the outlook for latin america and the caribbean region · 2013-04-12 · 7 us outlook unlike in the...

The Outlook for Latin America The Outlook for Latin America and the Caribbean Regionand the Caribbean Region

Markus RodlauerMarkus Rodlauerand and

Sanjaya PanthSanjaya PanthWestern Hemisphere DepartmentWestern Hemisphere Department

International Monetary FundInternational Monetary Fund

Kingston, JamaicaKingston, JamaicaDecember 7, 2007December 7, 2007

22

OutlineOutlineThe Global Economy and the U.S. OutlookThe Global Economy and the U.S. Outlook

Outlook for Latin America and the CaribbeanOutlook for Latin America and the Caribbean

Economic Challenges for the CaribbeanEconomic Challenges for the Caribbean•• Regional Integration IssuesRegional Integration Issues

•• Tax Incentives and InvestmentTax Incentives and Investment

•• Trade Preference ErosionTrade Preference Erosion

ConclusionConclusion

33


Outlook for Latin America and the Caribbean Outlook for Latin America and the Caribbean





44

U.S. Financial Market Volatility

0

5

10

15

20

25

30

Jan-07 Apr-07 Jul-07 Oct-07

VIX Index

Federal Funds (30 day) Futures implied volatility

100

110

120

130

140

150

160

Jan-07 Apr-07 Jul-07 Oct-07

Equity Markets in the U.S., Europe, and Japan(January 3, 2005 = 100)

Japan(Topix)

Europe(Eurofirst 300)

U.S.(S&P 500)

Recent financial volatility has shaken the global economy...Recent financial volatility has shaken the global economy...

Global outlook

Nov. 30, 2007

Nov. 30, 2007

55

1981 1984 1987 1990 1993 1996 1999 2002 2005 2008-3

-2

-1

0

1

2

3

4

5

6

7

8

9

Emerging markets

Global Outlook(Real GDP; annual percent change)

World

United States

...although it has come at a time of robust global growth, ...although it has come at a time of robust global growth, sustained in part by fastsustained in part by fast--growing emerging market countriesgrowing emerging market countries

Global outlook

18.318.333.833.8Industrialized Industrialized countriescountries

49.249.234.234.2BRICsBRICs (Brazil, (Brazil, Russia, India, Russia, India, and China)and China)

06/0706/0794/9594/95

Contributions to growthContributions to growth(PPP weighted; in percent)(PPP weighted; in percent)

66

In the U.S., consumption and net exports have so far In the U.S., consumption and net exports have so far sustained growth, and Q3 growth was unexpectedly strongsustained growth, and Q3 growth was unexpectedly strong

US outlook

05Q1 05Q3 06Q1 06Q3 07Q1 07Q3-3-2-10123456

Private consumption Residential investmentNet exports Other

Real GDP

U.S. Real GDP Growth and Contributions(Annualized quarterly contributions to grow th; %)

77

US outlook

Unlike in the past, Latin America has been little affected so Unlike in the past, Latin America has been little affected so far by turbulence in the U.S. and international marketsfar by turbulence in the U.S. and international markets

Global outlook

Tequila crisis Asian / Russian crisis

Dot Com bust

Sub-prime correction

Nov. 2007

1990 1992 1994 1996 1998 2000 2002 2004 20060

300

600

900

1,200

1,500

U.S. High Yield Bond Spreads and Latin EMBI Spreads(Basis points)

U.S. High Yield Bond Spreads

Latin EMBI+ Spreads

88

However the U.S. housing downturn has continued, and the However the U.S. housing downturn has continued, and the fourth quarter has gotten off to a slow start.fourth quarter has gotten off to a slow start.

US outlook

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

2003 2004 2005 2006 20075.0

5.5

6.0

6.5

7.0

7.5

Existing home sales (right scale)

New home sales(left scale)

Sales of New and Existing Homes(Million units, annualized, three-month moving average)

4.5

5.0

5.5

6.0

6.5

2003 2004 2005 2006 200710

20

30

40

50

60

70

80Homebuilders' sentiment(right scale)

Residential investment(left scale)

Residential Investment and Homebuilders' Sentiment

Percent of GDP Index

99

The large share of subprime and adjustable rate mortgages The large share of subprime and adjustable rate mortgages could hurt consumer spending when rates adjust.could hurt consumer spending when rates adjust.

US outlook

Prime agency

54%Subprime

12%

Alt-A10%

Prime jumbo

13%

Second liens11%

Mortgages Outstanding(percent of total)

$2.2 trillion; 13% of GDP

0

5

10

15

20

25

30

35

40

45

Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-090

5

10

15

20

25

30

35

40

45Subprime

Alt-A

Option ARMPrime

Adjustable Rate Mortgage Resets(billion U.S. dollars)

1010

While the Fed has cut interest rates, While the Fed has cut interest rates, subprime corporate rates continue to rise. subprime corporate rates continue to rise.

US outlook

3.5

4.5

5.5

6.5

7.5

8.5

9.5

May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-083.5

4.5

5.5

6.5

7.5

8.5

9.5

U.S. Short-Term Interest Rates(In percent)

Three-month LIBOR

Target Federal Funds Rate

Expected Federal Funds Rate Based on

Futures Markets

BBB yields

B and BB yields

1111

With continuing external deficits, concern over assetWith continuing external deficits, concern over asset--backed backed securities could affect financing costs and the dollar.securities could affect financing costs and the dollar.

US outlook

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

1997 2000 2003 2006 2009 2012-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

Oil ExportersEmerging Asia

Euro AreaJapan

United States

Current account balance(percent of World GDP)

-4

-2

0

2

4

6

8

1990 1994 1998 2002 2006-4

-2

0

2

4

6

8

Debt securities Other

U.S. net capital flows(percent of GDP)

Current account deficit

1212







1313

Exports and Imports: Latin America & Caribbean

(In billions of U.S. dollars)

2002 2003 2004 2005 2006 2007 2008300

400

500

600

700

800

900

1000

Exports

Imports

2002 2003 2004 2005 2006 2007 2008-4

-2

0

2

4

6

8

Net exports

Investment

Consumption

Contributions to Growth: Latin America and Caribbean

(In percent, per year)

The regional economic outlook remains robust, as strong domesticThe regional economic outlook remains robust, as strong domesticdemand is offsetting the drag from higher import growth.demand is offsetting the drag from higher import growth.

LAC outlook

1414

But the external environment is subject to downside risks.But the external environment is subject to downside risks.

• Weaker external growth

• Further tightening in U.S. and global credit markets

• Volatile commodity prices

• Remittances may be more sensitive to US cycles.

LAC outlook

Growth Prospects for Latin America and the Caribbean

(In percent)

2003 2004 2005 2006 2007 20080.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

90 percent range50 percent range

Baselineforecast

1515

A sharp external slowing would erode the outlookA sharp external slowing would erode the outlook

-- Sharper U.S. slowdown in early Sharper U.S. slowdown in early ’’0808

-- Credit crunch in the U.S.Credit crunch in the U.S.

The regionThe region’’s growth falls s growth falls significantly (up to 2 pp in 2008 significantly (up to 2 pp in 2008 below our baseline forecast)below our baseline forecast)

Policy issues: monetary policy

LA6 GDP Growth: Downside Scenario

(In percent)

2003 2004 2005 2006 2007 20080.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

90 percent range

50 percent range

Baselineforecast

Downsideforecast

1616

Caribbean growth has been robust.Caribbean growth has been robust.

• Last year regional GDP expanded by 5½ percent.

• Growth is expected to slow down moderately.

• While outlook remains broadly favorable, downside risks have increased more recently.

-5

0

5

10

15

2000 2001 2002 2003 2004 2005 2006 2007 2008

Real GDP Growth(Annual percent change)

Sources: WEO, and IMF staff estimates.

Trinidad & Tobago

Caribbean

ECCU

Jamaica

1717

Strengthened policy frameworks have helped Strengthened policy frameworks have helped contain inflation.contain inflation.

0

10

20

30

40

50

2000 2001 2002 2003 2004 2005 2006 2007 2008

Jamaica

Inflation(Percent; annual end-of-period)


Dominican Republic

Caribbean

Trinidad & Tobago

1818

Economic expansion has allowed public balances Economic expansion has allowed public balances to strengthento strengthen

• Public balances improved.

• Tax reforms, more fiscal flexibility.

• More recently, in some countries fiscal efforts have waned.

-12

-10

-8

-6

-4

-2

0

2

2000 2001 2002 2003 2004 2005 2006

Public Sector Balance(In percent of GDP)


Caribbean

ECCUJamaica

1919

Reducing debt is critical to increase resilience to Reducing debt is critical to increase resilience to adverse shocks.adverse shocks.

• Debt ratios have declined since 2003.

• Debt is still very high.

• Commitment to further debt reductions.

50

75

100

125

150

175

200

2000 2001 2002 2003 2004 2005 2006

Public Debt (In percent of GDP)


Caribbean

Jamaica

Guyana

St. Kitts and Nevis

2020







2121

Regional integration promises significant benefits. Regional integration promises significant benefits.

OECD Latin Americaand Caribbean

Developingcountries

Caribbean0

20

40

60

80

100

120

1401980-20002001-2006

Source: WEO. 1/ Exports plus imports of goods and services.

Exports Plus Imports of Goods and Services(In percent of GDP) 1/

• Caribbean economies are small and very open.

• Regional cooperation promotes economies of scale and risk sharing.

2222

Financial sectors are large but often not well Financial sectors are large but often not well developed. developed.

ECCU JAM TTO GUY BHS BRB BLZCaribbean1/

0

50

100

150

200

250

Banks Nonbanks

Assets of Financial Institutions(In percent of GDP)

Sources: National authorities; and IMF staff calculations. 1/ Weighted average.

• Large but underdeveloped financial sectors.

• Primary markets dominated by government securities.

• Secondary markets illiquid.

• Stock market turnover low.

2323

Integration has progressed within CARICOM Integration has progressed within CARICOM creating new challenges.creating new challenges.

1995 1997 1999 2001 2003 20050

5

10

15

20

CARICOM

Eurozone

y=37.9 - 0.66 t (0.008)

ECCU

Cross-Country Standard Deviation of Short-term Interest Rate, Adjusted for Exchange Rates (Sigma convergence)

Sources: National authorities; and IMF staff calculations.

• Interest rate convergence

• Further integration ...

promises benefits,but also harbors risks.

• Strengthen institutions and regulatory oversight.

2424







2525

Tax incentives are a costly way to attract Tax incentives are a costly way to attract investment.investment.

Caribbean FDI as a Share of Regional Investment Flows(In percent)

Share of LAC Flows Share of Dev. Ctry. Flows Share of World Flows0

1

2

3

4

51990-94

2000-04

Sources: National authorities; and IMF staff estimates.

• FDI—a key anchor of the region’s developmental strategy.

• But tax incentives are costly.

• Other factors also attract FDI:infrastructure, strong institutions,stable economic conditions.

• Regional coordination to contain harmful tax competition.

2626







2727

Preference erosion for bananas and sugar is Preference erosion for bananas and sugar is resulting in significant output losses.resulting in significant output losses.

1997 2000 2003 20060

200

400

600

800

1000

1200

Real Banana Prices, 1997 - 2007

(U.S. dollars per metric ton)

European Union

World

Large economic impact —value of implicit subsidies:

• Windward Islands (8% of GDP—bananas).

• Guyana (10% of GDP—sugar).

1990 1995 2000 20050

5

10

15

20

25

30

35

Real Sugar Prices,1990 - 2007

(U.S. cents per lb.)

European Union

United States

World

2828

Affected Countries need to develop Affected Countries need to develop adaptation strategies adaptation strategies

• Targeted safety nets and job search support.

• More efficient agricultural production.

• Shift out of traditional agriculture.

2929

ConclusionsConclusions

• Baseline outlook for Caribbean favorable.• But region remains vulnerable to shocks.• Policy priorities:

Lower debt and reform public spending;Investment climate/FDI;Advance financial sector reforms.

3030

EndEnd

the outlook for latin america and the caribbean region · 2013-04-12 · 7 us outlook unlike in the...

Documents