- International Monetary Fund. Western Hemisphere Dept.
- Published Date:
- October 2010
©2010 International Monetary Fund
Regional economic outlook: Western Hemisphere: heating up in the south, cooler in the north—Washington, D.C.: International Monetary Fund, 2010.
p. ; cm.—(World economic and financial surveys, 0258-7440)
Includes bibliographical references.
1. Economic forecasting – North America. 2. Economic forecasting – Latin America. 3. Economic forecasting – Caribbean Area. 4. Economic development – North America. 5. Economic development – Latin America. 6. Economic development – Caribbean Area. 7. Credit – Latin America. 8. Business cycles – Latin America. 9. Financial institutions – State supervision – Latin America. I. International Monetary Fund. II. Series (World economic and financial surveys)
HC94 .R445 2010
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This October 2010 issue of the Regional Economic Outlook: Western Hemisphere (REO) was prepared by a team led by Steven Phillips and Luis Cubeddu under the overall direction of Nicolás Eyzaguirre and the guidance of Rodrigo Valdés. The team included Gustavo Adler, Jorge Iván Canales-Kriljenko, Leandro Medina, Rafael Romeu, Bennett Sutton, and Camilo E. Tovar. In addition, Marcelo Estevão, Oya Celasun, and Evridki Tsounta contributed to Chapter 1; Mercedes Vera Martin contributed to Chapter 4; Nita Thacker and Sebastián Acevedo contributed Chapter 5; and Mercedes García-Escribano, Andrea Maechler, Martin Sommer, Sebastián Sosa, and Aminata Touré contributed boxes. Martin Kaufman and Miguel Savastano provided especially helpful comments and guidance. Production assistance was provided by Patricia Attix, Luke Lee, Andrea Medina, and Breno Oliveira. Martha Bonilla and Joanne Blake of the External Relations Department edited the manuscript and coordinated the production. This report reflects developments through September 30, 2010.
In memory of Kornelia Krajnyak (1967–2010). We will remember Kornelia as a superb economist, a person of great integrity, a generous mentor of others, and as our good friend.
The recovery of the global economy is continuing, mainly thanks to the sustained dynamism in many emerging economies. As expected, the recovery in key advanced economies is proceeding only slowly, as private demand is held back by the weakness of household and financial sector balance sheets. Notwithstanding large output gaps, governments in advanced economies face limits on their room to further stimulate demand through fiscal policy, as they must eventually turn to consolidate public finances in the face of large and growing public debt levels. Indeed some in Europe face market pressures and the need for substantial upfront fiscal action. In that context, policy interest rates in major reserve currency economies are likely to remain very low for quite some time, pushing private capital to the most attractive emerging economies and invigorating further their domestic demand dynamics. In fact many emerging and developing economies, which entered the global crisis with improved fundamentals, are showing strong growth largely based on domestic private consumption and investment. Their momentum, particularly in emerging Asian countries, is projected to be enough to keep world prices of commodities relatively high.
This mixed global environment has distinct implications for countries of the Latin American and Caribbean (LAC) region. The current global setting is stimulative for those LAC economies with greater real linkages to the more dynamic emerging economies, and for those likely to be most attractive to foreign investors. Most commodity-exporting countries of South America are facing highly favorable conditions—particularly those with stronger fundamentals, who have easiest access to external financing and stand to benefit the most from low global interest rates. On the other hand, the environment is least favorable for those with strong real linkages to the weaker-performing advanced economies. This is the situation for many countries in Central America, with close ties to the U.S. economy in terms of income from exports and workers’ remittances, and much more so for the tourism-dependent economies of the Caribbean.
The outlook and challenges for LAC countries are shaped by these varying external influences, but also by the legacy of their past policies and their policy frameworks:
For many countries of South America—where growth recently has been even stronger than expected—policy challenges center on avoiding overstimulation of demand and credit, which would turn unsustainable. Although the strong recovery of domestic demand has been welcome in terms of bringing economies back to potential, its continued rapid expansion could bring overheating, inflation, and widening current account deficits. For these economies, it is essential to proceed with the timely removal of policy stimulus while ensuring that the monetary/fiscal policy mix does not exacerbate capital inflows. In most cases, fiscal policy should be the first line of immediate action, with emphasis on slowing the growth of public expenditure (and in some cases limiting the quasi-fiscal activities of public banks), with monetary policy playing a following role (clearly, policy interest rates must in time transition to neutral levels, but they can be raised more gradually if fiscal policy is normalized first). Those commodity-exporting countries with a history of procyclical expenditure policy responses, and those with little market confidence in their finances, should seize the opportunity of today’s high commodity prices to build policy buffers and reduce net public debt.
In Mexico also, the recovery recently has been faster than expected, especially on the back of booming exports to the United States, though some moderation is expected in the future. With falling inflation and expectations well anchored, monetary policy has some room for maneuver, while fiscal policy is appropriately focused on consolidation, given medium term risks for budget revenues from uncertainties over future oil production. In this regard, the authorities’ plans for fiscal consolidation in 2011 are appropriate.
Growth in Central American countries is likely to be positive but moderate. As external conditions have acted to limit potential output, output gaps are modest, and so the usefulness of applying further stimulus would be limited. Countries would do well to rebuild buffers, to assure fiscal space for the future. Some need to continue strengthening their policy frameworks to be able to effectively use their independent monetary policy as a countercyclical tool in the future. Structural changes, rather than demand policies, will be key to boosting growth and competitiveness.
For many countries of the Caribbean, recovery has begun only recently, and growth will be limited by the only gradual pickup of external demand, especially for the tourism-intensive countries. Very high public debt levels allow no space for fiscal stimulus. Rather than new stimulus, more benefit would come from pursuing steady fiscal consolidation—indeed, one chapter of this Regional Economic Outlook: Western Hemisphere shows that high debt itself is an important obstacle to growth in many of these countries.
The need for cautious policies is heightened by global financial conditions that are now exceptionally “easy”—and potentially highly stimulative—for many countries in the region. Sovereigns with stronger fundamentals can now borrow at near-record low cost. Such easy conditions create important opportunities for debt management operations, but experience shows that they can also stimulate booms in demand and credit and the accumulation of risks. As economic slack and easy monetary policy in the major advanced economies will persist for some time, so too will the associated risks for other economies. Better outcomes are likely to be achieved with a combination of policy responses, including exchange rate flexibility to avoid attracting more inflows, and fiscal tightening to take a direct bite out of excessive domestic demand, complemented by careful regulation and supervision of domestic financial developments, with attention also to cross-border links.
This edition of the Regional Economic Outlook: Western Hemisphere includes a special focus on financial issues:
Chapter 3 examines and draws lessons from the recent credit cycle in Latin America—the rapid growth of bank credit that ended abruptly with the global crisis, and which is resuming again in some countries. The region’s financial systems were generally resilient to the crisis, as reforms over the past decade aimed at improving oversight and regulation paid off. Unlike some economies in Europe, Latin American banks maintained low leverage ratios and asset quality was not impaired as they did not purchase toxic assets. Despite this relative success, the goal of avoiding financial crises, as well as undesirably high procyclicality of credit, remains as challenging as ever.
Chapter 4 discusses the importance of considering “macroprudential” regulatory policies to complement—but not substitute for—traditional macroeconomic tools, particularly in the current context of easy external financing conditions. Following the recent global financial crisis, a broad consensus is emerging that financial regulation and supervision must move beyond looking at the stability and solvency of individual financial institutions, in order to come to grips with problems of systemic risks, interconnectedness, and excessive procyclicality. While discussions on precisely what this means in practice are ongoing, Chapter 4 offers a timely review of the issues and pending questions, and documents the recent experience with such policies in the region and beyond.