Yet in Latin America and the Caribbean, growth will probably continue to slow, although some countries will do better than others. We analyze the challenges facing the region in our latest Regional Economic Outlook and discuss how policymakers can best deal with them.

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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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U.S. Housing and Labor Pains—Central America and the Caribbean Feeling the Pinch Too


By Evridiki Tsounta

(Version in Español)

If housing and labor market woes aren’t bad enough in the United States, they’re hurting Central America and the Caribbean too.

It has been five years since the U.S. housing bubble burst and three years since the onset of the global financial crisis. And still, in the world’s largest economy—which in the past quickly and vigorously recovered from downturns—jobs and output are barely growing. In fact, output is just 1.6 percent higher than a year ago, and almost 14 million people remain unemployed.

True, some of this lackluster economic performance reflects global factors, particularly the uncertainty surrounding the lingering European crisis, but also temporary factors related to the Japanese earthquake. However, on the domestic front, fragile household balance sheets and stubbornly high unemployment have been major factors impeding growth. This latter development is having negative spillovers on many Central American and Caribbean countries, where remittances and tourism flows from workers in the United States are important for their economies (see our most recent Regional Economic Outlook for Western Hemisphere).

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Latin America’s Commodity Dependence: What if the Boom Turns to Bust?


By Gustavo Adler and Sebastián Sosa

(Version in Español)

As a commodity exporting region, Latin America has greatly benefited from the commodity price boom of the past decade. But with talk of a new global recession, what will happen to the region if the boom turns to bust?

The IMF’s latest Regional Economic Outlook: Western Hemisphere sheds light on Latin America’s reliance on commodities from a historical perspective. Our study also looks at the effect of a sharp decline in commodity prices on emerging market economies and on the policies that could shield countries from that shock.

More dependent but also more diversified

The reliance on commodity exports can be looked at as a share of GDP (commodity dependence) as well as relative to total exports of goods and services (export diversification). Continue reading

Does Foreign Exchange Intervention Slow the Pace of Currency Appreciation?


By Gustavo Adler and Camilo E. Tovar

(Version in Español)

Abundant global liquidity and high exposure to capital movements have put foreign exchange intervention at center stage of the policy debate in Latin America. Although intervention is widely used, there is limited evidence about its effects on the exchange rate, and particularly in terms of slowing the pace of currency appreciation.

In the latest Regional Economic Outlook: Western Hemisphere we took a fresh look at this issue, examining intervention practices and effectiveness for a group of economies in Latin America and other regions during 2004-10. In particular, we sought to answer the following questions:

  • How do Latin American countries intervene and in what respects do they differ from other economies?
  • What are the rationales for these policies?
  • How effective have they been in affecting the exchange rate?  Continue reading

Today’s Information is Ammunition for Tomorrow


By Luis M. Cubeddu and Camilo E. Tovar

(Version in Español)

Many Latin American economies are booming due to strong inflows of capital and stronger export earnings from high commodity prices. Though favorable today, this situation is also a double-edged sword.

Households, companies, and banks are spurred to take on financial risk. But, if risks become excessive or poorly managed, they sow the seeds of future problems. The region has experienced firsthand the boom and bust cycles that can ensue, and there is consensus that this needs to be avoided or minimized in the future. The IMF’s two latest Regional Economic Outlooks for the region—published in May and October 2010—focused on precisely this issue.

While the bottom line is the need for effective macroeconomic policy management and implementation, information is an essential ingredient. Continue reading

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