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. IV. Domestic Developments The Outlook and Risks V. Policies
Recovery is becoming more uneven. Activity in some of the large economies is slowing, even coming to a halt in some cases. LAC countries continue to register primary deficits that exceed debt-stabilizing levels, limiting the scope for fiscal support. Higher energy prices and continued depreciation limit the room to maneuver interest rate policy; real policy rates below neutral. Exchange rate flexibility remains key. Despite increased downside risks, countries should continue to focus on much-needed structural reforms to boost productive capacity and ensure strong, durable, and inclusive growth. 3
I. Key Messages II. Global Crosscurrents III. IV. Domestic Developments The Outlook and Risks V. Policies
World Advanced Economies U.S. Japan Euro Area Emerging Market and Developing Economies China Russia Low Income Countries 2017 3.7 2.3 2.2 1.7 2.4 4.7 6.9 1.5 4.7 2018 3.7 2.4 2.9 1.1 2.0 4.7 6.6 1.7 4.7 Revision from Apr. 2018-0.2-0.1 0.0-0.1-0.4-0.2 0.0 0.0-0.3 2019 3.7 2.1 2.5 0.9 1.9 4.7 6.2 1.8 5.2 Revision from Apr. 2018-0.2-0.1-0.2 0.0-0.1-0.4-0.2 0.3-0.1 Source: IMF, World Economic Outlook database. Note: Difference based on rounded figures for both the current and April 2017 World Economic Outlook forecasts. 5
Despite weaker global growth, external demand and export growth remain robust. Commodity prices recovered from their trough, but are expected to remain low by historical standards. 30 25 External Demand and Real Exports Growth (y-o-y % change) 120 Global Commodity Prices (index: 2011:Q1 = 100) 20 105 Energy 15 10 External demand 90 Agricultural raw materials 5 75 0 Metals 5 Real exports 60 10 45 15 20 2000:Q1 02:Q1 04:Q1 06:Q1 08:Q1 10:Q1 12:Q1 14:Q1 16:Q1 18:Q1 30 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Sources: IMF, Direction of Trade Statistics database; IMF, Global Data Source database; and IMF staff calculations. Note: US dollar nominal GDP-weighted average of Argentina, Brazil, Chile, Colombia, Mexico, and Peru. Sources: IMF, Global Assumptions database. Note: Dotted lines refer to the July 2018 Update Global Assumptions vintage. 6
Despite a recent blip, corporate and sovereign spreads remain low. Equity prices are elevated, but declining from recent peaks. 800 700 (basis points) 140 120 Equity Indices (index: Jan-11 = 100) 600 500 Corporate spreads (CEMBI) 100 400 80 300 200 60 100 Sovereign spreads (EMBIG) 40 BRA CHL COL MEX PER 0 20 2007 08 09 10 11 12 13 14 15 16 17 18 2007 08 09 10 11 12 13 14 15 16 17 18 Sources: Bloomberg Finance L.P.; and IMF staff calculations. Note: EMBIG is the median of Brazil, Chile, Colombia, Mexico, Peru, and Uruguay. CEMBI is the median of Brazil, Chile, Colombia, Mexico, and Peru. Sources: Bloomberg Finance L.P.; and IMF staff calculations. 7
Capital flows are ebbing... causing currencies in the region to depreciate beyond U.S. dollar appreciation. 40 30 Equity and Bond Flows (cumulative flows in US$ billions) 2017 130 120 110 Bilateral Exchange Rates (index: Jan-08 = 100; US$/NC) Colombia 80 70 60 20 10 2016 100 90 80 Uruguay Peru Chile 50 40 0-10 2018 2014 2015 70 60 50 Argentina (right scale) Brazil Mexico 30 20 10-20 Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec. 40 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 0 Sources: Emerging Portfolio Fund Research (EPFR) database; and IMF staff calculations. Note: Includes Argentina, Brazil, Chile, Colombia, Mexico, Peru, and Venezuela. Sources: Emerging Portfolio Fund Research (EPFR) database; and IMF staff calculations. 8
I. Key Messages II. Global Crosscurrents III. IV. Domestic Developments The Outlook and Risks V. Policies
Real policy rates, with the notable exception of Mexico, are at or below neutral levels. 7 6 5 4 3 2 1 0 1 Real Policy Rates and Inflation Gaps (%) Inflation minus target Neutral rate September 2018 Fiscal policy in some large economies is modestly expansionary, providing a small impulse for the region as a whole. Fiscal Impulse 1 (Percentage points of GDP) 2018 2019 Argentina² 2.3 1.8 Brazil 1.0 0.2 Chile³ 0.4 0.2 Colombia 0.3 0.1 Ecuador 4 1.2 0.3 Mexico 0.5 0.1 Peru 0.1 0.3 Uruguay 0.2 0.2 2 MEX GTM COL CHL BRA PRY PER CRI Latin America 0.2 0.3 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 at the midpoint of the inflation target range. The high-low lines represent the range of IMF staff s neutral rate estimates.. Source: IMF staff calculations. Note: Regional aggregate is fiscal year US dollar nominal GDP-weighted average. 1 Defined as the change in structural primary deficit. 2 General government. Adjusted by the GDP gap and soy prices. 3 Change in the nonmining structural overall balance. 4 Change in the non-oil structural primary balance. 10
I. Key Messages II. Global Crosscurrents III. IV. Domestic Developments The Outlook and Risks V. Policies
Mildly supportive global and domestic conditions underpin a moderating recovery, with divergent outcomes across the region. 2018 LAC growth: 1.2% Latin America and the Caribbean: Real GDP Growth (Percent change) Projections 2016 2017 2018 2019 LAC 0.6 1.3 1.2 2.2 South America 2.4 0.7 0.6 1.9 Argentina 1.8 2.9 2.6 1.6 Brazil 3.5 1.0 1.4 2.4 Chile 1.3 1.5 4.0 3.4 Colombia 2.0 1.8 2.8 3.6 Peru 4.0 2.5 4.1 4.1 Mexico 2.9 2.0 2.2 2.5 CAPDR 4.6 4.0 3.8 4.1 Caribbean Tourism dependent 1.1 1.1 1.4 1.8 Commodity exporters 4.7 1.3 1.4 1.6 Sources: IMF, World Economic Outlook database; and IMF staff calculations. Note: Revisions comparing October 2018 and April 2018 World Economic Outlook vintages. Sources: IMF, World Economic Outlook database; and IMF staff calculations. Note: PPP GDP-weighted average. Green/red denotes upward/downward revision compared with the April 2018 WEO vintage. 12
4 3 Contributions to Real GDP Growth (y-o-y % change) 2 Real GDP growth 1 0 1 2 3 Private consumption Investment Exports 2014 2015 2016 2017 2018 (Projected) Public consumption Inventories Imports 2019 (Projected) Sources: IMF, World Economic Outlook database; and IMF staff calculations. Note: PPP GDP-weighted average of Brazil, Chile, Colombia, Mexico, and Peru. Inventories include statistical discrepancies. 13
External A sudden tightening of global financial conditions Escalation of trade tensions Unsustainable macroeconomic policies in some advanced economies Rising inequality Domestic Political risks Regional spillovers from financial strain in Argentina Migration flows from Venezuela Extreme weather events 14
Tighter external financial conditions are likely to be transmitted quickly to domestic financial conditions and to domestic economic activity. 1.6 1.4 1.2 Financial Conditions (index; 0 = neutral, +/ = tight/loose) 1.0 0.5 Cumulative Impact of Financial Conditions on GDP (%) 1.0 0.0 0.8 0.5 0.6 0.4 1.0 0.2 1.5 0.0 2.0 0.2 0.4 1 standard deviation Maximum Current 2.5 6 months 12 months 24 months 0.6 Brazil Chile Colombia Mexico Peru 3.0 Brazil Chile Colombia Mexico Peru Source: IMF staff calculations. Note: For methodology and variables included in the financial conditions index, refer to Annex 3.2 of the October 2017 Global Financial Stability Report. Source: IMF staff calculations. Note: Cumulative response of real GDP (percent) to a one standard deviation increase in the FCI index. The impulse responses are constructed from a VAR at the country level, suing monthly data from 2000 18. The VAR includes the following variables in a recursive ordering: Inflation, GDP growth, REER, FCI, and monetary policy rate. 15
Trade Tensions Scenario (Percent deviation from control) Tariffs in baseline Add China (25 percent on $267 billion) with retaliation Add cars, trucks, and parts with retaliation Add confidence effect Add market reaction World United States China 0.4 0.4 0.4 0.0-0.4-0.8-1.2-1.6 0.0-0.4-0.8-1.2-1.6 0.0-0.4-0.8-1.2-1.6-2.0-2.0 2017 2018 2019 2020 2021 2022 2023 Long term G20 Emerging Economies US NAFTA Trading Partners Euro Area 0.4 2017 2018 2019 2020 2021 2022 2023 Long term 0.4-2.0 0.4 2017 2018 2019 2020 2021 2022 2023 Long term 0.0-0.4-0.8-1.2-1.6 0.0-0.4-0.8-1.2-1.6 0.0-0.4-0.8-1.2-1.6-2.0 2017 2018 2019 2020 2021 2022 2023 Long term -2.0 2017 2018 2019 2020 2021 2022 2023 Long term -2.0 2017 2018 2019 2020 2021 2022 2023 Long term Sources: IMF, World Economic Outlook, October 2018, Chapter 1; and IMF staff estimates. 16
Smaller neighbors more vulnerable to an intensification of financial strain in Argentina. Elections scheduled to take place in many countries in 2018 and 2019. 18 16 14 12 Exports of Goods to Argentina, 2017 (%) Share of total Share of GDP (right scale) 4.0 3.5 3.0 2.5 Recently held elections May 2018 Colombia Presidential July 2018 Mexico General October 2018 Brazil General October 2018 Peru Regional 10 2.0 February 2019 El Salvador Presidential 8 6 4 2 0 1.5 1.0 0.5 0.0 Forthcoming elections March 2019 Ecuador Regional May 2019 Panama General June 2019 Guatemala General October 2019 Bolivia General PRY BOL URY BRA ECU CHL COL PER VEN October 2019 Argentina Presidential Sources: IMF, Direction of Trade Statistics database; IMF, World Economic Outlook database; and IMF staff calculations. Note: Uruguay includes total expenditures by Argentinian tourists. October 2019 Uruguay Presidential 17
I. Key Messages II. Global Crosscurrents III. IV. Domestic Developments The Outlook and Risks V. Policies
Fiscal revenues have not recovered from the commodity price bust and fiscal deficits have yet to narrow in some key economies. 0 2 4 4 2 0 2 Fiscal Primary Balance (% ppts. FY GDP) 6 4 Change 2012 16 8 Change 2012 18 6 8 Change 2012 16 10 12 Commodity Revenue (% ppts. FY GDP) 10 12 Change 2012 18 COL CHL PER MEX BOL ECU TTO MEX URY COL LAC ARG CHL PER BRA 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 2017. 19
Low investment rates in Latin America are correlated to low saving rates. To a large extent, due to lower public savings. 26 24 Investment, 1995 2016 (% GDP; average) 50 45 Feldstein-Horioka Puzzle, 2016 (% GDP) 4.0 3.5 Public Savings, 1995 2016 (% GDP; average) 22 Difference is 3.22 percentage points 40 35 3.0 20 18 Investment 30 25 20 2.5 2.0 16 15 1.5 14 10 1.0 12 10 LA6 Other emerging markets 5 0 Full sample LA6 0 10 20 30 40 50 Savings 0.5 0.0 LA6 Other emerging markets Sources: IMF, World Economic Outlook database; and IMF staff calculations. Note: Simple average. LA6 = Brazil, Chile, Colombia, Mexico, Peru, Uruguay. Sources: IMF, World Economic Outlook database; World Bank, World Development Indicators database; and IMF staff calculations. Note: LA6 = Brazil, Chile, Colombia, Mexico, Peru, Uruguay. Sources: IMF, World Economic Outlook database; and IMF staff calculations. Note: Simple average. LA6 = Brazil, Chile, Colombia, Mexico, Peru, Uruguay. 20
Low per capita growth compromises convergence as countries in the region have witnessed a lackluster total factor productivity (TFP) performance. 8 7 Real GDP Growth per Capita (%) 0.9 Total Factor Productivity Across Time (relative to US) 6 1995 2005 2006 17 2018 23 0.8 5 4 3 EMDE (2020 23) = 3.6% 0.7 2 1 0.6 0 0.02-1 LAC ARG BOL BRA CHL COL CRI ECU MEX PER TTO URY 0.5 1980 84 88 92 96 2000 04 08 12 14 Sources: IMF, World Economic Outlook database; and IMF staff calculations. Note: Bars denote purchasing-power-parity GDP-weighted averages; red markers indicate the medians; and black markers denote the top and bottom deciles of per capita GDP growth in the country groups. LAC and EMDE aggregates are based on PPP 2011 international dollars. Source: IMF staff calculations. Note: Includes Argentina, Brazil, Chile, Colombia, Mexico, Peru, Uruguay. 21
Regional Economic Outlook was released on Friday, October 12, 2018 in Bali, Indonesia. A portal to access the report can be found here: http://data.imf.org/whdreo. Download Full Report: English Spanish 22
International Monetary Fund November 1, 2018 An Uneven Recovery Outlook for Latin America and the Caribbean A Presentation by Western Hemisphere Department