Western Hemisphere
Stronger Fundamentals Pay Off
May 2009
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The global crisis that began in advanced economies has sent severe shocks around the world, posing a test to the economies of Latin America and the Caribbean. The good news is that during this decade the region has made itself more resilient to external shocks, by strengthening policy frameworks and reducing vulnerabilities in its public finances and financial systems. These preparations, the report shows, mean that countries are now more able to respond to the external crisis, many for the first time, with active policies to boost output and employment and protect the most vulnerable groups. This will help contain the damage from the global crisis and speed up the region’s recovery.
Contents
| I. | Global, U.S., and Canadian Outlook |
| Global and U.S. Outlook | |
| Canadian Outlook | |
| II. | Latin American and Caribbean Outlook |
| A “Double Squeeze” on the Balance of Payments | |
| Ongoing Adjustment | |
| Policy Response Thus Far | |
| Economic Outlook and Risks | |
| Policy Challenges: Orderly Adjustment with Limited Output Losses | |
| Annex 2.1 Global Shocks and Sovereign Bond Yields | |
| Annex 2.2 Financing Conditions for Corporates | |
| Annex 2.3 Geographical Concentration of LAC Exports and Exposure to Shocks in the United States and Europe | |
| Annex 2.4 Declining Workers’ Remittances | |
| Annex 2.5 Caribbean Tourism: A Severe Demand Downturn and Policy Responses | |
| III. | The Global Crisis and Banking Systems in Latin America and the Caribbean |
| Challenges from a Global Crisis | |
| Starting Condition of LAC Banking Systems | |
| Financial System Impact of Selected Macroeconomic Risks | |
| Implications for Prudential Regulation and Banking Supervision | |
| Conclusions | |
| IV. | Will International Banks Transmit the Global Credit Crunch to Latin American and Caribbean Countries? |
| A Potential Channel of Credit Crunch Transmission | |
| Key Features of Foreign Banks Lending to LAC | |
| Sources of Stability | |
| What Drives Foreign Bank Lending Flows to the LAC Region? | |
| Is a Retrenchment Under Way? The Latest Evidence | |
| What Will Happen in 2009? | |
| Conclusions | |
| Technical Appendix | |
| Western Hemisphere: Main Economic Indicators | |
| Latin America and the Caribbean: Main Fiscal Indicators | |
| References | |
| Boxes | |
| 1.1 | Lessons from the Crisis and the Regulatory Reform Agenda |
| 2.1 | LAC Country Groupings |
| 2.2 | Corporate Sector Exposure to Foreign Currency Derivative Contracts in Brazil and Mexico |
| 2.3 | Why Do Bad Things Still Happen to Resilient Economies? |
| 2.4 | Saving for a Rainy Day? Sensitivity of LAC Fiscal Positions to Commodity Prices |
| 2.5 | Countercyclical Fiscal Policy under Alternative Monetary Policy Frameworks |
| 3.1 | Financial Systems in Latin America and the Caribbean |
| 3.2 | Forward-Looking Provisioning Considerations |