Front Matter

Front Matter

International Monetary Fund. Western Hemisphere Dept.
Published Date:
April 2008
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    ©2008 International Monetary Fund

    Cataloging-in-Publication Data

    Regional economic outlook: Western Hemisphere – [Washington, D.C.]: International

    Monetary Fund, 2008.

    p. cm. – (World economic and financial surveys)

    APR 08.

    Includes bibliographical references.

    ISBN 978-1-58906-716-5

    1. Economic forecasting – North America. 2. Economic forecasting – Latin America. 3. Economic forecasting – Caribbean Area. 4. North America – Economic conditions. 5. Latin America – Economic conditions – 1982- 6. Caribbean Area – Economic conditions – 1945-7. North America – Economic conditions – Statistics. 8. Latin America – Economic conditions – 1982- – Statistics. 9. Caribbean Area – Economic conditions – 1945- – Statistics. I. International Monetary Fund. II. Series (World economic and financial surveys)

    HC94 .R445 2008

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    This April 2008 issue of the Regional Economic Outlook: Western Hemisphere— which updates the issues covered more extensively in the November 2007 issue—was prepared by a team led by Robert Rennhack and Vikram Haksar and under the direction of Caroline Atkinson and Anoop Singh. The team included Rita Babihuga, Jingqing Chai, Ana Corbacho, Roberto Garcia-Saltos, Priyadarshani Joshi, and Herman Kamil. Specific contributions were made by Andreas Bauer, Ravi Balakrishnan, Tamim Bayoumi, Christina Daseking, Katja Funke, Cleary Haines, Andreas Jobst, Padamja Khandelwal, Daniel Leigh, Rituraj Mathur, Evridiki Tsounta, and Nancy Wagner. Thomas Duffy, Priyadarshani Joshi, Genevieve Lindow, Joan McLeod-Tillman, and Carolina Worthington provided research and production assistance.

    Executive Summary

    Overview. The Western Hemisphere region has enjoyed four years of strong growth through 2007, which has lifted incomes, created employment, and reduced poverty. The Latin American and Caribbean (LAC) region, in particular, has reaped the benefits of stronger macroeconomic positions and improved credibility of policy frameworks. Countries have also been buoyed by the exceptionally strong global economy of recent years, some especially by the boom in commodity prices, and rising foreign direct investment (FDI). However, the global expansion is losing momentum in the face of the recent financial disturbances. This update to the Regional Economic Outlook: Western Hemisphere discusses the shocks to the U.S. economy, how the LAC region is placed to address these, and their impact on the outlook (Chapter 1).

    Housing risks and financial market dislocation in the United States have weakened the global growth outlook. The reversal of the U.S. housing boom and stresses at the core of the financial system have eroded U.S. growth prospects in 2008. A modest recovery is expected in 2009 as ongoing policy stimulus takes hold, and balance sheet problems in the financial system are gradually resolved. The U.S. slowdown is also expected to slow growth in Canada.

    Despite the global financial shock, LAC financial markets have held up well so far. The shock to housing markets and financial sectors in industrialized countries has thus far had less impact on LAC financial markets and external funding than in past episodes of global financial stress. Domestic money and bond markets remain generally stable. However, external funding conditions have tightened, especially for the LAC corporate sector, though less as compared with other emerging markets. Developments here are discussed in Chapter 2.

    LAC prospects have also been supported by strong commodity prices. The commodity boom of recent years has boosted growth and strengthened fiscal and external positions across the region. Commodity prices are projected to decline somewhat, in line with indicators in futures markets, though levels will remain elevated by historical standards. Combined with strong import growth, external current account surpluses in the region are expected to shrink.

    Growth in the LAC region is nevertheless expected to slow given the weaker external conditions. In the baseline scenario, LAC growth is projected to slow gradually from 5.6 percent in 2007 to 4.4 percent in 2008 and 3.6 percent in 2009. This reflects the impact of weaker external demand and financial conditions, and moderating commodity prices and remittances.

    Inflation pressures remain a concern for monetary policymakers. Strong demand combined with exogenous external shocks, especially to food and fuel prices, have put upward pressure on inflation. This has posed risks for one of the region’s most important macroeconomic accomplishments in the past decade—the sustained decline in inflation to the single-digit range. High food prices have also had a disproportionate impact on the poor—governments have sought to mitigate these effects. These issues are analyzed in more depth in Chapter 3.

    Rising public spending has been eroding fiscal balances. A substantial strengthening of primary fiscal balances has been a key achievement for the region in the past few years. However, in many cases the strength of fiscal positions is dependent on the continued buoyancy of commodity prices. Moreover, spending has surged in recent years, lowering primary surpluses.

    The balance of risks for growth is tilted to the downside, reflecting the uncertainty over the global growth and commodity price outlook. The financial shocks currently playing out in the United States and global economy introduce a particularly high degree of uncertainty for growth and financial stability prospects across the world. The outlook for commodities also remains a key unknown, and an unwinding of recent price increases would be an important downside risk for the LAC region. Model-based scenario analysis undertaken by the IMF staff suggests a downward tilt to the balance of risks for the region’s growth outlook. At the same time, inflation risks remain a concern given the region’s strong growth momentum, especially if growth turns out to be stronger than in the baseline.

    Navigating this period of financial turbulence and heightened uncertainty is the key near-term policy challenge. The region is facing the current situation from a far stronger position than in the past, especially given flexible exchange rate regimes. However, balancing the expected growth slowdown against ongoing inflation pressures will require careful policy management:

    • Monetary policy. This has been oriented toward containing continued pressures on headline inflation and inflation expectations. The moderation of domestic demand and tighter financial conditions seen in the baseline scenario should reduce overheating pressures and may ease the task for policymakers. Flexible exchange rates would be the first shock absorber in the event of a weaker external environment than envisaged in the baseline.

    • Fiscal policy. Compared with the past, there is less need for countries to reduce spending in the face of a cyclical slowdown in revenues, and many have room to allow automatic stabilizers to operate. But analytical work undertaken by the IMF staff cautions against discretionary fiscal stimulus in many countries. In the LAC region, increases in public spending could undermine policy credibility and ultimately have a negative impact on growth as risk premia rise and investment falls.

    • Financial sector policies. Supervisory authorities are continuing their close monitoring of financial sector risks, as well as maintaining a close dialogue with regulators in other countries, given the international nature of the current shocks.

    • Social policies. Addressing the impact of higher food prices on the poor is an important policy concern. Well-targeted cash transfers present an effective policy tool in this regard. However, administrative measures to reduce the pass-through of high food prices risk creating fiscal and quasi-fiscal costs and distorting economic incentives and efficiency.

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