Tale of Two Adjustments. The Outlook for Latin America and the Caribbean. Port of Spain, Trinidad and Tobago June 14, 2017

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1 Regional Economic Outlook: Western Hemisphere April 17 Tale of Two Adjustments The Outlook for Latin America and the Caribbean Port of Spain, Trinidad and Tobago June 1, 17

2 Outlook and Risks Tale of Two Adjustments Act I Act II Fiscal External Policies

3 Outlook and Risks

4 World Advanced economies USA United Kingdom Japan Euro Area EMDE China India Brazil Russia Source: IMF, World Economic Outllook April 17.

5 Contributions to GDP growth (Annual percentage change) Selected Economic Indicators Net Exports (cont. to growth) Change in Inventories (ctg) Private fixed domestic residential investment (ctg) Government consumption and investment (ctg) Private fixed domestic non-residential investment (ctg) Private final consumption expenditure (ctg) 16 Proy. 17 Proy Real GDP growth April 17 GDP growth (annual percentage change) Current account (percent of GDP) Core inflation (Annualized, percent) Q 1Q1 1Q 1Q3 1Q 16Q1 16Q 16Q3 16Q October 16 GDP growth (annual percentage change) Current account (percent of GDP) Core inflation (Annualized, percent) Sources: U.S. Bureau of Economic Analysis; IMF staff estimates.

6 Growth of Output and Imports (annual percentage change) 8 Import growth GDP growth Sources: Haver Analytics; IMF World Economic Outlook, April 17. 6

Growth is positive in most countries but is weaker than

1% Proyecciones 1 1 16 17 18 LAC 6.1.1-1. 1.1. South America 6.

7 3.9. Trinidad & Tobago 3.3 -.6 -.1.3 3. Brazil 7. -3.8-3.6. 1.

7 Growth is positive in most countries but is weaker than previously projected. 17 LAC growth: 1.1% Proyecciones LAC South America Central America.9.1.,3.3 Caribbean Trinidad & Tobago Brazil Mexico Sources: IMF, World Economic Outlook database; and IMF staff calculations. Note: Historical average refers to the average growth from 13. Source: IMF, World Economic Outlook database. 7

8 Growth is positive in most countries but is weaker than previously projected. 17 LAC growth: 1.1% 3 GDP growth, y/y % change.%.6% 1 1.1% 1-1.% WEO vintages: October 13 October 1 October 1 October 16 April Sources: IMF, World Economic Outlook database; and IMF staff calculations. Note: Historical average refers to the average growth from 13. Source: IMF, World Economic Outlook database. 8

9 Some improvement in external demand. Modest recovery in commodity prices. Relatively accommodative financial conditions. 8 6 External Demand South America 1 1 Commodity Terms of Trade 18 (Index: Jan-13 = 1) Sovereign spread Equity market index Corporate spread Central America and Mexico Change from 11 to August 16 Change since August 16 Change since U.S. election - 8Q1 9Q1 1Q1 11Q1 1Q1 13Q1 1Q1 1Q1 16Q1 VEN BOL ECU COL CHL PER BRA ARG PRY SUR URY GUY MEX BLZ PAN GTM CRI SLV HND NIC TTO ATG KNA HTI BRB BHS DOM GRD DMA LCA JAM VCT South America Central America and Mexico Caribbean 8 6 Jan-13 Jan-1 Jan-1 Jan-16 Jan-17 Sources: Haver Analytics; and IMF staff calculations. Note: Quarter-over-quarter real final domestic demand growth of trading partners, weighted by the share of each trading partner in total exports. Percent change; -quarter moving average. Sources: Gruss (1); and IMF staff calculations. Note: Percent change; index weighted by GDP. Sources: Bloomberg L.P.; and IMF staff calculations. Note: Sovereign spread refers to J.P. Morgan Emerging Market Bond Index Global; equity refers to Morgan Stanley Capital International (MSCI) local currency index; and corporate spread refers to J.P. Morgan Corporate Emerging Markets Bond Index Broad Diversified. 9

10 Inflation (Percent) Brazil Chile Colombia Mexico Peru 3 1 Sources: Bloomberg L.P.; Global Data Source; Haver Analytics; national authorities; and IMF staff calculations. Note: Shaded area refers to the target range. 1

11 1 Selected LAC: Contributions to Real GDP Growth 1 (Index: 11 = 1) Consumption Investment Net exports Real GDP growth 1 1 Consumer confidence index Business confidence index (right scale) Jul-9 Feb-1 Sep-1 Apr-11 Nov-11 Jun-1 Jan-13 Aug-13 Mar-1 Oct-1 May-1 Dec-1 Jul-16 Feb-17 Sources: IMF, World Economic Outlook database; and IMF staff calculations. Note: LAC excludes Dominica, Grenada, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines due to data limitations. Inventories include statistical discrepancies. PPP GDP-weighted average; year-over-year percent change. Sources: Haver Analytics; and IMF staff calculations. ¹Simple average of Brazil, Chile, Colombia, and Mexico. ²Simple average of Brazil, Chile, Colombia, Mexico, and Peru. 11

13 Deep recession could be nearing its end. Faster-than-expected disinflation is providing more policy space. Fiscal sustainability is still a concern, with backloaded adjustment Contributions to Real GDP Growth 1 Consumption Investment Net exports Real GDP growth Feb-1 Policy rate (%) Inflation expectations, 1m ahead (%) Oct-1 Jun-11 Feb-1 Inflation target (%) Oct-1 Jun-13 Feb-1 Oct-1 Policy rate expectations, Analysts (%) Jun-1 Feb-16 Oct Jun Debt-stabilizing primary balance Primary balance NFPS gross debt (right scale) Sources: IMF, World Economic Outlook database; and IMF staff calculations. Note: Year-over-year percent change. Note: Analysts policy rate expectations from Central Bank s Weekly Focus Survey. Note: Debt-stabilizing primary balance excludes interest. Percent of GDP. 13

14 Financial conditions have eased after the tightening in the aftermath of the U.S. election. But elevated uncertainty and subdued confidence... are expected to weigh on growth. Nov. 8 Jan. Nov. 8 Apr (Index: Jan-8 = 1) 6 Real GDP Growth (%) Consumer confidence 3 7 Producer confidence MXN/USD depreciation (percent) EMBIG (bps; right scale) CEMBI (bps; right scale) 1-y bond yield (bps; right scale) Sources: Bloomberg L.P.; and IMF staff calculations. Sources: Haver Analytics; and IMF staff calculations. Source: IMF, World Economic Outlook database. 1

Inflation is above target, reflecting mainly the liberalization of gasoline prices, compounded by the pass-through of depreciation, but expected to decline rapidly.

15 Inflation is above target, reflecting mainly the liberalization of gasoline prices, compounded by the pass-through of depreciation, but expected to decline rapidly. 6 3 Inflation (%) Target range Expectations, 18 Headline Core Expectations, 19 WEO WEO 3 1 Strengthening the fiscal framework will help bolster credibility and reduce public debt Fiscal Balance and Debt (% GDP) Primary balance Debtstabilizing primary balance NFPS gross debt (right scale) Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 Proj. 17 Proj Sources: Haver Analytics; anf IMF, World Economic Outlook database. Sources:. IMF, World Economic Outlook database; and IMF staff calculations. 1

16 Deepening economic crisis, accelerating inflation, and large fiscal deficits Unfolding humanitarian crisis Real GDP growth (%) CPS deficit (% GDP) CPI, Inflation, eop (%; right scale) Proj. 17 1, 1, 8 6 Worsening poverty: 8% (33% in 1) Collapse of the health system: scarcity of medicine, 76% of hospitals (% in 1) Security concerns: homicide rate 9 murders per 1, ( in 1998) Rising number of refugees: around 1, annually to Brazil and Colombia each. Sources: IMF, World Economic Outlook database; national authorities; and IMF staff estimates and projections. Note: Projecting the economic outlook in Venezuela, including assessing past and current economic developments as the basis for the projections, is complicated by the lack of discussions with the authorities (the last Article IV consultation took place in ), long intervals in receiving data with information gaps, incomplete provision of information, and difficulties in interpreting certain reported economic indicators in line with economic developments. The fiscal accounts include the budgetary central government and Petróleos de Venezuela, S.A. (PDVSA). Revenue includes the IMF staff's estimated foreign exchange profits transferred from the central bank to the government (buying U.S. dollars at the most appreciated rate and selling at more depreciated rates in a multitier exchange rate system) and excludes the staff's estimated revenue from PDVSA s sale of PetroCaribe assets to the central bank. 16

17 An escalation of global policy uncertainty and a rising tide of economic nationalism A tightening of global financial conditions A hard landing in China and renewed decline in commodity prices

Remittance Flows from the United States and Europe (% of

Destinations (% of exporting country s GDP) Europe Europe.

% Central America 6.1% Caribbean.1%.1% South America 1.1%.% 7% Mexico 6.

18 Remittance Flows from the United States and Europe (% of recipient country s GDP) Exports of Goods to Select Destinations (% of exporting country s GDP) Europe Europe.% United States 1.3% United States % Mexico 6.% Central America 6.1% Caribbean.1%.1% South America 1.1%.% 7% Mexico 6.3% Central America 1.% 1.6% 8% Caribbean % South America 1.6%.1%.%.% % China 18

19 3 Total Migrant Stock¹ (% relative to population of country of origin) Europe United States 3 3 Direct Investment from the United States, 1² (% GDP) FDI from the U.S. U.S. repatriated investment income (right scale) Caribbean Mexico Central America South America Chile Brazil Colombia Peru Argentina Uruguay Costa Rica Mexico Panama Honduras El Salvador Guatemala Sources: UN Department of Economics and Social Affairs 1 and Coordinated Direct Investment Survey; IMF, World Economic Outlook database; and IMF staff calculations. ¹ The aggregate measure can mask significant exposures across the region s members. ² FDI income repatriation is based on the 1 income from FDI (flow) and the share of U.S. FDI in total FDI stock. 19

20 Tale of Two Adjustments Act I: Fiscal

21 Fiscal revenues from commodities have fallen steeply. To fill the gap, different fiscal strategies have been deployed across the region. General Government Commodity Revenues (Percent of fiscal year GDP) Making Up for Lost Commodity Revenue, (Budget components; percent of fiscal year GDP) ARG BOL CHL COL ECU MEX PER TTO 6 Current primary expenditure Noncommodity revenue Commodity revenue Capital expenditure Change in primary balance Ecuador Mexico Colombia Argentina Chile Peru Bolivia Sources: IMF, World Economic Outlook database; and IMF staff calculations. 1

22 Primary deficits currently exceed debt-stabilizing levels causing rising public debt and eroding fiscal space. Gross Debt (% GDP) Primary balance, 16 (% GDP) Mexico Uruguay Colombia Peru Chile Brazil Average EMDE debt level Latin America Debt-stabilizing primary balance (% GDP) Sources: IMF, World Economic Outlook database; and IMF staff calculations. Sources: IMF, World Economic Outlook database; and IMF staff calculations.

23 Debt-Stabilizing Primary Balance (Percent of GDP) % 3.8% 31.%.7% 8.% 1.8% 3 6 Primary balance (Apr-17) Debt-stabilizing primary balance Primary balance (Apr-16) Brazil Chile Colombia Ecuador Mexico Peru Sources: IMF, World Economic Outlook database; and IMF staff estimates. Note: Number next to the red line refers to the 1 debt-to-gdp ratio. For Brazil, debt-stabilizing primary balance excludes interest. 3

24 Tale of Two Adjustments Act II: External

25 Current Account Balance (% GDP) Trough Managed regimes Flexible regimes Bolivia Colombia Mexico Peru Argentina Chile Brazil Ecuador -8 Venezuela Source: IMF, World Economic Outlook database. Note: Trough year for Argentina, Bolivia, Ecuador, Peru, and Venezuela was 1; Brazil and Colombia was 1; and Chile and Mexico was 13.

26 Current account adjustment through import compression but domestic demand more resilient in economies with flexible ER regimes with large depreciations lowering the hardship of current account adjustment (lower sacrifice ratio). (% GDP change; peak to trough) (Percentage point change from peak current account deficit). 1. Other Exports Oil imports Non-oil imports Current account balance Current account balance 1 Lower sacrifice ratio for countries with flexible exchange rate regime is due to: 1. Import compression - Sacrifice ratio (right scale) Domestic demand growth % Import expenditure switching % Export expenditure switching LA6 Managed exchange rate regimes Flexible exchange rate regimes Sources: IMF, World Economic Outlook database; and IMF staff calculations. Note: Peak to trough is: Brazil (1 16), Chile (13 1), Colombia (1 16), Mexico (13 1), Peru (1 16), and Uruguay (1 16) for the period Note: Sacrifice ratio of external adjustments is defined as how much domestic demand must compress in order for the current account balance to improve by one percentage point of GDP. Source: IMF staff estimates based on a counterfactual exercise in a PVAR model that includes 38 countries at quarterly frequency from 16. 6

27 Policies

Maintaining exchange rate flexibility Continuing with fiscal adjustment Easing monetary policy where inflation is declining and credibility is strong Securing strong and sustainable

28 Maintaining exchange rate flexibility Continuing with fiscal adjustment Easing monetary policy where inflation is declining and credibility is strong Securing strong and sustainable medium-term growth Prioritizing capital and human capital spending Improving institutions and governance Furthering trade integration Encouraging female labor participation where gaps exist

29 Despite improvements, effective tariff rates remain higher than in other regions. Weighted Average Tariff 1 Weakly integrated into global trade Trade Openness Low regional integration Regional Export Shares, World East Asia & Pacific Europe & Central Asia North America South Asia (RHS) LAC² Latin America Caribbean Intra-Region Inter-Region MENA Africa LAC Emerging and Developing Asia Emerging and Developing Europe Sub-Saharan Africa Middle East and North Africa North America Asia Europe Sources: World Bank, WITS database; and IMF staff calculations. 1 Effectively applied weighted average tariff (%): The average of tariffs weighted by their corresponding trade value figures. Refers to 3-month moving average. Sources: IMF, World Economic Outlook database; and IMF staff calculations. Note: Exports and imports in percent of GDP. Sources: IMF, Direction of Trade Statistics database; and IMF staff calculations. Note: Percent of total exports. 9

30 Regional Economic Outlook: Western Hemisphere April 17 Tale of Two Adjustments The Outlook for Latin America and the Caribbean Port of Spain, Trinidad and Tobago June 1, 17

An Uneven Recovery. Outlook for Latin America and the Caribbean. A Presentation by Western Hemisphere Department

An Uneven Recovery. Outlook for Latin America and the Caribbean. A Presentation by Western Hemisphere Department International Monetary Fund November 1, 2018 An Uneven Recovery Outlook for Latin America and the Caribbean A Presentation by Western Hemisphere Department I. Key Messages II. Global Crosscurrents III.