IMF Sees Negative Growth for LatAm, Caribbean
World Economy

IMF Sees Negative Growth for LatAm, Caribbean

It’s been a rough start to 2016, as seen by the recent bouts of financial volatility, stemming from uncertainties related to the slowdown in China, lower commodity prices, and divergent monetary policy in advanced economies.
The global recovery continues to struggle to gain its footing, with strains in some large emerging market economies weighing on growth prospects. For Latin America and the Caribbean, growth in 2016 is now expected to be negative for the second consecutive year—the first time since the debt crisis of 1982–83, which triggered the “lost decade” for the region, IMF report says.
The regional recession, however, masks the fact that most countries continue to grow modestly but surely. In particular, country specific developments are being determined by the interplay between external shocks and domestic fundamentals. While countries with strong policy frameworks have been adjusting to external shocks smoothly, countries with weaker domestic fundamentals are experiencing significant downturns.
The sizeable decline in commodity prices (about 30 to 50% relative to its peak depending on the country) has led to significant losses in export revenues (estimated at around $200 billion for the seven listed economies). However, the sizes of the terms of trade shocks relative to the sizes of these economies (less than 1% of GDP for Argentina, Brazil, and Mexico in 2015 and 2016) are not enough to explain the severity of contraction in some cases.
Indeed, the negative growth projection is driven by four countries (Argentina, Brazil, Ecuador, and Venezuela), as the decline in commodity prices in combination with macroeconomic imbalances and microeconomic distortions has led to sharp declines in private investment.
Overall, over the medium term, growth is expected to remain tepid, highlighting the importance of resolving domestic challenges.
The regional outlook also hides important sub-regional differences.

 South America
In Chile, Colombia, and Peru, a relatively orderly adjustment process continues, where a policy mix of large exchange rate depreciations, gradual fiscal consolidation, and accommodative monetary policies have staved off contraction.
In Bolivia, growth also remains strong, but faces risks from rising public debt and the current account deficit.
In Brazil, a combination of macroeconomic fragilities stemming from slow domestic adjustment, a wide-reaching scandal involving government and corporate officials, and political problems have paralyzed investment and dominated the economic outlook. Following a sharp contraction of 3.8% in 2015, output is expected to fall a further 3.5% in 2016—the largest total contraction since 1981–83. Unemployment has risen sharply, and inflation is in double digits.
In Venezuela, longstanding policy distortions and fiscal imbalances were already having a deleterious effect on the economy before the collapse in oil prices. These problems worsened as falling oil prices triggered an economic crisis, with an expected fall in output of almost 18% over 2015 and 2016 (the third sharpest decline in the world). A lack of hard currency has led to scarcity of intermediate goods and to widespread shortages of essential goods—including food—exacting a tragic toll. Prices continue to spiral out of control, and the IMF expects inflation to rise to 720% this year, from a world-high inflation of about 275% in 2015.
In Argentina, the new government has started an important transition to correct macroeconomic imbalances and microeconomic distortions. Significant steps towards this transition have been taken by eliminating restrictions on the foreign exchange market, removing several constraints on international trade, and announcing the main guidelines of the macroeconomic framework, and the partial removal of energy subsidies. The new approach has improved prospects for growth in the medium term, but the adjustment is likely to generate a mild recession in 2016.
In Ecuador, a smoother adjustment to falling oil prices is precluded by macroeconomic rigidities. With continued decline in oil prices and real exchange rate appreciation, we anticipate a recession this year.
Mexico is expected to continue to recover at a moderate pace, supported by healthy private domestic demand and spillovers from a strong US economy. The depreciation of the peso and lower electricity prices should boost manufacturing production and exports.
Central America and the Dominican Republic have benefited from the oil price decline and higher remittances, but the recent softening of world coffee and banana prices could reduce this impulse.

Short URL : http://goo.gl/e2aFBv
  1. http://goo.gl/xJZKpe
  • http://goo.gl/YbNnlQ