Typical street scene in Santa Ana, El Salvador. (Photo: iStock)
IMF Survey: Latin America Shows Signs of Renewed Growth
October 4, 2009
- Recession had substantial impact on Latin America and Caribbean
- But better policy frameworks made region better prepared
- Now reasons for cautious optimism
Many countries in Latin America are showing signs of a renewed growth, after being hit hard by the global recession through drops in exports, workers remittances, and tourism, as well as a reversal of capital inflows, according to the Director of the IMF’s Western Hemisphere Department.
Eyzaguirre: Reasons for cautious optimism about Latin America (photo: IMF)
Regional Economic Outlook
Latin America as a whole is likely to have resumed growth in the third quarter of this year, and we expect growth to pick up moderately in 2010 in line with the global economy,” Nicolas Eyzaguirre told a press briefing at the IMF-World Bank Annual Meetings in Istanbul, Turkey on October 4.
For the United States, the IMF projects that recovery will be very gradual and growth is expected to remain weak over the next several years. Also, employment conditions will likely get worse before they start to improve. Reflecting the damage from the financial and housing crises, a permanent loss in potential output and the very large increase in debt levels in the U.S. will be negative legacies of the crisis that could adversely affect the Latin America and Caribbean region.
Global recession hits home
Eyzaguirre said the impact of the global recession on the Latin America and Caribbean region has been substantial, reflecting the severity of the recent global shocks. Initially, the global crisis sent wide-ranging shocks through a drop in exports, workers remittances, and tourism receipts; an increase in the cost of external funding; and a reversal of capital inflows.
Moreover, the mounting uncertainty dented confidence and the private sector pushed back its spending decisions. But IMF analysis shows that the region was better prepared to weather such shocks than in the past, entering the cycle with more comfortable fiscal and external positions, much more resilient financial systems, and stronger and more credible policy frameworks.
“This preparedness has paid off. In contrast with past episodes of global stress, the region avoided crises in the financial system and the balance of payments. In addition, many countries were able to implement active policy measures to partly offset the impact of the large external shocks on output,” Eyzaguirre told reporters.
Still, throughout the region, aggregate demand slowed or contracted, opening sizeable output gaps and leading to increases in unemployment in several countries. But performance on average has been better than in many other emerging market countries this year. “Latin American countries with the strongest policy frameworks have been able to perform considerably better than in the past. Our estimates suggest that the output loss of these countries could have been up to 4 percent larger if they had not taken the steps that have made them more resilient,” Eyzaguirre said in a statement at the start of the briefing.
Eyzaguirre, a former Chilean finance minister, gave the briefing on the sidelines of the Annual Meetings. The IMF will publish its full Regional Economic Outlook for the Western Hemisphere this year in Brazil, on October 23, when it will also be released on the IMF’s website. This will be followed by presentations in Bolivia, Peru, and other countries in the region.
Cautious optimism
“Going forward, there are reasons to be cautiously optimistic. First, negative external shocks are abating. Second, many countries in the region are showing signs of renewed growth. Latin America as a whole is likely to have resumed growth in the third quarter of this year, and we expect growth to pick up moderately in 2010, in line with the global economy,” he said.
But prospects vary within the region. Growth should be stronger in some of the larger countries, as financial and commodity export shocks subside, and pre-existing buffers and exceptional policy responses bear fruit. But the road to recovery will be bumpier in Central America and the Caribbean, which are more dependent on economic activity in the United States. With employment and consumption expected to remain weak, shocks to remittances and tourism are still playing out. Some countries in the Caribbean are under particular stress as the impact of the external shocks is being compounded by domestic vulnerabilities and limited room for policy maneuver.
Regional challenges
Against this background, the IMF sees several policy challenges for the region in the near term, again with differences across countries. For countries that were better prepared to deal with the effects of the crisis, and where countercyclical monetary and fiscal policies are being implemented this year, the key macro policy theme will be the timing and sequence of stimulus withdrawal (the “exit strategy”). In addition, low returns on savings in advanced economies may prompt a search for yield in emerging markets that could lead to renewed capital inflows, suggesting that fiscal stimulus would need to be withdrawn ahead of monetary stimulus.
In Central America, and particularly in the Caribbean, countries have not yet felt the full effect of external shocks, and many face more constraints given preexisting imbalances and less flexible policy frameworks. The sharp decline in trade and activity has adversely affected government revenues particularly hard, and fiscal deficits and public debt have increased across the board. But room for stimulus is often limited, including because of financing limitations.
In Central America, while avoiding procyclicality, countries should save some of the limited remaining buffers to be able to react if the global recovery stalls. Caribbean countries should keep focusing on safeguarding macroeconomic stability while revisiting the composition of spending, reprioritizing it to be most effective in cushioning the impact of the crisis on the most vulnerable groups.
Beyond the near term phase of recovery, the IMF sees three broad areas of policy challenges for the region in the medium term. These arise from the need to adapt to a changed environment—the legacies of the crisis described before—and to make further progress on the existing agenda in limiting vulnerabilities, building buffers, and creating conditions for faster growth.
In particular, the new medium-term outlook includes the possibility of higher interest rates for government debt than in the past, as well as slower growth of output and, therefore, of tax revenue. Fiscal policy plans will need to adjust to this less favorable environment.
Beyond this, to better prepare themselves for shocks in the future, many countries should consider developing more robust frameworks that will commit themselves systematically to saving during “good times,” in order to be able to afford a weakening of fiscal balances during difficult times. In addition, financial sector policies will need to reflect the new lessons learned from the financial crisis in advanced economies and to continue to address the weaknesses that were present before the crisis.
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