Latin America, Caribbean Face Post-Crisis Challenges

• Author: International Monetary Fund

In its Regional Economic Outlook for the region, issued on October 23 in Sao Paulo, Brazil, the IMF said countries that took on board the hard lessons of previous global crises were better prepared to deal with this one.

"The question, now that the worst of the storm is behind us, is how to adjust policies to the new reality of a more sluggish global economy and still provide conditions for growth and poverty alleviation," said Nicolás Eyzaguirre, director of the IMF's Western Hemisphere Department.

The regional growth forecast in 2009 as a whole is -2 ½ percent, mainly reflecting contractions earlier in the year. But many countries have already started to recover, and the region is expected to post moderate growth of about 3 percent in 2010.

Phased recovery shapes policy challenges

The timing and path of recovery will vary among the region's economies, depending on the nature of their international linkages, as well as their policy frameworks and track records, the IMF said. One key factor is the recent recovery of commodity prices-good news for the region's large commodity exporters, but not for the commodity importing countries.

For the purpose of analyzing the regional scene, the report divides countries into four analytical groups: 1) countries that are net exporters of commodities and have full access to financial markets, including Brazil, Chile, Colombia, Mexico and Peru; 2) other commodity exporters; 3) commodity importers with large tourism sectors, primarily in the Caribbean; and 4) other countries that are net importers of commodities, including many that rely on remittances from workers abroad.

The outlook for the financially integrated commodity exporting countries is stronger. These countries had the most room to ease monetary and fiscal policies this year; stimulus that is supporting the recovery. A key issue now will be timing and sequencing a withdrawal of such policies. In general, fiscal stimulus should be withdrawn before monetary stimulus, according to the IMF. In addition, some of these countries may be facing strong capital inflows, which could pose challenges. In such cases, the withdrawal of stimulus may need to advance even more quickly, starting on the fiscal side, while enhanced exchange rate flexibility will limit one-sided bets on domestic currencies.

The recovery will be lukewarm for...