Article

Regional Economic Outlook: Western Hemisphere: Seizing the Moment

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
May 2006
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The outlook for the United States, Canada, and Latin America and the Caribbean (LAC) is favorable, according to the IMF’s April 2006 Regional Economic Outlook, which was released in Washington, D.C., on April 21 by Anoop Singh (Director of the IMF’s Western Hemisphere Department). According to Singh, “the region is at an important historical juncture. The recent strong performance of the regional and global economy and the continuing generally favorable outlook provide a rare opportunity for policymakers in the region.”

The report projects that growth in the United States and Canada will continue to provide key support for global expansion. U.S. growth is projected to remain close to 3½ percent in 2006, with continued low core inflation and strong productivity growth. Growth in Canada is expected to pick up to just over 3 percent. The expansion of household demand should moderate somewhat in both countries, but healthy corporate profits and business investment should provide an offsetting boost to demand.

Growth in the LAC region is expected to continue at a robust 4¼ percent in 2006, supported by strong commodity export prices, which have helped the region achieve current account surpluses for the third year in a row, as well as easy global financing conditions and record-low sovereign spreads. Despite the rise in world oil prices and an acceleration in credit growth, inflation is expected to ease further to 5¾ percent in 2006 from 6¼ percent in 2005. The containment of inflationary pressures reflects strengthened commitments to price stability—in some cases supported by explicit inflation targets—and to greater exchange rate flexibility.

Big improvement in fiscal policy

Recent macroeconomic stability both fiscal and monetary in Latin America and the Caribbean has kept inflation low and is attributable in part to improved fiscal policy and reduced public debt.

(change in percent of GDP)

Data: IMF staff estimates.

Better management of public debt

Several countries, including Brazil, Colombia, Mexico, Panama, Peru, and Venezuela, have actively improved debt structures, which, coupled with the drop in debt ratios, has reduced vulnerability to external shocks.

(percent of GDP)

Data: Country authorities and IMF staff estimates.

Fiscal positions have also continued to improve, with primary surpluses averaging 3¾ percent of GDP in 2005, compared with 2¾ percent in 2003-04. This improvement reflected continued buoyancy of revenues, but the recent acceleration of primary spending in some countries will need to be monitored closely. Public debt-GDP ratios have also declined, and many countries have taken advantage of favorable global capital market conditions to deepen local currency markets and to buy back and refinance foreign currency debt. Moreover, by end-2005, Brazil and Argentina had repaid all outstanding obligations to the IMF, and Uruguay made a sizable advance repayment in March 2006.

The region’s near-term prospects are good, but there remain risks, including the potential for high, volatile oil prices to dampen demand in oil-importing countries in the region and also trading partners, and for a possible abrupt tightening of credit in global financial markets. Therefore, a key message of the report is the importance of using the favorable regional and global situation to cement commitments to disciplined fiscal and monetary policies, including through firmer control over public spending, and to exchange rate flexibility, and to tackle underlying impediments to poverty reduction and growth. Paving the way for faster productivity and income growth will require reform of financial sectors, improvements in the business climate and natural resource management, and greater openness to international trade.

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