Front Matter

Author(s):
International Monetary Fund. Western Hemisphere Dept.
Published Date:
May 2013
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    ©2013 International Monetary Fund

    Cataloging-in-Publication Data

    Regional economic outlook. Western Hemisphere. – Washington, D.C. : International Monetary Fund, 2006–

    v. ; cm. — (World economic and financial surveys, 0258-7440)

    Once a year.

    Began in 2006.

    Some issues have thematic titles.

    1. Economic forecasting – North America – Periodicals. 2. Economic forecasting – Latin America – Periodicals. 3. Economic forecasting – Caribbean Area – Periodicals. 4. North America – Economic conditions – Periodicals. 5. Latin America – Economic conditions – 1982- – Periodicals. 6. Caribbean Area – Economic conditions – Periodicals. 7. Economic development – North America – Periodicals. 8. Economic development – Latin America. 9. Economic development – Caribbean Area. I. Title: Western Hemisphere. II. International Monetary Fund. III. Series: World economic and financial surveys.

    HC94.A1 R445

    ISBN: 978-1-48434-792-8

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    Contents

    Preface

    The May 2013 Regional Economic Outlook: Western Hemisphere was prepared by a team led by Dora Iakova and Luis Cubeddu under the overall direction of Alejandro Werner and the guidance of Miguel Savastano. The team included Gustavo Adler, Hye Sun Kim, Nicolás E. Magud, Anayochukwu Osueke, Sebastián Sosa, Ben Sutton, and Evridiki Tsounta. In addition, Gabriel Di Bella, Deniz Igan, Julien Reynaud and Martin Sommer, contributed to Chapter 1. Aliona Cebotari, Juan Carlos Hatchondo, Leonardo Martinez, Paulo Medas, Francisco Roch, and Camilo E. Tovar contributed boxes. Production assistance was provided by Patricia Delgado Pino and David Hidalgo; Joe Procopio of the Communications Department edited the manuscript and coordinated the production with the assistance of Martha Bonilla. This report reflects developments and staff projections through April 10, 2013.

    Executive Summary

    Global economic prospects have improved as policy actions in advanced economies helped defuse the serious short-term risks that were looming some months ago. World output is expected to rise by about 3¼ percent in 2013 and 4 percent in 2014. The strength of the global recovery, however, remains uncertain. In the near term, fatigue in repairing sovereign and bank balance sheets in the euro area could reignite market stress and compromise global activity. In the United States, the short-term risks have become more balanced, although failure to replace the fiscal sequester with more backloaded measures before October would imply a larger drag on growth in late 2013 and beyond. Meanwhile, medium-term global risks remain elevated. Lack of decisive actions to put public finances on a sustainable path in key advanced economies could hit investors’ confidence and global growth.

    Despite these risks, external conditions for Latin America are expected to remain stimulative. With monetary policy in advanced economies expected to stay accommodative for some time, external financing conditions will remain favorable. Strong demand from emerging Asia economies and the gradual recovery in the advanced economies will continue to support commodity prices, benefiting commodity exporters. However, a reversal of these favorable tailwinds at some point in the future remains a distinct risk. In this context, the main policy challenge for most of the region is to take advantage of the current favorable conditions to build a strong foundation for sustained growth.

    Output growth in Latin America and the Caribbean moderated to 3 percent in 2012 (from 4½ percent in 2011), with a pronounced deceleration in some of the region’s largest economies. Growth is set to pick up to 3½ percent in 2013, supported by stronger external demand and the effects of earlier policy easing in some countries.

    • In the context of closed output gaps, the policy priorities for the financially integrated economies of the region should be strengthening public finances and protecting financial sector stability. In these countries, setting macroeconomic policies based on a realistic assessment of economies’ supply potential would be particularly important. A more prudent fiscal stance would ease pressures on capacity and arrest the widening of current account deficits. In addition, maintaining exchange rate flexibility would help discourage large speculative capital inflows.

    • The less-financially integrated commodity exporters of the region would benefit from saving a larger share of commodity revenues. In some countries, tighter macroeconomic policies will be necessary to contain growing external imbalances and bring down inflation from high levels.

    • With output broadly at potential, Central American economies should not delay any further the rebuilding of fiscal buffers, as public debt levels in most countries remains well above pre-Lehman levels. Some countries should also give high priority to increasing exchange rate flexibility to help buffer external shocks.

    • In much of the Caribbean, high debt and weak competitiveness continue to constrain growth. The key challenges for these economies remain broadly unchanged—reducing high public debt, containing external imbalances, and reducing financial sector vulnerabilities.

    This edition of the Regional Economic Outlook features three analytical chapters dealing with the challenges of sustaining growth and strengthening balance sheets. Specifically, the chapters assess the region’s growth potential, the impact of changes in external conditions on public and external debt dynamics, and the use of the windfall from the recent terms-of-trade boom. The key findings are:

    • Latin America’s strong growth during the last decade has been driven primarily by factor accumulation (especially labor, although total factor productivity (TFP) also contributed). This contrasts with the experience of the region in the 1980s and 1990s. For the years ahead, the strong growth momentum is unlikely to be sustainable unless TFP performance improves significantly. Structural reforms, including improving the business climate, increasing competition, and investing in human capital, could help raise productivity growth.

    • Fiscal and external fundamentals in the region have strengthened markedly over the last decade, on the back of highly favorable external conditions. We look at whether these gains depend on a continuation of such conditions. We find that some countries appear well placed to withstand moderate external shocks, but many would benefit from a stronger fiscal position to be able to mitigate the effects of more severe shocks.

    • Finally, the recent terms-of-trade boom for the region is assessed through the prism of a simple metric that quantifies the associated income windfall. We find that this windfall has been unprecedented. However, the share of the windfall that has been saved is smaller than in previous episodes. Moreover, savings have been increasingly used for domestic investment (as opposed to foreign asset accumulation) during the current boom.

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