Regional Outlook Latin America and the Caribbean Sebastián Vergara M. Development Policy and Analysis Division Department of Economic and Social Affairs United Nations UN DESA Expert Group Meeting on the World Economy October 21-23, 2015 New York
Latin America & Caribbean: aggregate picture The region has entered into a period of economic difficulties, amid domestic weaknesses and more challenging external conditions. -0.6 Source: ECLAC and DESA, United Nations
The slowdown reflects a decrease in domestic demand, led by the contraction of investment and the slowdown of consumption Source: ECLAC, United Nations
Growth in two speeds at sub-regional level South America: Contraction of 1.7% in 2015 and zero growth in 2016, with major difficulties to close output gap afterwards in large countries. Period of significant macroeconomic adjustments. Mexico & Central America: moderate growth of 2.4% in 2015 and 3.1% in 2016; with gradually improving investment prospects and benefiting from the US recovery. Caribbean: stable and moderate growth (~3.4% in 2015 and 2016), resilient investment and improving tourism activity. 7.0 6.0 5.0 4.0 3.0 GDP Growth by sub-regions, 2010-2016 South America Mexico and Central America Caribbean 2.0 1.0 0.0 2010 2011 2012 2013 2014 2015 2016-1.0-2.0-3.0 Source: ECLAC and DESA, United Nations -0.6
Challenging external conditions for the region Lower commodity prices and subdued global trade Expectations over the normalization of monetary policy stance in the US, and recent rise in volatility in financial markets Slowdown in China Effects in the region Negative impact on fiscal accounts (MEX, VEN, ECU, COL) Contraction on capital inflows (BRA, COL, CHI, PER) Deterioration in export performance and in terms of trade for commodity exporters in S. America Investment prospects have sharply worsened in natural resources sectors. Enduring difficulties to reinvigorate private investment
Decline in capital inflows Unlike previous episodes, the contraction is now across the board, including portfolio flows and FDI. FDI inflows declined by more than 20% in the region during the first half of 2015. This might have serious implications, given i) the role FDI has played to finance current account deficits; ii) capital flows tend toamplify financial and real business cycles. Also, reserves already showing a decline (Venezuela, Uruguay, Trinidad & Tobago). Brazil: Portfolio flows, 2014 and 2015 Source: IIF (2015) Based on data from Central Bank of Brazil.
Monetary policy: a countercyclical approach Most countries have taken a countercyclical approach since 2014. Brazil is a an exception with an enduring monetary tightening to control inflationary and depreciation pressures. Monetary policy dilemmas are increasing, as i) growth remain subdued; ii) inflation tempers only slowly; and iii) Fed normalizes interest rates. For instance, Peru, Chile and Colombia raised interest rates recently Inflation-Targeting Economies: Monetary Policy Rate, January 2013 to June 2015 Selected countries: Year-on-year variation on monetary aggregates April 2014 April 2015 Source: ECLAC and DESA, United Nations -0.6
Inflation: divergence between sub-regions In Mexico & Central America, inflation remains stable and low; while in South America it has visibly accelerated, due to the strong depreciation in Colombia, Chile, Peru and Brazil. In Brazil inflation remains relatively high despite monetary tightening. Gradual adjustment on 2016. The extreme case is Venezuela, where inflation is projected above 150% in 2015 and 2016. Source: ECLAC, United Nations
Fiscal policy: external conditions and slowdown are reducing the policy space Fiscal accounts have deteriorated in 2015, due to a fall on revenues. Some countries have implemented large adjustments in budgets (Colombia, Brazil, Venezuela, Ecuador). However, public debts have remained stable, due to the (still) relatively good financing conditions. High heterogeneity across the region, though. There have been efforts towards public investment, but fiscal space is narrowing Latin America Caribbean Source: ECLAC, United Nations
Labor markets: gradual deterioration Employment rates are decreasing due to lower job creation... Unemployment is expected to increase from 6.0% in 2014 to 6.5% in 2015 and even further in 2016, mainly in South America. Some signs of deterioration of job quality: signs of a shift from salaried work to selfemployment. Source: ECLAC, United Nations
Strong depreciation of domestic currencies, but value of exports continue to decline Difficult economic conditions, lower commodity prices and capital inflows have resulted in a significant depreciation pressures across the region However, thevalueofexportscontinuetodeclinein2015 (for the third year). In 2015 exports value decreased by ~14%. The situation, again, is heterogeneous between sub-regions. Exports continue to be stronger in Mexico and Central America. Exports from Latin America and the Caribbean: Value, Volume and Price Depreciation of domestic currencies, December 2014-October 2015 Source: ECLAC, United Nations
The current account deficit is increasing moderately as the terms of trade have deteriorated Source: ECLAC, United Nations
The panorama at country level for 2016 8.0 Latin America and the Caribbean: GDP Growth forecasts, 2016 6.0 5.9 4.0 2.0 0.5 0.7 1.2 1.3 2.0 2.2 2.5 2.7 2.7 2.9 2.9 3.1 3.4 3.5 3.6 3.6 4.0 4.1 4.1 4.3 4.4 4.4 4.6 4.9 0.0-0.2-2.0-0.9-4.0-6.0-6.0 Source: DESA, United Nations
Anyhow, the recovery of investment will be difficult Latin America and the Caribbean: Investment over GDP and commodity prices, 1990-2015 400.0 24.0 Oil price index Mineral and metals price index Investment over GDP 350.0 23.0 300.0 22.0 250.0 21.0 200.0 20.0 150.0 100.0 19.0 50.0 18.0 0.0 1990 1993 1996 1999 2002 2005 2008 2011 2014 Source: DESA, United Nations 17.0
Downside risks Lower-than-expected growth in the United States A sharper slowdown in China and further declines in commodity prices Spillovers from global financial markets could reduce further capital inflows and increase external financing costs Strong dependency on commodity prices in South America Lack of diversification and technological content in productive structure Large infrastructure gaps with structural issues remaining Difficult to resume growth rates from previous decade, and to expand or even maintain social improvements
Thank you for your attention Sebastian Vergara M. Economic Affairs Officer Development Policy and Analysis Division DESA - United Nations New York, NY 10017 Phone: +1 212 9634745 Email: vergaras@un.org https://www.researchgate.net/profile/sebastian_vergara2