In Latam: IMF Says It Will Be A Struggle To Get Past Recession

20 October 2011

In its Regional Economic Outlook, highlights among many other things, the level of dependency that Peru, Venezuela and T&T have on commodity prices.

A few days after T&T presented its national budget for 2011-2012, the International Monetary Fund (IMF) gave its regional outlook for the economies of the Western Hemisphere. David Vegara, deputy director, Western Hemisphere Department, IMF, who delivered the report in Barbados last week, painted a picture of the Western Hemisphere’s economy of North America, Latin America and the Caribbean as struggling to emerge out of the global recession. Vegara was “polite” in reminding countries that the IMF is irrelevant to a country when it is prospering, but only becomes necessary when countries are not faring well.

“When you talk of the IMF, one has to remember that we are not usually around when things are well. It is not the purpose of why the institution was created. It was created to help countries when they have difficulties with balance of payments or they are in general economic crisis. When we talk about the IMF, we cannot ever forget that. So it is not that the countries in this region or other regions do not want to be engaged with the IMF,” he said. The IMF presented its Regional Economic Outlook in Barbados last Thursday at the Central Bank of Barbados, Bridgetown. It is the second time the report has been presented in the English-speaking Caribbean, with the first being in Jamaica.

T&T’s links with IMF
One year ago in November 2010, IMF representatives met with T&T Government officials. It was part of the IMF’s annual Article IV Consultation with T&T to review recent economic and financial developments and to discuss economic prospects and policies. The IMF’s mission to T&T, headed by Judith Gold, expressed “support for T&T’s plans for diversification” and expressed its gratitude for T&T’s “excellent co-operation and kind hospitality.” The IMF stated: “The mission supports the Government’s plans for diversification and structural reform. The focus is on investing in physical and human capital to support the development of a knowledge-based economy, improving the business climate, including through a one-stop shop for investors, strengthening the public enterprise sector by inviting private sector participation, and accelerating privatisation.”

In the IMF’s country report for T&T in March 2011, it called for new legislation and stronger supervisory and personnel procedures to tackle problems of companies, especially those from the insurance industries.
Against the backdrop of the CL Financial/Clico issue, the report stated: “A new Insurance Act has been drafted by the time of the crisis after extensive consultation with the industry. The collapse of CLF has had a devastating effect on the Caribbean. The cost could be as high as ten per cent of gross domestic product (GDP) in T&T and 17 per cent of GDP in the Eastern Caribbean Currency Union (ECCU) countries.”
In its report last week, the IMF projected economic growth of 2.6 per cent for T&T for 2012.

Investments to offset slow growth
Last week, in the IMF’s report Vegara advised the regional economies to search for more investments to boost their economies. “The region is very diverse, but in most countries, if not all in the region, there is ample opportunity to improve in this area, which could have positive impact on investments and growth at a time when the public sectors tend to have less space to manoeuvre because the revenues are lower. Certainly, improving the investment climate is an opportunity we hope will be taken by the countries in the region to offset the slower growth coming from the international economy.” Vegara said each Caribbean country has its own intricacies and investment opportunities, but qualified this by saying there are criteria that all foreign investors need to consider before investing.

“Guyana would have different policies from Jamaica and Barbados. One would have to take a look at the specific circumstances. Some of the issues that are  important to foreign investors are the ease to open a company, issues related to labour market and how flexible it is in hiring, issues of paying taxes and things like that,” Vegara said. The report stated that a further downturn in advanced economies would dampen the recovery and add pressure to an already heavy debt burden in the Caribbean. It issued a warning about the region’s weak financial sector regulations. “Financial fragilities in the region have become more troubling. In the ECCU, financial sector health indicators have continued to deteriorate, highlighting the important of steps to strengthen the sector.”

Recovery in the region remains weak, the report stated. “Great resolve is required in bringing down high public debt levels and decisively addressing persistent weaknesses in the financial sector.” While tourism economies are projected to grow by 1.25 per cent in 2012, the mineral-rich countries like Guyana and Suriname, are expected to project higher growth.

Commodity-dependent economies
In the report the IMF raised the question of how dependent Latin American countries like Peru, Venezuela and T&T are dependent on commodity prices. The report admits that the degree of commodity dependence as well as its evolution over time differs significantly across regions and sub-regions in Latin America. “South America is the most commodity-dependent sub-region, and this feature has become more pronounced over time (net commodity represented ten per cent of GDP in 2010, compared with six per cent in 1970). Although the increase has been broad-based, metals and energy still account for the largest shares of net commodity exports.”

The IMF cautioned that being overly dependent on commodities make these countries “vulnerable” to commodity prices shock, but diversification gives an economy a broader base to survive external economic crises. “Even larger increases in non-commodity exports (trade openness has grown markedly) have led, in many cases, to a more diversified export structure, arguably, making these economies more flexible to withstand commodity price shocks. “Several countries in South America (Argentina, Brazil and Uruguay) have diversified away from commodities, although the latter still account for 60 per cent of their total exports of goods and services. This diversification has not taken place in the case of the heavy metal or energy exporters (Chile, Colombia, Ecuador, Peru and Venezuela.)”

The IMF concluded by saying that the Latin American region has not progressed much from the 1970s in terms of its dependence on commodity exports. “In sum, Latin America remains, on average, as exposed to commodities-related risk as four decades ago , making it vulnerable to a sharp decline in commodity prices. This is not the case for energy and metal exporters, which are today particularly vulnerable to a global slowdown, given their higher overall commodity dependence and their greater concentration in commodities, heightened by their exposure to commodities that are more sensitive to the global economic cycle.”

North American outlook
In its global outlook, the report described the US recovery as having “lost steam.” “This reflects both temporary factors and weaker than anticipated private consumption resulting from persistent fragilities in household balance sheets and stubbornly high unemployment. Policies need to strike the right balance between supporting the recovery in the near-term and restoring public debt sustainability over the medium-term.”
According to the report, the US economy slowed sharply in the first half 2011, expanding at an annual rate of one per cent, well below the 2.8 per cent registered in the second half of 2010. The report described Canada—the next economy in North America—as having slowed. “The Canadian economy is slowing, largely reflecting close linkages to the US. Policy changes are less pressing than in the US, given relatively strong financial and sovereign balance sheets and still elevated commodity prices.”

Implications for the Caribbean
The IMF report suggest that the region’s more open economies will continue to benefit from high commodity prices and easy external finance. “However, souring global conditions are having uneven implications for the region. Countries with strong links to the advanced economies, such as Mexico, Central America and the Caribbean, are expected to be harder hit by the recent slowdown.” It added that while Mexico is more dependent on US manufacturing and trade, Central America and the Caribbean are more dependent on remittances and tourism flows. It advised that given the small or closed output gaps in most countries, policies must quickly shift towards rebuilding policy buffers. “On the fiscal side, efforts should centre on reducing public debt, which is up by an average of more than five per cent of GDP since the 2008 global crisis.”


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