Sunday, May 10, 2009

The IMF Take on Latin America Growth

The IMF has just released its Regional Economic Outlook for Latin America. In what follows we summarize the main points.

The Role of Fiscal Policy

The Fund argues that in the inflation-targeting countries, the authorities have announced transitory and targeted fiscal stimulus packages, with budget costs in 2009 ranging from 0.6 percent of GDP in Brazil to 2.9 percent of GDP in Chile. Several countries are also implementing stimulus plans through guarantees and loans to public development banks, which are not classified as government expenditure. In the case of Brazil, these measures amount to 3.5 percent of GDP over 2009–10.
With falling revenues, fiscal balances weakened in most countries in the last two quarters of 2008. Cuts in primary expenditure have been the exception, occurring only in a few countries where financing realities clearly left governments with few options. More typically, governments have begun to actively raise expenditure, with a view to having some countercyclical impact (including in Bolivia, Costa Rica, Paraguay).

A number of countries also have widened the coverage of social programs to ameliorate the effects of rising unemployment. Measures have included widening the coverage of or introducing unemployment insurance (Antigua and Barbuda, Brazil), a subsidy for youth employment (Chile), health benefits for the unemployed (Mexico), and increases in income transfers or targeted cash programs (Antigua and Barbuda, Argentina, The Bahamas, Brazil, Chile, Costa Rica, Dominica, El Salvador, Guatemala, Honduras, St. Lucia).

Relative to some countries in other regions, the overall “cost” of announced policies in response to the economic downturn has been modest. This reflects in part the absence of massive bank bailouts, and the still limited quasifiscal cost from credit guarantees by development banks. It also reflects governments’ assessment of the limits on the availability of financing to pursue fiscal stimulus on a grander scale.

Economic Outlook and Risks

According to the IMF output in Latin America is expected to contract by 1½ percent, following growth of about 4½ percent in 2008. The slowdown is projected across the board, being more pronounced for the region’s commodity exporters and for economies with the strongest manufacturing ties to global industrial production chains. This is a sharp markdown from the previous forecast in the October 2008 WEO, despite new monetary and fiscal stimulus in the pipeline. However, this suggests relatively good performance for the region compared with the past. While in previous global recessions the decline in LAC growth was generally more abrupt than in the rest of the world, this time around Latin America growth is expected to decline at the same pace as global growth. This speaks to the improvements in policy frameworks and the buildup of resilience in recent years.

In 2010, Latin economies should rebound and hence Latin America should grow 1.5% in 2010. Indeed, the forecast take into account the fact that Latin America´s potential output grows faster than in advance economies. All in all, the greater growth in Latin America is also due to the lack of systemic banking problems in the region, which would allow LAC economies to resume growth more quickly than in regions where severe problems persist in the financial sector. In addition, the greater scope for countercyclical policies, including measures to sustain public spending on infrastructure and social safety nets, would support growth going forward. Overall, output losses from the current crisis would amount to several percentage points of the region’s GDP over 2009–10.

In any case the IMF argues that the current crisis is likely reducing medium-term growth prospects in the LAC region as well as in other regions. Historically, recessions that are highly synchronized across countries, as the current one is, have been longer and deeper than those confined to a single region. Potential growth may also be affected, given the lasting damage on labor markets and the productive capital stock, particularly as supply chains need to be rebuilt. This underscores the importance of advancing the structural reform agenda of the region.

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