Outlook and Challenges for Latin America and the Caribbean

Transcription

1 International Monetary Fund Colombia, June 18 Outlook and Challenges for Latin America and the Caribbean Carlos Caceres Western Hemisphere Department

2 I. Global Economy, Financial Markets, and the U.S. II. Latin America and the Caribbean Recent developments and Outlook Risks and Uncertainties III. The Policy Mix Improving the Quality of the Fiscal Adjustment Enhancing Monetary Policy Effectiveness Need for Deep Structural Reforms

3 World Advanced Economies U.S. Japan Euro Area Emerging Market and Developing Economies China India Revision from Oct Revision from Oct Source: IMF, World Economic Outlook database. Note: Difference based on rounded figures for both the current and October 17 World Economic Outlook forecasts. 3

4 World GDP is accelerating, and projections revised up from the previous WEO vintage 7 6 World Real GDP Growth (%) at the same time, global trade is picking up World Trade and Industrial Production (3-month moving average; annualized % change) 5 April 18 WEO Vintage Industrial production 3 October 17 WEO Vintage World trade volumes Source: IMF, World Economic Outlook database. Sources: CPB Netherlands Bureau for Economic Policy Analysis; Haver Analytics; Markit Economics; and IMF staff calculations.

5 Despite the recent uptick, advanced countries bond yields remain low and global equity prices remain elevated 6 5 Ten-year Bond Yields (%) United Kingdom MSCI Equity Indices (index: January 1, 8 = 1; US dollars) United States 18 3 United States 3 1 Japan Japan Germany 1 6 Germany United Kingdom Sources: Haver Analytics, based on EPFR Global; and IMF staff calculations. Sources: Thomson Reuters Datastream; and IMF staff calculations. Note: MSCI = Morgan Stanley Capital International. 5

6 Commodity prices have increased noticeably since their trough in early-16, but still remain below the boom levels 1 Global Commodity Prices (11:Q1 = 1) 1 15 Energy Agricultural raw materials 75 6 Metals Q1 11Q1 13Q1 15Q1 17Q1 19Q1 3 Sources: IMF, World Economic Outlook database; and IMF staff calculations. Note: Dotted lines refer to the January 18 Global Assumptions. 6

7 Economic growth is above potential with unemployment at its lowest rate since 3.9 (% change; SAAR) Unemployment (%) Real GDP growth Output gap NAIRU NBER recession NBER recession Sources: US Bureau of Economic Analysis; and IMF staff estimates. Note: Dashed line refers to projections. Sources: US Bureau of Economic Analysis; US Bureau of Labor Statistics; and IMF staff estimates. Note: NAIRU = non-accelerating inflation rate of unemployment. 7

8 The US tax reform would provide a significant fiscal stimulus to the US economy over the next two years or so US GDP-Level Impact (% difference from baseline) Reduction in personal income tax and other Reduction in corporate and pass-through taxes, expensing of investment Source: IMF staff calculations. Note: Only the effects of the tax reform are shown in the charts. 8

9 Core inflation measures moving closer to target likely causing the FOMC to raise rates faster 6 Inflation (%).5 Policy Rate Expectations (%) IMF projection April 18 WEO FOMC median dots (as at 3/1/17) Core CPI 3..5 IMF projection Fall 17 WEO Core PCE. 1.5 Fed funds futures (solid as at 5/17/18) (dotted as at 9/9/17) Headline CPI Q1 19Q1 Q1 1Q1 Q1 3Q1 Q1 Sources: US Bureau of Labor Statistics; and IMF staff estimates. Note: CPI = consumer price index; PCE = personal consumption expenditure. Sources: Bloomberg Finance L.P.; US Federal Reserve; and IMF staff calculations. 9

10 I. Global Economy, Financial Markets, and the U.S. II. Latin America and the Caribbean Recent developments and Outlook Risks and Uncertainties III. The Policy Mix Improving the Quality of the Fiscal Adjustment Enhancing Monetary Policy Effectiveness Need for Deep Structural Reforms

11 LAC growth: -.6% 17 LAC growth: 1.3% 18 LAC growth:.% 19 LAC growth:.8% Sources: IMF, World Economic Outlook database; and IMF staff calculations. Note: Historical average refers to the average growth from

12 :Q1 1:Q1 :Q1 3:Q1 :Q1 5:Q1 6:Q1 7:Q1 8:Q1 9:Q1 1:Q1 11:Q1 1:Q1 13:Q1 1:Q1 15:Q1 16:Q1 17:Q1 Pick up in global growth and trade generating strong external demand for the region but LAC s exports not taking full advantage of robust import growth in trading partners 5 15 External Demand and Real Exports Growth (% yoy change) External demand 6 Export Performance Gap, 17:Q3 (% ppts.) Real exports PER MEX BRA LAC COL ARG CHL Sources: IMF, Direction of Trade Statistics database; IMF, Global Data Source database; and IMF staff calculations. Note: External demand is the country-specific component of import growth of trading partners, weighted by the share of exports to each trading partner. US dollar nominal GDP-weighted average of Argentina, Brazil, Chile, Colombia, Mexico, and Peru. Sources: IMF, Direction of Trade Statistics database; IMF, Global Data Source database; and IMF staff calculations. Note: "Export performance gap" is the difference between real export growth and its corresponding external demand component. 1

13 Latin American equity prices remain buoyant, and corporate and sovereign spreads remain compressed and most currencies have recovered some of the previously lost ground. 8 Latin America: Sovereign Spread and Equity Prices Sovereign spread (basis points) Equity (index: Jan. 11 = 1; right scale) June 1 to January 16 June 1 to April Bilateral Exchange Rates (% change; US$/NC) Peru Chile Uruguay Mexico Colombia Brazil Sources: Bloomberg Finance L.P.; and IMF staff calculations. Note: Sovereign spread refers to the median of LA6 J.P. Morgan Emerging Market Bond Index Global spread; US-dollar-denominated sovereign bonds. Shaded area refers to the min-max range. LA6 is Brazil, Chile, Colombia, Mexico, Peru, and Uruguay. Sources: Haver Analytics; national authorities; and IMF staff calculations. 13

14 Commodity terms of trade have improved sharply since their early- 16 trough increasing the probability of returning to their boom levels over the coming years 5 Commodity Terms of Trade (% change) 8 7 Probability of Commodity Terms of Trade Returning to or Staying above Boom Levels by 18 and 3 (%) to January to February ARG MEX BRA PER CHL COL BOL ECU TTO VEN BRA BOL COL TTO ECU VEN MEX ARG PER CHL URY Sources: Gruss 1; and IMF staff calculations. Note: Index weighted by GDP. Sources: Caceres and Medina 15; Gruss 1; UN Comtrade; and IMF staff calculations. Note: The bars denote the probability for each country s CTOT of reaching or exceeding by the end of a given year in the future the average level observed during the period 11:Q1 1:Q1, based on stochastic simulations (1 million iterations) using the Geometric Brownian Motion model of Caceres and Medina 1 15.

15 Investment growth projected to be the main driver behind the economic acceleration in 18 and 19 but investment levels remain subdued relative to other emerging and commodity-exporting economies 3 Contributions to Real GDP Growth (%) 1 13 Real Investment Levels (index: 13 = 1) Real GDP growth 15 1 World excluding LAC Commodity-exporting EMDE excluding LAC 1 3 Private consumption Public consumption Investment Inventories Exports Imports 9 8 Latin America and the Caribbean (Projected) (Projected) Sources: IMF, World Economic Outlook database; and IMF staff calculations. Note: PPP GDP-weighted average. Excludes Dominica, Grenada, Guyana, Jamaica, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines due to data limitations. Inventories include statistical discrepancies. Sources: IMF, World Economic Outlook database; and IMF staff calculations. Note: Purchasing-power-parity GDP-weighted average. EMDE = emerging market and developing economies; LAC = Latin America and the Caribbean.

16 Inflation has fallen sharply across the region Inflation (%) Target range Peak April 18 providing space for most of the inflation-targeting central banks to cut rates Real Policy Rates and Inflation Gap (%) Inflation minus target Peak April 18 Brazil peak = 9.% 1 URY MEX DOM GTM PRY COL BRA CRI CHL PER MEX COL DOM GTM PRY CRI CHL PER BRA Sources: Haver Analytics; national authorities; and IMF staff calculations. Note: Includes countries with an inflation-targeting framework. Peak over December 13 to December 16. Peak dates are Brazil, Peru (January 16); Chile (October 1); Colombia (July 16); Costa Rica (November 1); Dominican Republic (December 13); Guatemala (October 16); Mexico (January 1); Paraguay (May 1); and Uruguay (May 16). Sources: Haver Analytics; national authorities; and IMF staff calculations. Note: Real (ex ante) policy rates calculated as the difference between the policy rate and the one-year-ahead inflation expectations. Target is taken as the midpoint of the inflation target range. Peak real policy rate is since December 13. Peak dates are Brazil (August 16); Chile (December 13); Colombia (January 17); Costa Rica (November 17); Dominican Republic (December 1); Guatemala (February 1); Mexico (February 18); Paraguay (January 15); and Peru (April 17). 16

17 The widening of the current account deficits following the end of the commodity super-cycle has been partially reverted over the past two years, and in several countries the external adjustment is now essentially complete 3 Current Account Balance (% ppts. GDP) Change Change BOL COL PER ARG ECU MEX LAC CHL BRA Sources: IMF, World Economic Outlook database; and IMF staff calculations. Note: : LAC aggregate is fiscal year US dollar nominal GDP-weighted average. 17

18 I. Global Economy, Financial Markets, and the U.S. II. Latin America and the Caribbean Recent developments and Outlook Risks and Uncertainties III. The Policy Mix Improving the Quality of the Fiscal Adjustment Enhancing Monetary Policy Effectiveness Need for Deep Structural Reforms

19 External A sudden tightening of global financial conditions A shift toward more protectionist policies Accumulation of financial vulnerabilities in China Extreme weather events Uncertainty Longer term spillovers of the US tax reform (profit shifting and relocation of real activity out of the region) Domestic Election cycle Regional spillovers from Venezuela 19

20 A faster than expected monetary policy normalization in the US poses risks to domestic interest rates in the region Response of Domestic Interest Rates to US Interest Rates (bps) 1 1 More generally, LAC financial assets are sensitive to global market conditions Sensitivity to a 1 bps increase in the VIX EMBIG spread (bps) Long rate spillover 8 Exchange rate (% ppts.; right scale) Short rate spillover MEX PER ARG BOL URY CHL COL BRA LAC ADV EME Brazil Colombia Peru Mexico Chile Sources: Chapter 3 of WHD Regional Economic Outlook (October 15); and IMF staff calculations. Note: Short rate spillovers denote the response of domestic short-term interest rates to a change in the Fed Fund rate; long rate spillovers denote the response of domestic long-term interest rates to a change in the 1-year T-bill rate. Dark bars denote statistically significant. LAC = Brazil, Chile, Colombia, Mexico, Peru. Sources: Thomson Reuters Datastream; and IMF staff calculations. Note: Cumulative response of EMBIG spreads (basis points) and exchange rates (percentage points) to an increase of 1 VIX basis points (one standard deviation) after 3 months. VIX increased by bps during 8 global financial crisis; by 3 bps during the European debt crisis in 11; and by 15 bps with the monetary policy rate lift-off in the US in 15. Positive values for the exchange rate indicate depreciations.

21 MEX CAN TTO HTI SLV NIC CRI HND DOM ECU GTM COL JAM CHL PER BOL BHS BRA URY ARG PAN SLV HTI HND JAM GTM DOM NIC MEX PAN CRI TTO Mexico, Central America, and the Caribbean exhibit significant trade linkages with the U.S. Goods Exports by Destination, 16 (% GDP) 18 as well as significant financial and migration linkages Remittances from the U.S., 16 (% GDP) United States China Rest of the world Sources: IMF, Direction of Trade Statistics database; IMF, World Economic Outlook database; and IMF staff calculations. Sources: IMF, Direction of Trade Statistics database; IMF, World Economic Outlook database; World Bank, Migration and Remittances database; and IMF staff calculations. 1

22 Forthcoming elections Recently held elections Falling presidential approval ratings raises the risk of populism Elections scheduled to take place in many countries in 18 9 Post-election peak Latest March 18 Grenada General 8 April 18 Costa Rica Presidential (Second Round) 7 April 18 Paraguay General 6 5 May 18 Venezuela Presidential May 18 Colombia Presidential 3 June 18 Colombia Presidential (Second Round) 1 Argentina Brazil (Dilma) Brazil (Temer) Chile (Bachelet) Chile (Piñera) Colombia Mexico Peru July 18 Mexico General October 18 Brazil General Sources: La Nación-Poliarquia (Argentina), Datafolha (Brazil), Adimark and GfK SE (Chile), Gallup (Colombia), Consulta Mitofsky (Mexico), and El Comercio-Ipsos (Peru). Note: Peru refers to former President Kuczynski who resigned from office on March 1, 18. October 18 Peru Regional

23 I. Global Economy, Financial Markets, and the U.S. II. Latin America and the Caribbean Recent developments and Outlook Risks and Uncertainties III. The Policy Mix Improving the Quality of the Fiscal Adjustment Enhancing Monetary Policy Effectiveness Need for Deep Structural Reforms

24 Fiscal revenues fell sharply following the end of the commodity supercycle leading to a significant deterioration of fiscal balances Fiscal Primary Balance (% ppts. FY GDP) 6 Change 1 16 Change Change Commodity Revenue (% ppts. FY GDP) 1 1 Change 1 18 ARG COL CHL PER MEX BOL ECU TTO MEX URY COL LAC ARG CHL BRA PER ECU BOL TTO Sources: IMF, World Economic Outlook database; and IMF staff calculations. Sources: IMF, World Economic Outlook database; and IMF staff calculations. Note: Mexico excludes one-off revenues for 17.

25 Debt has increased significantly and is above that of other emerging market but there is a significant heterogeneity within the region 7 Gross Public Debt (% GDP) 9 Government Debt (% FY GDP) 65 6 Latin America and the Caribbean 75 6 Gross debt, 1 17 Gross debt, 1 Net debt, 17 EMDE 17 gross debt EMDE without LAC (17) CHL PER TTO ECU COL BOL ARG MEX LAC URY BRA Sources: IMF, World Economic Outlook database; and IMF staff calculations. Note: US dollar nominal GDP-weighted average. EMDE = emerging market and developing economies; LAC = Latin America and the Caribbean. Sources: IMF, World Economic Outlook database; and IMF staff calculations. Note: Definition of government debt varies across countries. Net debt data are not available for Argentina, Ecuador, and Latin America and the Caribbean (aggregate). 5

26 Different countries exhibit varying degrees of frontloading the adjustment 1 8 Primary Balance (% ppts. GDP) Required change to reach debt-stabilizing primary balance Change Change 19 1 Change ECU BOL TTO ARG CHL LAC BRA PER COL URY MEX Sources: IMF, World Economic Outlook database; and IMF staff calculations. Note: LAC aggregate is fiscal year US dollar nominal GDP-weighted average. Mexico excludes one-off revenues for 17. Argentina refers to the federal government. 6

27 Expenditure increases / Revenue reductions Expenditure cuts / Revenue increases Contributions to Changes in the Primary Balance, 17 3 (%ppts GDP) Capital investment cuts Commodity revenue Noncommodity revenue Current primary expenditure Capital expenditure Primary balance ECU BOL ARG TTO CHL BRA PER COL MEX Sources: IMF, World Economic Outlook database; national authorities; and IMF staff calculations. Note: Expenditure cuts (increases) have a positive (negative) contribution to the changes in the primary balance. Mexico excludes one-off revenues for 17. 7

28 Public investment cuts, in particular, are likely to hurt economic activity more..5 Primary expenditure 1. Higher Fiscal Multiplier 1.5 Public investment. Spending Cuts by Component (cumulative multiplier) t-1 t t+1 t+ Source: IMF staff calculations. Note: This figure reports estimates based on identification of fiscal actions using forecast errors for a sample of 19 LAC countries. Shaded area indicates +/- 1 HAC standard error. 8

29 Brazil Costa Rica Venezuela Nicaragua Ecuador Paraguay Dominican Rep. Argentina El Salvador Mexico Peru Honduras Panama Guatemala Uruguay Chile Bolivia Colombia Healthcare spending is high compared to other EM, and PAYG pension systems are generous (and typically underfunded) Healthcare Spending, 15 (% GDP) CRI Pension Spending, 15 (% GDP) BRA Reforms needed to ensure long-term sustainability of healthcare and pension systems Sustainability of Public Pension and Healthcare Systems (PDV of additional expenditure 15 3 relative to current expenditure levels; %GDP) Pension Healthcare Emerging Market and Middle-Income Economies VEN Latin America and the Caribbean DOM Latin America and the Caribbean Emerging Market and Middle-Income Economies -15 Sources: Country authorities; and IMF staff calculations. Note: Bottom (top) edge of squares denote the 5 th (75 th ) percentiles; the bottom (top) of the whiskers represents the 5 th (95 th ) percentiles. Source: IMF staff calculations. Note: A negative PDV number denotes that future pension/healthcare-related expenditure is projected to decline relative to current pension/healthcare-related expenditure. 9

30 I. Global Economy, Financial Markets, and the U.S. II. Latin America and the Caribbean Recent developments and Outlook Risks and Uncertainties III. The Policy Mix Improving the Quality of the Fiscal Adjustment Enhancing Monetary Policy Effectiveness Need for Deep Structural Reforms

31 ZAF BRA AUS COL MEX CHL EUR CAN PRY URY DOM CRI ARG JAM TTO PER GTM Notwithstanding greater use of exchange rate flexibility pass-through to inflation has been limited Exchange Rate Variability, 5 17 (6m rolling standard deviations of daily changes) Pass-through Into Domestic Inflation Pass-through (headline) Expectation anchoring (right scale) Lower Pass-through ADV LA5 LA (other) Sources: Thomson Reuters Datastream; and IMF staff calculations. Note: Bilateral exchange rates against the US dollar. EUR denotes the euro-dollar exchange rate. Sources: WHD Regional Economic Outlook (April 16); and IMF staff calculations. Note: The figure shows the average cumulative exchange rate pass-through to headline consumer prices two years after a 1 percent increase in the nominal effective exchange rate from panel regressions by group of countries estimated over January 3 and December 15. Expectation anchoring is the inverse of - month inflation forecast disagreement. 31

32 Pro-cyclical Counter-cyclical Monetary policy in LA5 countries turns procyclical / less countercyclical during episodes of large exchange rate depreciations Large depreciations Normal times BRA MEX PER COL CHL Source: IMF staff calculations. Note: Elasticities of real (ex ante) policy rates to changes in output gaps, controlling for deviations of inflation expectations from target. Inflation expectations are two-year-ahead inflation expectations from Consensus Economics. Large depreciations are periods characterized by an average depreciation of the exchange rate against the dollar exceeding 1 percent over the past 1 months. 3

33 Monetary policy forecast error, 1 17 (root mean square error) Absolute MT inflation expectation gaps, Average Monetary Policy Surprise BRA COL PHL.8.7 Inflation Expectation Gaps ( years ahead) IND IDN IND MEX PER ROU CHL Higher transparency IDN KOR NOR POL CAN GBR AUS Less predictability HUN NZL CZE MEX BRA COL PER THA ROU Higher transparency KOR CHL PHL POL NOR AUS GBR CAN USA Less credibility HUN NZL CZE Central Bank Transparency Index, 1-1 Central Bank Transparency Index, 1-1 Sources: Bloomberg Finance L.P.; Consensus Economics; Dincer and Eichengreen (1); and IMF staff calculations. Note: Transparency refers to the Dincer and Eichengreen (1) index of central bank transparency, which covers five categories including political, economic, procedural, policy, and operational aspects. In left panel, monetary policy surprises refer to the Mean Square Error of the average Bloomberg analyst forecast for the monetary policy rate the day before each policy meeting. In the right panel, the average medium-term inflation expectation gap uses the average forecast two years ahead from Consensus Economics. 33

34 I. Global Economy, Financial Markets, and the U.S. II. Latin America and the Caribbean Recent developments and Outlook Risks and Uncertainties III. The Policy Mix Improving the Quality of the Fiscal Adjustment Enhancing Monetary Policy Effectiveness Need for Deep Structural Reforms

35 Real GDP per capita growth, 3 6 Subdued potential growth hindering convergence prospects for the region Real GDP per Capita Growth, 3 (%) 6 with a significant degree of intra-regional heterogeneity Real GDP per Capita Growth Convergence Advanced economies = 1.1% NIC HND DOM PER BRA URY BOL MEX COL LAC ECU LCA BRB VEN PAN ARG CHL ATG BHS USA CAN Asia EME LAC Sub-Saharan Africa United States Log of real GDP per capita, 17 Source: IMF, World Economic Outlook database. Note: Asia = Emerging and developing Asia; EME = Emerging and developing Europe; LAC = Latin America and the Caribbean. Sources: IMF, World Economic Outlook database; and IMF staff calculations. Note: Dotted line refers to real GDP per capita growth for 3 for advanced economies. 35

36 Infrastructure bottlenecks reflected in low investment levels Gross Fixed Capital Formation (% GDP) Average Education outcomes remain low, even though the region spends more than others on education Education Outcomes and Spending (% rank) 8 6 PISA education outcomes Public education spending (percent of GDP; right scale) Advanced economies education outcome = Asia EME COL MENA SSA LAC Asia CIS EME LAC COL 3. Sources: IMF, World Economic Outlook database; and IMF staff calculations. Note: PPP GDP-weighted average. Sources: Organisation for Economic Co-operation and Development, 15 Programme for International Student Assessment (PISA); World Bank, World Development Indicators database; and IMF staff calculations. Note: Simple average. Latest available data. 36

37 Low openness levels call for further trade liberalization... and there is ample scope for more regional integration 1 Trade Openness, 17 (% GDP) Goods Exports by Destination, 17 (% GDP) 1 1 Advanced economies = Latin America and the Caribbean Rest of the world EME Asia MENA LAC SSA COL MEX CHL PER URY COL BRA ARG Sources: IMF, World Economic Outlook database; and IMF staff calculations. Note: Simple average. Trade openness is measured as the sum of exports and imports of goods and services as a share of GDP. Sources: IMF, Direction of Trade Statistics database; IMF, World Economic Outlook database; and IMF staff calculations. 37

38 International Monetary Fund Colombia, June 18 Outlook and Challenges for Latin America and the Caribbean Carlos Caceres Western Hemisphere Department

39 U.S. has cut relatively high CIT rates to the OECD average, affecting tax rate differentials which can have important economic effects in destination countries 38 Corporate Income Tax Rates (%) 6 Domestic Exposure to US MNEs (1 13) United States 5 Foreign pre-tax income (% of GDP) Foreign income taxes (% of total CIT revenues; right scale) 15 3 Latin America OECD 1 5 CAN CHL PER MEX CRI ARG COL BRA Sources: Oxford Centre for Business Taxation (17); and IMF staff calculations. Note: Statutory rates at central government level. Latin America and OECD are unweighted averages. Latin America includes Argentina, Brazil, Chile, and Mexico. Sources: IMF, World Economic Outlook database; IMF, World Revenue Longitudinal Data database; US Bureau of Economic Analysis; and IMF staff calculations. 39

40 Monetary policy forecast error, 1 17 (root mean square error) Readability of Central Bank Press Releases WHD REO 17 Harry Potter Local newspaper COL CHL MEX PER Readability of Central Bank Communication and Monetary Policy Predictability ROU BRA MEX KOR PHL THA CHL IDN PER HUN POL IND COL NZL CAN AUS CZE NOR. GBR 1 COL CHL MEX PER BRA Flesch readability index, 1 17 Sources: Bloomberg Finance L.P.; and IMF staff calculations. Note: The left panel shows the Flesch-Szigriszt readability index for press releases in English, which measures the complexity of text structure. For Brazil, the English version of the statement was used. The right panel correlates the readability score with the short-term predictability of policy rate decisions, as measured by the mean squared error of the average Bloomberg analyst forecast the day before each meeting. IN this chart, for Mexico, the English version of the monetary policy discussion of the inflation report was used.