IMF Regional Economic Outlook for Latin America and the Caribbean (LAC)

The world economy continues to be buffeted by the burgeoning downdraft of the financial crisis and volatile commodity prices. As such, the outlook points to a major downturn for the global economy, with growth falling to its slowest pace since the 2001–02 recession. However, authorities around the world have taken further, massive, and increasingly coordinated corrective actions. The central scenario in the IMF’s recently World Economic Outlook (http://www.imf.org/external/pubs/ft/weo/2008/02/index.htm) anticipates that these will be successful in stabilizing financial conditions. However, it will take time, under any rescue plan, to restore the proper functioning of credit markets. For the United States, our baseline projection is that recovery will begin in the second half of 2009, and will be more gradual than previous recoveries, because of the exceptional nature of the asset price adjustments taking place. Overall, growth in the advanced economies as a whole will also be close to zero at least until the middle of 2009.

As discussed in the IMF’s recently released Regional Economic Outlook: Western Hemisphere (http://www.imf.org/external/pubs/ft/reo/2008/WHD/ENG/wreo1008.htm), financing conditions for the region have tightened and commodity prices have fallen. Equity markets have sold off dramatically in recent months, private external bond spreads have picked up, some domestic financial markets have come under pressure, and exchange rate volatility has increased sharply. Sovereign spreads have also risen, although by less in several countries than in previous episodes of international financial stress, reflecting substantial improvements in fundamentals. Corporate bond issuance and credit growth have slowed, which will weigh on investment and growth going forward. At the same time, commodity prices for key regional exports have declined sharply from their recent record highs.

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The ongoing global financial turmoil represents a confluence of negative shocks for the LAC region: the freeze in global credit markets, weaker external demand, and lower commodity prices. These shocks can have strong negative feedback loops, particularly for financing conditions. A similar scenario, when stress-tested in the April 2008 Regional Economic Outlook: Western Hemisphere(http://www.imf.org/external/pubs/ft/reo/2008/whd/ENG/wreo0408.pdf), risked near-recessionary conditions for the LAC region. While the region is not at that point and our central scenario points to growth of around 3 percent next year––close to the average for emerging market countries––risks are tilted to the downside reflecting the uncertain global outlook. Nonetheless, the region is expected to deal with the current global shocks better than in previous crises. This reflects the progress many countries in the region have made in improving their macroeconomic fundamentals over the past decade.

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Foremost among the downside risks for the region is the outlook for commodity prices. Prices have already fallen sharply, but could fall further, in line with the experience in previous global downturns. Of course, lower food and fuel prices would bring welcome relief for some countries, in particular low-income commodity importers in Central America and many Caribbean countries. But for the region as a whole, strong commodity prices have been a major factor in bolstering fiscal and external positions and driving growth in recent years. A further sharp fall would have considerable adverse implications for the region’s fiscal and external positions. Policy makers remain on high alert to deal with the current shocks and these additional risks.

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Against this background, several essential priorities arise for the region in the period ahead. First, it is key to preserve the proper and efficient functioning of financial systems by preemptively addressing risks from liquidity and asset quality, and some countries have already taken steps in this regard. Many countries have built up considerable foreign exchange buffers that could be used to deal with exceptional and temporary shocks. Second, it remains important to preserve the hard-won gains on inflation. Central banks will need to maintain an active communication with markets on policy challenges and measures, especially on the future course of inflation, to keep expectations well anchored. This is especially important for countries where domestic demand has been growing well above trend and inflation remains above target. Third, fiscal situations will likely come under stress at a time when there will be increased need to maintain a robust safety net for those low-income households that would be affected by the slowdown. This will require a much more targeted strategy for fiscal spending to ensure that essential needs can be met while containing any additional financing requirements.

2 Responses to "IMF Regional Economic Outlook for Latin America and the Caribbean (LAC)"

  1. crgordon   December 23, 2008 at 11:34 am

    Thank you for the overview of South America. In some future post, it would be interesting to see more information specific to Central America and Costa Rica in particular. Although CR isn’t a major economy in the region, it seems to be attracting more government-to-government economic commitments from China than from the US – at least that is the impression on the ground. How does the developing relationship between China and this region add to/subtract from the economic stability of the region? Some future comments possible?

  2. Anonymous   January 14, 2009 at 8:35 am

    why is not brazil included in your sensitivity chart?