BUSAN, Korea, March 29 2015 – Many Latin American and Caribbean countries need to make budget adjustments in the face of rising fiscal imbalances and higher financial risks, according to the Inter-American Development Bank’s annual macroeconomic report issued today.
The 2015 report addresses the question of how budgets should be adjusted and how fast, and projects a baseline annual growth scenario for 2016-2019 of three percent, on par with the 1990s but below the 4.7 percent registered during the pre-crisis 2003-2008 period. Additional negative external shocks in China, Japan and Europe could further erode economic growth.
On the bright side, stronger U.S. growth and lower commodity prices, including oil, may give a boost to countries that import energy and have strong trade ties with the United States.
“Latin America and the Caribbean has performed well in the years that followed the global financial crisis, increasing fiscal spending to fuel economic growth,” said IDB Chief Economist José Juan Ruiz.
“But lower commodity prices and higher inflexible spending are threatening to erode many of the gains. Countries will need to find ways to enhance revenues and the efficiency of spending while they protect social gains.”
The report – The Labyrinth, How Can Latin America and the Caribbean Navigate the Global Economy – points to common trends affecting the entire region but also provides analysis for the specific situations faced by individual nations, and provides policy suggestions going forward. It was issued during the IDB’s Annual Meeting held in Busan, Korea.
The slowdown in growth comes amid rising inflation in some countries, which will constrain their ability to use exchange depreciations to respond to negative shocks.
At the same time, corporate bond amortizations are expected to rise annually to $64 billion in 2020, the majority in dollars. Dollar issuance soared in recent years but is now falling and may fall below the level of required payments.
From 2011 to date, metal prices have fallen 44 percent, food prices have declined 20 percent and oil has plunged 59 percent. While commodity prices are subject to volatility, the report does not foresee prices bouncing back to their previous highs anytime soon.
For nine commodity-dependent countries, the average decline in fiscal revenue is 9 percent in the baseline scenario, ranging from a 2 percent drop for Peru to over 10 percent for Trinidad and Tobago, Ecuador, and Venezuela.
