The global context and regional outlook for latin america and the caribbean
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The Global Context and Regional Outlook for Latin America and the Caribbean. Benedict Clements Division Chief Western Hemisphere Department International Monetary Fund* June 20, 2007

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The global context and regional outlook for latin america and the caribbean

The Global Context and Regional Outlook for Latin America and the Caribbean

Benedict Clements

Division Chief

Western Hemisphere Department

International Monetary Fund*

June 20, 2007

*The views expressed herein are those of the author and should not be attributed to the IMF, its Executive Board, or its management.


Outline

Outline

  • Global Outlook and Risks

  • Outlook for Latin America and the Caribbean (LAC)

  • The Effect of the External Environment on LAC Growth

  • Sustaining the Expansion and Raising Long-Term Growth


Outline1

Outline

  • Global Outlook and Risks

  • Outlook for Latin America and the Caribbean (LAC)

  • The Effect of the External Environment on LAC Growth

  • Sustaining the Expansion and Raising Long-Term Growth


The global context and regional outlook for latin america and the caribbean

Global Outlook and Risks

The global expansion remains vigorous, with its pace expected to decelerate only moderately in 2007

Real GDP Growth, 1970-2007 (percent)

(projections are shown for 2007)

4


The global context and regional outlook for latin america and the caribbean

Global Outlook and Risks

The prospects for the world economy continue to be favorable, with risks weighted moderately to the downside...

  • The US economy has so far been resilient

  • Growth has picked up in the euro area and Japan

  • Oil prices have remained steady

  • Financial market conditions remain benign

...but risks remain

  • Weakness in the US housing market may persist

  • Financial market volatility could increase

  • Supply shocks in the oil market remain possible

  • Downward adjustment in commodity prices may affect commodity-rich countries

  • A disorderly unwinding of global imbalances could have high costs

5


The global context and regional outlook for latin america and the caribbean

Global Outlook and Risks

Looking forward, the U.S. economy is expected to continue its “soft landing”, even though risks are weighted to the downside

Real GDP growth:

2006: 3.3%

2007: 2.2%

2008: 2.8%

6


Outline2

Outline

  • Global Outlook and Risks

  • Outlook for Latin America and the Caribbean (LAC)

  • The Effect of the External Environment on LAC Growth

  • Sustaining the Expansion and Raising Long-Term Growth


The global context and regional outlook for latin america and the caribbean

Outlook for the LAC region

Growth across the region remains robust, with domestic demand now being the main engine of growth...

8


The global context and regional outlook for latin america and the caribbean

Outlook for the LAC region

In light of the exceptionally benign conditions of recent years, risks are moderately weighted to the downside

On the downside:

  • a sharper-than -expected slowdown in the U.S.

  • tighter global financial market conditions

  • a larger-than-expected decline in non-fuel commodity prices

On the upside:

  • Faster global growth

9


The global context and regional outlook for latin america and the caribbean

Outlook for the LAC region

Encouragingly, the current expansion is generally on a solid basis, in contrast with previous recoveries

  • Autonomous central banks focused on low inflation

  • Primary fiscal surpluses

  • Higher reserves and exchange rate flexibility

Prudent macroeconomic policies have been entrenched

This, in turn, has contributed to positive macro outcomes

  • Low inflation

  • Declining public debt

  • External current account surpluses

But there are some trends that deserve careful monitoring

10


The global context and regional outlook for latin america and the caribbean

Outlook for the LAC region

Inflation declined in most countries last year and is expected to remain generally contained in 2007

11


The global context and regional outlook for latin america and the caribbean

Outlook for the LAC region

Social indicators have continued to improve

12


The global context and regional outlook for latin america and the caribbean

Outlook for the LAC region

Private sector growth, especially to households, continues to grow briskly

This is not yet a source of concern but requires careful vigilance

13


The global context and regional outlook for latin america and the caribbean

Outlook for the LAC region

Market turbulence in early 2007 was largely confinedto equity markets

14


The global context and regional outlook for latin america and the caribbean

Outlook for the LAC region

The region’s external accounts have reached record surpluses, albeit with significant variations across countries…

15


The global context and regional outlook for latin america and the caribbean

Outlook for the LAC region

...reflecting the dependence of many countries on commodities

16


The global context and regional outlook for latin america and the caribbean

Outlook for the LAC region

However, continued strong import growth and declining terms of trade are projected to reduce external surpluses significantly

17


The global context and regional outlook for latin america and the caribbean

Outlook for the LAC region

Strong commodity prices have also boosted primary fiscal balances across the region, helping reduce public debt ratios

The share of FX-denominated debt has also been reduced significantly, with mixed progress on lengthening maturities

18


The global context and regional outlook for latin america and the caribbean

Outlook for the LAC region

Fiscal Policy Stance, 2004-06, 2006-07

(changes in % of GDP between indicated years)

3

Primary balance

Revenue

2

Primary spending

1

0

-1

-2

2004-06

2006-07

However, public non-interest spending has also grown rapidly, which has contributed to exerting a pro-cyclical fiscal stimulus

19


The global context and regional outlook for latin america and the caribbean

Outlook for the LAC region

The stance of monetary policy varies widely across countries, reflecting institutional features but also external and fiscal developments

20


Reserves continue to strengthen to record highs and on average exchange rates are broadly unchanged

Outlook for the LAC region

Reserves continue to strengthen to record highs, and on average exchange rates are broadly unchanged


Outline3

Outline

  • Global Outlook and Risks

  • Outlook for Latin America and the Caribbean (LAC)

  • The Effect of the External Environment on LAC Growth

  • Sustaining the Expansion and Raising Long-Term Growth


The global context and regional outlook for latin america and the caribbean

The effects of the external environment

How are changes in external conditions likely to affect growth in Latin America?

Critical external factors include:

  • External demand

  • Investor risk appetite and global liquidity

  • Commodity prices

Model-based simulations show that:

  • On average, LAC growth appears fairly resilient to a moderate deterioration in external conditions

  • The region remains sensitive to a number of more adverse (albeit low probability) scenarios

Further progress in reducing remaining vulnerabilities would lower the region’s exposure to external conditions

23


The global context and regional outlook for latin america and the caribbean

The effects of the external environment

Latin America’s sensitivity to the global economy

24


The global context and regional outlook for latin america and the caribbean

The effects of the external environment

Commodity prices are key for growth in the region

25


Outline4

Outline

  • Global Outlook and Risks

  • Outlook for Latin America and the Caribbean (LAC)

  • The Effect of the External Environment on LAC Growth

  • Sustaining the Expansion and Raising Long-Term Growth


The global context and regional outlook for latin america and the caribbean

Sustaining the expansion and raising long-term growth

While the battle for macroeconomic stability is being won, the key challenge is to raise investment and boost productivity beyond historical long-run averages...

27


But also beyond that observed during the ongoing expansion

Sustaining the expansion and raising long-term growth

...but also beyond that observed during the ongoing expansion

28


The global context and regional outlook for latin america and the caribbean

Sustaining the expansion and raising long-term growth

Significant increases in per capita income will require higher investment and, more importantly, productivity growth

For example, to double per capita income in 20 years:

  • Scenario 1 (S1): If annual TFP growth is 2 percent, investment needs to rise to 24½ percent of GDP (from 20 percent in 2006)

  • Scenario 2 (S2): If TFP growth is only 1½ percent, investment needs to rise well above 30 percent of GDP

S1

S2

TFP Growth (% per year)

29


The global context and regional outlook for latin america and the caribbean

Sustaining the expansion and raising long-term growth

Raising productivity and investment requires policies that entrench and extend recent achievements

  • Entrenching macroeconomic stability

  • Removing structural impediments to growth

  • Greater trade openness and competition

  • Improving equity and reducing poverty

There are strong complementarities between policies that foster higher growth and those that share its fruits more equitably

30


Reducing labor market rigidities would have beneficial effects

Sustaining the expansion and raising long-term growth

Reducing labor market rigidities would have beneficial effects

  • Lower labor market rigidities would allow for a more efficient resource allocation...

  • ... but lower unemployment would also have a direct effect on growth

    • For instance, bringing unemployment to the current OECD average would boost per capita income in 2026 by 4½ %

31


Improving education levels and quality would boost the region s human capital

Sustaining the expansion and raising long-term growth

Improving education levels and quality would boost the region’s human capital

  • Better human capital could complement higher physical investment while reducing inequality

    • For instance, catching up with current OECD level in 2025 (rather than in 2050) would boost per capita income by 8%

  • Improving education quality is critical to achieve this goal

Perceived Quality of

Math and Science Education

32


The global context and regional outlook for latin america and the caribbean

Sustaining the expansion and raising long-term growth

Frequency and Duration of Growth Spells

80

Mean duration

% spells lasting at least 10 years

60

40

20

0

Industrial

Emerging Asia

Latin America

Sub-Saharan

Other

Countries

Africa

developing

Continued implementation of sound macroeconomic policies will help the region to escape the boom-bust pattern of the past

33


The global context and regional outlook for latin america and the caribbean

Thank youFor a copy of the IMF’s Regional Economic Outlook for the Western Hemisphere:http://www.imf.org/external/pubs/ft/reo/2007/whd/eng/wreo0407.htm


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