Most people know Argentina as the land of tango, Malbec, and some of the greatest soccer players of all times. But Argentina is also famous for being home to some of the most diverse and extreme landscapes of the world—from subtropical rainforests and Iguazu Falls in the north to the glaciers of Perito Moreno in the south, and from the lowest site in South America (Laguna del Carbón) to the highest elevation in the Americas (Aconcagua mountain).
Following a rough start at the beginning of the year, both external and domestic conditions in Latin America and the Caribbean have improved. But the outlook for the region is still uncertain.
Commodity prices have recovered since their February 2016 trough, but they are still expected to remain low for the foreseeable future. This has been accompanied by a brake—or even a reversal—in the large exchange rate depreciations in some of the largest economies in the region.
The rapid increase in Latin American corporate debt—fueled by an abundance of cheap foreign money during the past decade—has contributed to an increase in corporate risk. Total debt of nonfinancial firms in Latin America increased from US$170 billion in 2010 to US$383 billion in 2015. With potential growth across countries in the region slowing, in line with the end of the commodity supercycle, it will now be more difficult for firms to operate under increased debt burdens and reduced safety margins.
In this environment, Latin American firms are walking a tightrope. With external financial conditions tightening, the walk towards the other side—notably through adjustment and deleveraging—while necessary, has become riskier. After making good progress, the crossing has also become more perilous due to strong headwinds—including slower global demand and bouts of heightened market volatility.
Version in Español (Spanish)
Forecasts of real GDP growth attract a lot of media attention. But what matters more to the person on the street is how growth translates into jobs. Unfortunately, the mediocre growth outlook of recent years may lead to a disturbing outlook for jobs, particularly among fuel-exporting countries and in the Latin America and Caribbean region.
“The human influence on the climate system is clear and is evident from the increasing greenhouse gas concentrations in the atmosphere, positive radiative forcing, observed warming, and understanding of the climate system.” —Intergovernmental Panel on Climate Change, Fifth Assessment Report
Fossil fuel prices are likely to stay “low for long.” Notwithstanding important recent progress in developing renewable fuel sources, low fossil fuel prices could discourage further innovation in and adoption of cleaner energy technologies. The result would be higher emissions of carbon dioxide and other greenhouse gases.
Policymakers should not allow low energy prices to derail the clean energy transition. Action to restore appropriate price incentives, notably through corrective carbon pricing, is urgently needed to lower the risk of irreversible and potentially devastating effects of climate change. That approach also offers fiscal benefits.
Emerging markets have had a great run. The fifteen largest emerging market economies grew by 48% from 2009 to 2014, a period when the Group of Twenty economies collectively expanded by 6%.
How did emerging markets sustain this growth? In part, they drew upon bank lending to drive corporate credit expansion, strong earnings, and low defaults. This credit boom, combined with falling commodity prices and foreign currency borrowing, now leaves emerging market firms vulnerable and financial sectors under stress, as we discuss in the latest Global Financial Stability Report.
Growth in Latin America and the Caribbean is suffering a double whammy—economic activity has slowed down sharply and the medium-term outlook continues to deteriorate. It is therefore not surprising that policymakers across the region are eagerly searching for ways to revitalize growth.
One answer may be more trade—both within the region and with the rest of the world. Our new study analyzes the export performance in developing and emerging market regions over the past two decades to assess the potential for future export growth in Latin America. We find evidence that most countries in the region “undertrade” compared to what standard models would predict. This has been an entrenched problem for almost a quarter of a century, partly as a result of the region’s geography and a legacy of protectionist policies.
The turn of the year usually brings a fresh dose of optimism. Yet, worries dominate across much of Latin America and the Caribbean today, as 2015 marks yet another year of reduced growth expectations. Regional growth is projected at just 1¼ percent, about the same low rate as in 2014 and almost 1 percentage point below our previous forecast. Challenging external conditions are an important drag for many countries. Still, it’s not too late for some good New Year’s resolutions to address domestic weaknesses and improve growth prospects.
By Sean Hagan
(version in Español)
To restructure or not to restructure? That is a question few governments would like to face. Yet, if a country does find itself with an unsustainable debt burden, one way or another, it will have to be restructured. And if that time comes, it is better for the debtor, creditors, and the entire financial system that the restructuring be carried out in a prompt, predictable, and orderly manner.
The global financial crisis ushered in a new wave of sovereign debt crises that has reinvigorated discussions over the current framework for sovereign debt restructuring. The experience with Greece’s debt restructuring in 2012 and the ongoing litigation involving Argentina, in particular, provide a salutary reminder that vulnerabilities remain.
It looks as if labor markets in Latin America have not been following the economic news—literally! Economic activity has slowed markedly in the last three years, with some South American countries slipping into outright recession more recently. Yet, labor markets still appear remarkably strong, with unemployment rates, in particular, hovering at record-low levels in most countries (Figure 1). So, what is going on? Has the region discovered how to defy the law of gravity?