New Challenges to Growth in Latin America & the Caribbean

Alejandro Werner is Director of the Western
Hemisphere Department of the International Monetary Fund (IMF).

By Alejandro Werner
WASHINGTON DC, Jan 30 2020 (IPS)

Economic activity in Latin America and the Caribbean stagnated
in 2019, continuing with the weak growth momentum of the previous
five years and adding more urgency and new challenges to reignite
growth.

Indeed, real GDP per capita in the region has declined by 0.6
percent per year on average during 2014–2019—a sharp contrast
from the commodity boom’s average increase of two percent per
year during 2000–2013.

This weak momentum reflects structural and cyclical factors. On
the structural side, potential growth remains constrained by low
investment, slow productivity growth, a weak business climate, and
the low quality of infrastructure and education.

On the cyclical side, growth has been held back by low global
growth and commodity prices, elevated economic policy uncertainty,
economic rebalancing in some economies, and social unrest in
others.

Regional challenges

Elevated policy uncertainty in several large Latin American
countries continues to weigh on growth. For example, uncertainty
about the course of economic policy and reforms in Brazil and
Mexico likely contributed to the slowdown in real GDP and
investment growth in 2019.

Continued economic rebalancing in stressed economies that
experienced sudden stops in capital flows in 2018-19 (Argentina,
Ecuador), while helping restore internal and external balances,
have also acted as a drag on economic growth.

More recently, a few countries in the region experienced social
unrest—Bolivia, Colombia, Chile, and Ecuador—which, in some
cases, disrupted economic activity. Economic policy uncertainty has
also risen in these countries as governments consider alternative
policies and reforms to make growth more inclusive and address
social demands.

Outlook and risks

As noted in the recent World Economic Outlook
update
, growth in the region is projected to rebound to 1.6
percent in 2020 and 2.3 percent in 2021—supported by a gradual
pick up in global growth and commodity prices, continued monetary
support, reduced economic policy uncertainty, and a gradual
recovery in stressed economies.

However, there are also prominent downside risks. While previous
external downside risks have moderated following globally
synchronized monetary policy easing and the signing of the
U.S.-China phase one trade deal, some new risks have appeared,
including the potential global spread of the coronavirus, which
could significantly disrupt global economic activity, trade, and
travel.

Domestic and regional downside risks have also intensified.
Social unrest could spike throughout the region, while economic
policy uncertainty could rise further due to both heightened social
tensions and policy slippages.

Policy priorities

Economic policies will need to strike a balance between
rebuilding policy space and maintaining economic stability on the
one hand and supporting economic activity and strengthening the
social safety net on the other hand.

Although the causes and triggers of social unrest have varied
across countries, they generally reflect discontent with some
aspects of the economic and political systems. A key priority going
forward is to reignite growth, while making it more inclusive.

Promoting competition will be important to avoid monopolistic
practices that may hurt the poor disproportionally. Tackling
corruption and weak governance will help make political systems
more representative, although deeper political reforms may be
needed.

Fiscal policy will need to support to growth, expand the social
safety net, and improve the quality of public goods and services.
However, in many countries, spending room in the budget remains
constrained by high deficits and public debt.

These countries will need to improve spending efficiency,
reallocate spending from nonpriority areas to public investment and
social transfers and increase revenues over the medium term to
finance additional increases in these areas.

Monetary policy can remain accommodative to support growth given
the stable inflation outlook, well-anchored inflation expectations,
and declining neutral rates worldwide.

South America

In Brazil, growth remained subdued at 1.2
percent in 2019, but is projected to accelerate to 2.2 percent in
2020 due to improving confidence following the approval of the
pension reform and lower monetary policy interest rates in the
context of low inflation.

Steady implementation of the government’s broad fiscal and
structural reform agenda will be essential to safeguard public debt
sustainability and boost potential growth.

In Chile, the outlook is subject to uncertainty
resulting from social unrest and the evolving policy responses to
the social demands. Following a sharp decline in late 2019,
economic activity is expected to recover gradually supported by a
significant fiscal expansion and looser monetary policy, with
growth reaching about 1 percent in 2020.

In Colombia, strong domestic demand led to a
pickup in growth to 3.3 percent in 2019 and a widening of the
current account deficit to 4½ percent of GDP. Growth is projected
to accelerate to around 3½ percent in 2020 due to continued
monetary support, migration from Venezuela, remittances, civil
works and higher investment due to recent tax policy changes.

In Peru,
growth
is estimated to have slowed to 2.4 percent in 2019,
hampered by lower global trade and under-execution of government
spending. With these factors dissipating in the coming years,
growth is projected to recover to 3.2 percent in 2020 and 3.7
percent in 2021, with inflation remaining well-anchored within the
central bank’s target range.

Venezuela remains immersed in a deep economic
and humanitarian
crisis
. Since the end of 2013, real GDP has contracted by 65
percent driven by declining oil production, hyperinflation,
collapsing public services, and plummeting purchasing power.

A continuation of these trends is projected for 2020, although
at a slower pace. The acute humanitarian crisis has led to one of
the largest migratory crises in history, with migration to
neighboring countries expected to surpass 6 million—20 percent of
the population—by 2020.

Mexico, Central America, and the Caribbean

In Mexico, economic activity stagnated in 2019
due to policy uncertainty and slower global and U.S. manufacturing
production. Growth is expected to recover to 1 percent in 2020 as
conditions normalize, including with the ratification of the trade
agreement between the United States, Mexico, and Canada (USMCA) and
the recent easing of monetary policy, which should continue as
along as inflation expectations are well-anchored.

Fiscal policy should be geared at putting the public debt-to-GDP
ratio on a downward trajectory, with priority on increasing
revenues, improving the efficiency of spending, and enhancing the
fiscal framework.

In Central America, Panama, and the Dominican
Republic
growth is projected to rebound to 3.9 percent in
2020, from 3.2 percent in 2019, supported by the beginning of
operations of a large copper mine in Panama, and
accommodative monetary policy in Costa Rica and
the Dominican Republic. In Costa
Rica
, continued implementation of all measures in the
fiscal reform bill will be key to rebuild market confidence and
fiscal space.

In Honduras, the
economic plan
includes important efforts to improve
institutional, governance, and anti-corruption frameworks
supporting business confidence, while Guatemala is
expected to continue benefitting from a fiscal impulse and economic
reform plans of the new administration.

El Salvador is already reaping the effects of
the pro-growth agenda of the new administration inaugurated in
June, while unfavorable political tensions in
Nicaragua are creating a significant headwind to
economic recovery.

In the Caribbean, economic prospects are
improving, but with substantial variation across countries. Growth
in tourism-dependent economies is expected to strengthen in 2020.
With commodity prices remaining broadly stable, commodity exporters
are expected to see modest recovery in growth, while large oil
discoveries and the start of their production in 2020 is expected
to boost growth in Guyana.

The region’s exposure to climate risks continues to require
strong policies. Potential growth continues to be impeded by
lingering structural problems including high public debt, weaker
financial systems, high unemployment, and vulnerability to
commodity and climate-related shocks.

Some countries have started to strengthen their fiscal
positions, but further tightening is needed in others to ensure
debt sustainability.

*IMFBlog is a forum for the views of the International Monetary
Fund (IMF) staff and officials on pressing economic and policy
issues of the day. The views expressed are those of the author(s)
and do not necessarily represent the views of the IMF and its
Executive Board.

The post
New Challenges to Growth in Latin America & the Caribbean

appeared first on Inter Press
Service
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Excerpt:

Alejandro Werner is Director of the Western
Hemisphere Department of the International Monetary Fund (IMF).

The post
New Challenges to Growth in Latin America & the Caribbean

appeared first on Inter Press
Service
.

Source: FS – All – Ecology – News
New Challenges to Growth in Latin America & the Caribbean