The Global Context and Regional Outlook for Latin America and the Caribbean
Anoop Singh Director Western Hemisphere Department International Monetary Fund LACEA Annual Meetings Mexico City—November 2, 2006
Outline
Global and US Outlook 2. Latin America and the Caribbean (LAC)
1.
A. Outlook and Policy Stance B. External Risks to the Regional Outlook
Policy Challenges Facing LAC 4. The Evolving Role of the Fund
3.
Outline
Global and US Outlook 2. Latin America and the Caribbean (LAC)
1.
A. Outlook and Policy Stance B. External Risks to the Regional Outlook
Policy Challenges Facing LAC 4. The Evolving Role of the Fund
3.
Global outlook
Global growth is running above 5 percent...
Real GDP
(Percent change from four quarters earlier)
9 8
Emerging
markets
World
7 6 5 4 3
Advanced economies
2 1 0
1996
1998
2000
2002
2004
2006:Q2
4
Global outlook
...but the balance of risks is increasingly slanted to the downside
Prospects for World GDP Growth
(In percent)
7 6 5 4 3 90% confidence interval 70% confidence interval 50% confidence interval Central forecast 2 1 0 2007
5
2001
2002
2003
2004
2005
2006
U.S. outlook
The sources of global growth are widening, but remain dependent on the United States (and China)
Real GDP Grow th
(percent change from four quarters earlier)
US Real GDP
(y/y percent change)
12 C hina 10 8 Unit e d S t a t e s 6 4 2 0 J a pa n
2000 2002 2004
Q3 1.6%
5
Upside risks Business investment
(q-o-q, annualized)
4
3
Downside risks Housing market Productivity Global imbalances
2
E uro a re a
2006
-2 -4
2003 2004 2005 2006
1
0
2007
6
U.S. outlook
Productivity growth remains close to its high 10-year average and corporate profits are at a record high...
6
(percent change from four quarters ago)
(percent of GDP)
11
Productivity (left scale)
10
5
Corporate profits (right scale)
4
9
3
8
2
7
1
6
0
1996
1998
2000
2002
2004
2006:Q2
7
5
U.S. outlook
...while corporate risk spreads remain low
Bond spread over U.S. Treasuries
(In basis points)
350 300 250 400
BBB-rated
200 150 100 50
AA-rated
1997
0
1999
2001
2003
2005
2006/Sep
8
U.S. outlook
Although unit labor costs have been rising, inflation expectations remain well contained
(percent change from twelve months ago)
6 5
Unit labor costs (nonfinancial corporate) Inflation expectations
4 3 2 1 0 -1 -2
9
1997
1999
2001
2003
2005
U.S. outlook
The flattening yield curve does not necessarily herald a recession, as real rates remain low... (percent)
12
10-year Treasury Federal Funds Rate
10
8
6
Yield curve slope
4
2
0
-2
1985
1990
1995
2000
2005
10
...but the risk of a “substantial correction” in housing markets could weigh on activity...
16 14 12 10 8 6 4
U.S. outlook
(percent change from four quarters ago) Inventory-sales ratio (right scale)
(months’ supply at current sales rate)
12
10
House prices (left scale)
8
6
4
2 0
2
1985 1990 1995 2000 2005
11
1980
U.S. outlook
...in part by slowing wealth appreciation, which may dampen consumption
3.0 2.5 2.0 1.5 1.0 0.5 0.0
1994 1998
Ratio to disposable income
Saving rate (percent, RHS)
7 6 5 4 3
Equities
2 1 0
Real estate
-1
2002 2006
12
-2
Risks to the Global Outlook
Impact of global monetary tightening High and volatile oil prices Global imbalances
13
Global risks
Synchronized tightening by the major central banks has usually been followed by a global slowdown
World real GDP
(Annual percent change)
Short-term interest rates increase in each G-3 currency area
8 7 6 5 4 3 2 1 0
1971
75
79
83
87
91
95
99
2003
07
14
Crude oil prices have fallen but remain high and volatile
Spot and Future Prices
(US dollars a barrel)
Global risks
90 Im plie d f ut ure s pric e a t O c t o be r 2 3 , 2 0 0 6 80 70 Im plie d f ut ure s pric e a t O c t o be r 3 , 2 0 0 5 60 50 40 A v e ra ge P e t ro le um S po t P ric e 30 20 10 0
19 9 0 19 9 2 19 9 4 19 9 6 19 9 8 2000 2002 2004 2006 2008
15
Global risks
Global imbalances remain a pressing policy challenge
Current Account Balance
(In percent of World GDP)
1.5 J a pa n 1.0 O il E xpo rt e rs C hina 0 .5 0 .0 - 0 .5 - 1.0 - 1.5 - 2 .0
19 9 6
19 9 8
2000
2002
2004
2006
2008
2 0 10
Unit e d S t a t e s
16
Outline
Global and US Outlook 2. Latin America and the Caribbean (LAC)
1.
A. Outlook and Policy Stance B. External Risks to the Regional Outlook
Policy Challenges Facing LAC 4. The Evolving Role of the Fund
3.
LAC outlook
Growth in LAC remains strong, although it is expected to moderate in 2007
Real GDP Grow th
(Annual percent change)
8
M e xic o
La t in A m e ric a
C a ribbe a n
6
4
19 9 0 - 2 0 0 5 LA C a v e ra ge
2
0
-2
2000 2001 2002 2003 2004 2005 2006 2007
18
LAC outlook
Inflation has generally remained subdued (with exceptions) and is projected to decline further
Inflation
(% annual average) ,
30 A rge nt ina V e ne zue la B ra zil 25 20 15 10 LA C R e gio n 5 M e xic o 0 -5
2000 2001 2002 2003 2004 2005 2006 2007
19
LAC outlook
The recovery has contributed to falling unemployment rates
Unem ploym ent
Argentina
(In percent)
25
Venezuela 20 Colombia 15 Brazil 10 Peru Mexico Chile 5
0
2002 2003 2004 2005 2006
20
LAC outlook
Financial markets have largely recovered from the spring turbulence and spreads are back close to historical lows
Equity Market Developm ents
(December, 2005 = 100) 16 0
Em erging m arket sovereign spreads
(Basis point s)
A rge nt ina
14 0
15 0 0 E M B I+ La t in
12 5 0
P e ru
12 0
10 0 0 E M B I+ C o m po s it e
B ra zil
10 0
750
M e xic o C o lo m bia
80
500
60
250 E M B I+ A s ia E M B I+ E uro pe
Jan- 0 4 Jan- 0 5 Jan- 0 6
40 Jan- 0 5 M ay- 0 5 Sep - 0 5 Jan- 0 6 M ay- 0 6 Sep - 0 6
Jan- 0 2 Jan- 0 3
0
21
LAC outlook
Strong global demand for commodities has supported the regional expansion and improved current accounts...
Grow th and Com m odity Prices
40 30 20 10 0 - 10 -20 -30
19 9 4 19 9 6
LA C R e a l G D P gro wt h (R H S)
8 6 4 2 0 -2
Current Account Balance
(In percent of GDP)
3 S o ut h A m e ric a & M e xic o 1
-1 La t in A m e ric a -3 C e nt ra l A m e ric a
Wo rld f ue l a nd no n- f ue l c o m m o dit y pric e s ( LH S )
19 9 8 2000 2002 2004 2006
-5
-4 -6
-7
2002 2003 2004 2005 2006 2007
22
LAC outlook
...but the benefits of commodity price increases have been unequally distributed across countries
Im pact of Com m odity Price Movem ents on Trade Balances
(In percent of 2006 GDP)
N o n- f ue l H o ndura s N ic a ra gua P a ra gua y CA C o s t a R ic a E l S a lv a do r P a na m a C a ribbe a n G ua t e m a la Urugua y B ra zil M e xic o LA C A rge nt ina SA O il e xpo rt e rs B o liv ia C o lo m bia P e ru E c ua do r C hile V e ne zue la
- 10 -5 0
F ue l N e t im pa c t Central America
Caribbean
LAC South America Oil exporters
5
10
15
20
25
(% of 2006 GDP)
23
LAC outlook
High remittances have bolstered living standards and current account positions
Remittances, 2001-03, 2004-06
(%of GDP, average)
C e nt ra l A m e ric a
C a ribbe a n
LA C
12
10
8
6 4
2
0
2 0 0 1- 2 0 0 3 2004-2006
24
Solid recovery
Compared to previous recoveries, this expansion is generally solid
Balanced contributions from external and domestic demand Higher reserves and exchange rate flexibility Improved monetary institutions Primary fiscal surpluses
25
Solid recovery
Domestic demand is playing an increasingly important role for the recovery
Contributions to Grow th
(In percent, per annum)
Co nsumptio n
Investment
Net Expo rts
4
3
2
1
0
-1
2002-05 2006-07
26
Solid recovery
Reserves have increased and exchange rates have strengthened without harming competitiveness
Exchange Rates and Reserves
Index January 2002 = 100 Billions of U.S. Dollars
Average Export Share
(In percent of world imports, indexed 2001 = 100)
12 5 12 0
10 0 95 90 85 80 75 70 65
2002
R eal e f f e c t iv e e xc ha nge ra t e
250 T o t a l re s e rv e s (R H S)
225
T o indus t ria lize d c o unt rie s
115 110 10 5 10 0 95
200
17 5
N o m ina l e f f e c t iv e e xc ha nge ra t e ( LH S )
2003 2004 2005 2006
15 0
T o a ll c o unt rie s
2002 2003 2004 2005 2006
12 5
27
Solid recovery
Monetary policy institutions have improved, allowing for lower inflation
Targets and Outturns in IT countries
(cross country averages)
8 7 6 5
Inf la t io n
T a rge t
4 3 A v e ra ge ga p ( a bs o lut e v a lue ) 2 1 0
Jan- 0 2
Jan- 0 3
Jan- 0 4
Jan- 0 5
Jan- 0 6
(includes: Brazil, Chile, Colombia, Mexico, and Peru)
28
Solid recovery
Higher revenues have strengthened fiscal positions across the region (but with high cyclical components)
Total Revenues and Prim ary spending
(percent of GDP)
Prim ary Balance by Region
29 28
(percent of GDP)
5
2004
2005
2006
4
R e v e nue s
27
3
26 25 24
P rim a ry s urplus
2
1
P rim a ry s pe nding
2002 2003 2004 2005
23 22
2006
0
Lat in A mer ica So ut h A mer ica & C ent r al A mer ica M exico
29
Outline
Global and US Outlook 2. Latin America and the Caribbean (LAC)
1.
A. Outlook and Policy Stance B. External Risks to the Regional Outlook
Policy Challenges Facing LAC 4. The Evolving Role of the Fund
3.
External risks
A sharper-than-expected slowdown in the U.S. could significantly affect demand for the region’s exports
Real GDP Grow th
(Annual %change)
Latin Am erica: Exports to the United States
(In %of total exports from Latin American countries to the world)
90
7
80
La t in A m e ric a a nd C a ribbe a n
6 5 4 3 2 1 0 -1
Lat in A mer ica So ut h A mer ica C ent r al C ar ib b ean M exico A mer ica
70 60 50 40 30 20 10 0
Unit e d S t a t e s
19 9 0
19 9 2
19 9 4 19 9 6
19 9 8 2 0 0 0 2 0 0 2 2 0 0 4
31
External risks
Primary fiscal surpluses would be halved by falling commodity prices
Stress Tests of Fiscal Balances
(percent of GDP)
6
Spending grow th at 2005-06 average
5
4
Baseline Com m odity revenues at 2004 level
3
2
1
Com bined
0
2002 2003 2004 2005 2006 2007
32
External risks
Some countries face trade pressures Caribbean: erosion of preferential access for sugar and banana exports in EU markets Central America: competitive pressure in textiles following the phasing out of MFA quotas Andean Region: expiration of trade preferences under the ATPDEA
Share of Total Exports Affected by Expiration of ATPDEA Trade Preferences
(In percent)
40 30 20 10 0
B o livia C o lo mb ia Ecuad o r Per u
33
Outline
Global and US Outlook 2. Latin America and the Caribbean (LAC)
1.
A. Outlook and Policy Stance B. External Risks to the Outlook
Policy Challenges facing LAC 4. The Evolving Role of the Fund
3.
Policy challenges
The overriding challenge in Latin America today is to raise investment and productivity on a sustained basis
Even during the ongoing expansion, growth and investment in Latin America lags other regions
Real GDP per capita grow th and real Investm ent to GDP, 2003 - 2006
40 35 30 25 20 15 10 5 0
Emer g ing A sia East er n Eur o p e and C ent r al A sia Lat i n A mer ica O EC D (In percent )
8 7 6 5 4 3 2 1 0
Inv e s t m e nt t o G D P , c o ns t a nt pric e s ( LH S ) R e a l G D P pe r c a pit a gro wt h ( R H S )
35
Policy challenges
Addressing this challenge requires policies that entrench and extend recent achievements Entrenching macroeconomic stability Improving equity and reducing poverty Removing structural impediments to growth Basic Message There are strong complementarities between the polices that can achieve these objectives
36
Policy challenges
To reduce risk premia and raise investment, the region needs to entrench its recent macroeconomic stability This requires:
Further lowering public debt Containing and better targeting public expenditures Making budgets less rigid Expanding revenue bases Deepening the credibility of monetary policy institutions and further financial sector reforms Monitoring rapid credit growth
37
Policy challenges
While public debt is projected to decline, it remains generally high
2 0 0 4 : 13 2 %
Total Public Debt
(%of GDP)
10 0
2004
2005
2006
75
19 9 6 LA C A v e ra ge
50
25
0
ARG BRA C HL C OL M EX PER V EN LA C 1/
38
Policy challenges
However, primary expenditure growth has accelerated...
Fiscal Policy Stance, 2002-04, 2004-06
(change in percent of GDP between indicated years)
Real Prim ary Spending
3
(annual percent change)
15
P rim a ry ba la nc e P rim a ry s pe nding
R e v e nue
O il e xpo rt e rs 10
2
C e nt ra l A m e ric a
1
5
0
0
O t he r S o ut h A m e ric a
2002-2004 2004-2006
-1
-5
2000 2001 2002 2003 2004 2005 2006
39
Policy challenges
...as the underlying fiscal stance in many countries is turning expansionary
Fiscal Impulses (Adjusted for Commodity Revenue Effects)
(percent of GDP) 8
6
Venezuela
4
M exico A rgentina B razil P eru
0 2
C o lo mbia
C hile
-2
-4
2003 2004 2005 2006
40
Policy challenges
More flexible budgets would allow fiscal policy to better respond to shocks and improve spending efficiency
Budget Rigidity
(percent of primary revenue)
C o m bine d rigidit y E xpe dit ure rigidit y R e v e nue e a rm a rk ing
10 0 90 80 70 60 50 40 30 20 10 0
A r g ent ina
B r az il
C hile
Ecuad o r
41
Policy challenges
Broader tax bases and higher revenues could create room for more public investment
Public Sector Revenues, 2006
(percent of GDP)
Prim ary Current and Capital Spending
(percent of GDP)
60
24 20 16 12 8 4 0
O t he r re v e nue T a x re v e nue
P rim a ry c urre nt s pe nding
50 40 30 20
C a pit a l s pe nding
10 0
A R G B R A C H L C OL S L V GT M M EX P ER U R Y VEN Ot h e r Em e r . M k t s.
19 9 5
19 9 7
19 9 9
2001
2003
2005
42
Policy challenges
Strong monetary and financial sector institutions help achieve low and stable real interest rates
Short-Term Real Interest Rates
(in percent )
Net interest m argins of the banking sector
(in percent)
15 B ra zil 12 9 6 3 C hile 0 -3 P e ru A rge nt ina -6 -9 V e ne zue la - 12 - 15
2004 2005 2006
Eur o p e A sia Lat in A mer ica
5
C o lo m bia
M e xic o
4
3
2
1
0
43
Policy challenges
The rapid expansion of domestic credit (from a low base) will require continued close monitoring
Household Debt and Credit Grow th in 2005 129%
(Annual percent change)
60
D e bt
C re dit
50
40
30
20
10
0
ARG BRA C HL C OL M EX PER V EN
44
Policy challenges
Reducing inequality would have positive effects on growth and macroeconomic stability...
Incom e Inequality
(Gini coefficient; larger figures indicate greater income inequality) 19 9 0 s 2000s
70 A s ia a v g, 19 9 0 s 60
There are policy levers to promote equity Tax reform Reallocation of government expenditures Reduction of budget rigidities Reforms of labor markets, government services, and credit markets
O E C D a v g, 19 9 0 s
50
40
30
C ent r al A mer ica So ut h A mer ica Lat in A mer ica & M exico
...but entrenching macroeconomic stability would also have a salutary effect on equity
45
Policy challenges
While some obstacles to growth are country-specific, Latin American countries suffer from common problems
Global Com petitiveness
(Percentile rank)
Cost of Doing Business
(Percentile rank)
OEC D E a s t A s ia a nd P a c if ic La t in A m e ric a a nd C a ribbe a n
10 0 80 60 40 20 0
OEC D E a s t A s ia a nd P a c if ic La t in A m e ric a a nd C a ribbe a n
10 0 80 60
40 20 0
Over al l Ind ex St ar t ing a b usiness D ealing wit h l icenses Enf o r cing co nt r act s
Over all Ind ex
B asic Ef f iciency R eq uir ement s Enhancer s
Inno vat io n f act o r s
46
Outline
Global and US Outlook 2. Latin America and the Caribbean (LAC)
1.
A. Outlook and Policy Stance B. External Risks to the Outlook
Policy Challenges Facing LAC 4. The Evolving Role of the Fund
3.
Fund role in the region
The Fund’s role in the LAC region is evolving The need for direct financial support to the region has diminished The focus of the Fund involvement is shifting in response to country needs The Fund is currently reshaping its role
o o o
Improved country and global surveillance Improved lending instruments Improved governance
48