Latin America has continued to weather global turbulences relatively well. Its resilience reflects robust macro fundamentals and well-balanced policy mixes in most countries. Ultra-accommodative monetary policies in the mature world and the region’s strong capital pulling forces, however, have increased currency appreciation pressures, putting stress on policymaking.
- The policy response has varied across countries. It has consisted of reliance on exchange rate flexibility, intervention in exchange markets, tightening of macroprudential regulation, and imposition of capital inflow controls.
- While the region has achieved broad macroeconomic stability, most countries still measure up poorly in a number of structural areas, which is weighing on productivity. Structural reforms need to be accelerated in order to lift trend growth.
- Policy frameworks also need to be upgraded to smooth out the effects of terms-of-trade fluctuations on local economies.
Latin America: Call of the Yield
The main challenge facing Latin America has shifted from counteracting global weakness to coping with currency appreciation pressure from capital inflows attracted by relatively higher dollar yield-risk ratios. While appreciation pressures are putting stress on policy, they also represent an opportunity to accelerate implementation of productivity-enhancing structural reforms, which would help protect competitiveness and lift trend growth.
Latin America Publications
Country Publications
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Brazil: Waiting for the Animal Spirits
May 23, 2013A low ratio of investment to GDP is weighing on trend growth. Despite lower interest rates, investors remain in a cautious, wait-and-see mode amid heightened policy uncertainty. Above-productivity wage growth has further dampened investor sentiment. While critical to shaking investors out of their current cautious mindset, successful implementation of infrastructure concessions is a necessary but not sufficient condition for a lasting lift in investment.
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Venezuela: Tough Fiscal Choices Ahead
May 08, 2013President Nicolás Maduro faces the daunting task of addressing rapidly growing fiscal challenges while avoiding political upheaval stemming from the required adjustment. While he may try to “muddle through” at least for the short term, a more forceful policy response is likely to be needed to stabilize public sector finances.
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Mexico: Delivering on the Structural Front
April 29, 2013Broad political consensus has enabled President Enrique Peña Nieto to make substantial and rapid progress on reform implementation, auguring higher trend growth. Politics, however, could become an issue for approval of high-profile fiscal and energy reforms scheduled to be addressed in the coming months.
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Chile: Close Eye on the Currency
April 23, 2013The policy response to quantitative easing in mature economies has, thus far, relied heavily on the floating exchange regime and heightened fiscal restraint in order to safeguard competitiveness. Nonetheless, intensification of appreciation pressures is likely to trigger sterilized dollar purchases by the central bank and/or the tightening of macroprudential regulation.
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Uruguay: Brewing Fiscal Imbalances
April 10, 2013A rising ratio of current primary spending to GDP, driven by rigid spending items such as salaries and entitlements, has narrowed fiscal policy flexibility. Above-GDP growth of public spending has fueled inflation, overwhelmed monetary policy and eroded competitiveness. Lack of a timely and decisive effort to curtail spending growth will worsen macroeconomic vulnerabilities.
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Venezuela: No Easy Task Ahead
March 25, 2013Campaigning for the presidential election has kicked off. We expect acting President Nicolás Maduro to win the upcoming election. A wide-margin victory will broaden his scope for implementing more pragmatic policies.
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Venezuela: Post-Chávez Challenges
March 07, 2013President Hugo Chávez’s death marks the beginning of what is likely to be a protracted political transition. Regardless of who will win the upcoming presidential elections, the next government will face daunting economic challenges.
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Regional Publications
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Latin America: Call of the Yield
March 01, 2013The main challenge facing Latin America has shifted from counteracting global weakness to coping with currency appreciation pressure from capital inflows attracted by relatively higher dollar yield-risk ratios. While appreciation pressures are putting stress on policy, they also represent an opportunity to accelerate implementation of productivity-enhancing structural reforms, which would help protect competitiveness and lift trend growth.
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Latin America Regional Overview
March 08, 2012Although global headwinds have moderated growth, Latin America has proven increasingly resilient to external shocks. The region’s improved global standing, however, is putting upward pressure on local currencies, highlighting the need for productivity-enhancing reforms and recalibration of the policy mix in order to protect competitiveness.
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LatAm has Strengthened its Buffers Against Global Turmoil
September 30, 2011Latin America is well-positioned to withstand deepening turbulence in the global economy and sustain moderate growth in 2012. In most countries, resilience to external shocks has been bolstered by price stability, strong public finances, flexible exchange rates, high international reserves and more robust banking systems. Countries that have pursued heterodox policies cannot count on these buffers.
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Latin America Regional Overview
March 26, 2011In 2010, high commodity prices and countercyclical stimulus resulted in rapid recovery from the global slowdown. Regional output increased 6.1%. We project growth to decelerate to 4.5% in 2011 as most key countries counter rising inflationary pressures with monetary tightening. Strong fundamentals have given rise to recovery of capital inflows; currencies have appreciated to pre-crisis levels.
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Moderating Currency Appreciation
January 20, 2011Private capital inflows are increasing to pre-crisis levels. Following a sharp depreciation of local currencies during the global crisis, they are now appreciating back to the levels that prevailed before the crisis. Countries trying to moderate appreciation pressures would benefit from fiscal adjustment and productivity-enhancing reforms.
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Latin America Regional Overview
March 12, 2010Strong fundamentals and counter-cyclical stimulus programs have set the stage for robust economic recovery after the worst recession in 25 years, but timely withdrawal of monetary and fiscal stimulus is essential to repair public balance sheets and preserve hard-won macroeconomic stability. We project 4.8 percent regional GDP growth in 2010.
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