The countries of Latin America and the Caribbean will end the year with growing economies, after suffering a significant GDP contraction of -1.3 percent in 2016, according to the World Bank’s forecast in its latest bi-annual report.
In its latest bi-annual report, “Between a rock and a hard place: The Crossroads of Monetary Policy in Latin America and the Caribbean,” the World Bank’s Chief Economist Office for Latin America and the Caribbean explored the potential of monetary policy to support growth, without risking difficult gains in the battle against inflation.
Policymakers will have to be subtle to increase growth while ensuring protection for the most vulnerable,”
said the report.
For Latin America and the Caribbean, market analysts forecast a GDP growth of 1.2% by 2017 and 2.3% by 2018. The recovery will be led by a rebound in Argentina and Brazil. Argentina is expected to grow by 2.8% in 2017 and 3% by 2018.
Brazil is expected to grow 0.7% in 2017 and 2.3% in 2018, after contracting for two consecutive years. Mexico will likely continue to grow above two percent in 2017 and 2018, while growth in Central America and the Caribbean is expected to remain close to four percent in both 2017 and 2018.
Without a key role for external growth engines such as high commodity prices, the region will have to depend on its own sources of growth,”
said Carlos Végh, chief economist at the World Bank for Latin America and the Caribbean. “Reforms in labor markets and education and increases in infrastructure investment will be key as well as addressing the fiscal situation.”
The report reveals that 28 of the 32 countries in the region will show a negative overall fiscal balance in 2017. Average debt rates are estimated to be 58.7% of GDP, with six countries with rates above 80%. Finally, the recent series of natural disasters in the region will only increase existing fiscal pressures due to significant losses.
While it is true that countries in the region still need to make fiscal adjustments to adapt to the new reality following the commodity boom, many countries are right to do so gradually and thus avoid a further recession,”
said Végh.
The report identifies a critical monetary policy dilemma in the countries of Latin America and the Caribbean. Industrialized countries can reduce interest rates to stimulate the economy without worrying about currency depreciation, rising inflation or macroeconomic instability. On the other hand, this countercyclical monetary policy is not an easy option in the region. Proof of this is that several countries in South America remain procyclical. While raising interest rates in bad times helps prevent currency depreciation and keeping inflation under control, it ultimately also weakens the economy.
The report also notes that other financial instruments, such as the reduction of legal reserve requirements to stimulate the economy in bad times, have proved useful in countries that are still procyclical. These measures can help them counter-cyclically respond to a slowdown.