Western Hemisphere
Heating Up in the South, Cooler in the North
October 2010
"Heating Up in the South, Cooler in the North" broadly describes the economic scene for the Western Hemisphere. The report emphasizes how a mixed environment—with slow recovery in the United States and other advanced economies, but strength in Asia—differently shapes the outlooks for the diverse economies of Latin America and the Caribbean. This issue also focuses on financial issues in Latin America, with a chapter on the challenges of allowing credit to expand safely, without creating excessive risks, and a chapter that looks at macroprudential financial policies—topics especially important in today’s context of low global interest rates and capital flows to emerging economies. The final chapter turns to Caribbean economies, exploring the drivers, and obstacles, that affect their growth.
Video: IMF Says Strong Recovery in Latin Americ
Contents
| Preface | |
| Executive Summary | |
| 1. | Global, U.S., and Canadian Outlook |
| The Global Backdrop—A Recovery Still Led by Emerging Economies | |
| United States—Recovery Is Still Policy Driven | |
| Canada—Strong Recovery with Elevated Risks | |
| Implications for the Latin American and Caribbean Region | |
| 2. | Latin America and the Caribbean: Recent Developments and Outlook |
| Growth to Normalize from Recent Highs | |
| Wide Divergence in the Regional Outlook | |
| Diverse Policy Challenges | |
| South America—Ensuring a Soft Landing | |
| Withdrawing Policy Stimulus Amid Ample Global Liquidity | |
| Favorable Terms of Trade Continue to Offset Limited Market Access | |
| Mexico and Central America—Recovery Gathers Strength Despite | |
| Headwinds from the United States | |
| Mexico: Fiscal Consolidation Amid Weak Trading Partner Outlook | |
| Central America: Rebuilding Policy Buffers | |
| The Caribbean—Turning the Corner Amid Vast Challenges | |
| Securing Growth | |
| Reducing High Debt Burdens | |
| Strengthening the Financial Sector | |
| 3. | Looking at the Last Credit Cycle to Better Manage the Next One |
| An Overview of the Financial System | |
| Learning from the Last Financial Cycle | |
| How Big Was the Recent Cycle? | |
| Shifts in Funding and Asset Structure | |
| Differences in Bank Behavior: Foreign and Public Banks | |
| Asset Quality | |
| A Complementary Financing Role of Bond Markets | |
| Policy Implications for the Ongoing Cycle | |
| Using Macroprudential Regulation to Smooth out Financial Cycles | |
| Keys to Financial Deepening in a Safe Manner | |
| Increasing Crowding in, where Possible | |
| Foreign and Public Banks | |
| Strengthening Other Financial Markets | |
| Final Remarks | |
| 4. | Macroprudential Tools in Latin America: A Primer |
| Systemic Risk and Macroprudential Policy—An Ongoing International Debate | |
| Recent Country Experiences with Macroprudential Tools | |
| Macroprudential Policy Challenges in the Current Latin American Context | |
| 5. | A Cross-Country Perspective on Growth in the Caribbean: The Role of Tourism and Debt |
| Growth Performance in the Last 40 Years | |
| A First Pass: Growth Accounting | |
| Does Tourism Help Growth? | |
| The Drag from Debt | |
| Conclusions | |
| Appendix | |
| Western Hemisphere: Main Economic Indicators | |
| Latin America and the Caribbean: Main Fiscal Indicators | |
| References | |
| Boxes | |
| 1.1 | Labor Market Adjustment in the United States |
| 1.2 | The Financing of U.S. Federal Budget Deficits—and Its Global Implications |
| 1.3 | Highlights of the 2010 U.S. Financial Regulatory Reform |
| 2.1 | Latin America’s Resilience to the European Financial Turmoil of 2010 |
| 2.2 | The Outlook for Commodity Prices and the Role of China |
| 2.3 | Reserve Accumulation: Building Insurance or Leaning Against Appreciation Winds? |
| 2.4 | What Is Driving Financial Dedollarization in Latin America? |
| 2.5 | Domestic Demand Growth under Easy and Tight External Financial Conditions: The Role of Exchange Rate Flexibility |
| 2.6 | Real Spillovers from Brazil into Neighboring Countries |
| 3.1 | Structure of Private Sector Credit Market: Role of Foreign Banks |
| 3.2 | Government Bond Markets in Latin America |
| 3.3 | Financial Structure and Corporate Performance during the Global Crisis: Microevidence for Latin America |
| 3.4 | Public Banks as a Countercyclical Tool: Experience in Brazil, Chile, and Costa Rica |
| 4.1 | Dynamic Provisioning in Latin America |
| 4.2 | Reserve Requirements as a Macroprudential Tool in Latin America |
| 5.1 | Haiti's Growth Performance and Challenges |
| 5.2 | Outlook for Tourism in the Caribbean––Is Cuba a New Competitor? |
| 5.3 | Debt and Growth |