Front Matter

Front Matter

International Monetary Fund. Western Hemisphere Dept.
Published Date:
May 2011
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    © 2011 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)

    Twice a year.

    Began in 2006.

    Some issues have also 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 9781616350659

    Please send orders to:

    International Monetary Fund

    Publication Services

    PO Box 92780

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    Tel.: (202) 623-7430 Fax: (202) 623-7201





    This April 2011 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, Oya Celasun, Andrea Medina, Leandro Medina, Bennett Sutton, Sebastián Sosa, and Camilo E. Tovar. In addition, Nicoletta Batini and Martin Sommer contributed to Chapter 1; Jaime Guajardo and Alexander Klemm contributed to Chapter 2; and Francesco Columba, Erika Tsounta, Mercedes Vera Martin, Abdelrahmi Bessaha, Aminata Touré, Alfred Schipke, and Alexander Klemm contributed boxes. Production assistance was provided by Patricia Delgado Pino 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 April 15, 2011.

    Executive Summary

    The global economy continues to expand unevenly, with emerging economies running faster than advanced economies—and consequently, facing different challenges and risks. Output remains well below potential in the United States and other advanced economies. In many emerging market economies, including in Latin America, the recovery has been much faster, and the task is to avoid overheating.

    • The World Economic Outlook baseline scenario for 2011–12 envisages continued recovery of the global economy, led by emerging markets, amid high commodity prices and easy global financing conditions. Strong demand for commodities, especially the substantial share now coming from emerging Asian economies, will keep their prices unusually high. At the same time, economic slack and easy monetary policy in advanced economies will keep global financing sources cheap.
    • For the United States, the near-term outlook for growth has become somewhat more favorable, although the overall picture of a sluggish recovery remains. With unemployment remaining high, monetary policy will need to provide ongoing support to demand, as fiscal consolidation needs to proceed in the coming two years.

    Downside risks continue to dominate at the global level. The risk of a double-dip recession in the United States has receded, but Europe remains vulnerable and new risks have emerged. New uncertainties about oil supply have raised the risk of a jump in oil prices, which would slow global growth—and in turn push down prices of other commodities, including those exported by Latin America. The absence of a well-defined medium-term fiscal adjustment plan in the United States could put upward pressure on U.S. interest rates and tighten global financial conditions.

    Global conditions continue to have varying implications for economies within the Latin America and Caribbean (LAC) region. They remain especially stimulative for those that are commodity exporters and are well integrated with global financial markets, as they experience double tailwinds. Economies that are most closely linked to the United States and other advanced economies will see conditions that are improving, but only gradually; their revenues from foreign tourism and remittances especially remain closely tied to the still-weakened labor and housing markets in advanced economies.

    Overheating risks stand out in much of Latin America. Growth is moderating from fast rates last year, but remains above trend. Domestic demand has been growing even faster, pushed not only by favorable external conditions but also by macroeconomic policies that have been quite stimulative and are only gradually normalizing. Early signs of overheating pressures and possible excesses are appearing in several realms:

    • Inflation is rising in much of the region, though so far it is still relatively close to targets in most cases. Some countries have begun to reverse monetary stimulus, but more rate hikes will be needed in light of cyclical considerations. Vigilance is required to ensure that the recent rise in food and energy prices does not spill over into core inflation (so “second-round effects” are limited). Fiscal policy generally has not been helping monetary policy, and it will be important to slow the growth of public expenditure this year.
    • Reflecting strong domestic demand, current account deficits are widening in many countries, even in those benefiting from higher commodity export prices, as import growth outpaces exports. While current account deficits are not yet excessive, their movement in that direction will need to slow. In this fiscal policy can also contribute.
    • Credit and asset prices. Credit growth is accelerating in many countries. While banking systems seem to remain sound, vigilance is required as leverage and external exposure is increasing in some countries. External borrowing by firms is up and some asset prices are looking increasingly bubbly. Countries have continued to adopt and strengthen macroprudential policies, though these should not be deployed as a substitute for macroeconomic policy adjustment.

    Countries with weaker growth so far also will need to proceed carefully, in several dimensions. As their demand recovers, overheating risks will become ever more relevant. Those with less-established monetary policy frameworks will need to carefully watch that commodity price increases do not trigger large second-round effects on inflation more broadly. Many countries, including in Central America, need to turn fiscal policy now to the job of rebuilding buffers that were used during the recent global recession. In the Caribbean especially, where public debt is very high, fiscal policy will need to continue consolidating, to ensure macro stability and set the stage for better growth in the future.

    For all countries of the region, rising global prices of commodities, especially food, pose an important social challenge, threatening the most vulnerable populations. This applies even to countries that are net exporters of commodities and food. In some cases existing social programs—including targeted transfers—can help meet this urgent need; in other cases second-best approaches need consideration. For all countries, the challenge is to target the effort to protecting the most vulnerable, avoiding universal subsidy approaches that are often very costly and regressive, and can turn out to be permanent, requiring large adjustments to other parts of the budget.


    This edition of the Regional Economic Outlook: Western Hemisphere takes a special analytical look at foreign exchange market intervention. Chapter 3 presents the findings to date of a crosscountry research project examining intervention practices, over the last seven years, of a sample of Latin American and other countries with floating or very flexible exchange rates. It analyzes their tendency to intervene in the foreign exchange market selectively, in apparent response to appreciation pressures against the U.S. dollar. The chapter also documents key aspects of how intervention is implemented in practice, including the use of policy rules, the reliance on different instruments, and the degree of transparency. Two empirical methodologies address the long-standing question of whether exchange market intervention has an effect on the exchange rate: such effects have been notoriously difficult to detect in previous work, but the analysis does turn up new evidence suggesting that under certain circumstances intervention can slow the pace of appreciation. This effect is larger when a currency already has appreciated substantially and where the capital account is less open. The chapter also documents the quasi-fiscal costs of the intervention practiced over the last seven years, finding that these have been significant for some countries, largely reflecting valuation losses.

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