International Monetary Fund

September 19, 2013

The Global and Regional

Context for the Caribbean:

Outlook and Challenges

Alejandro Werner Western Hemisphere Department

Views expressed are those of the speaker alone and

should not be reported as representing the official

position of the International Monetary Fund.

The global recovery remains tepid…

World Real GDP Growth¹ (Percent, year-on-year, July WEO update)

-1

0

1

2

3

4

5

6

2000 2004 2008 2012 2014

Sources: IMF, World Economic Outlook; and IMF staff calculations.

Note:¹ GDP(PPP) weighted average

-5

-4

-3

-2

-1

0

1

2

3

4

2008 2010 2012 2014

Oct. 2008 WEO

Sep. 2011 WEO

July 2013 WEO update

World Real GDP1

(Percent deviation from pre-crisis

trend, 2008 = 0)

… as a pick-up in activity in some

advanced economies …

90

92

94

96

98

100

102

104

106

2008 2009 2010 2011 2012 2013

US

Japan

Euro area

UK

Real GDP (2008Q1 = 100)

Sources: Bloomberg LP; and IMF staff calculations.

… is partly offset by a slowdown in

emerging markets. Real GDP Growth (Percent, year-on-year)

Sources: Bloomberg LP; and IMF staff calculations.

-2

1

4

7

10

13

2010 2011 2012 2013

Brazil China

India Russia

South Africa

Global activity is expected to

strengthen only moderately in 2014.

The U.S. economy should see higher growth, as

fiscal headwinds ease

The euro area is crawling out of recession, with

activity remaining very subdued

China’s growth is expected to stabilize at a lower

rate, reflecting both cyclical and structural factors

Overall, downside risks to global growth are

somewhat more prominent

The LAC region is confronting a trio

of macroeconomic challenges

1. The golden decade of ever-improving

terms of trade is likely over …

Commodity Prices (Index, 2004=100)

Sources: IMF, World Economic Outlook; and IMF staff calculations.

50

100

150

200

250

300

350

400

2004 2006 2008 2010 2012 2014

Forecasts

… as China’s structural slowdown has

started weighing on commodity prices.

Sources: CEIC; and IMF, World Economic Outlook (July 2013 Update).

0

3

6

9

12

15

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

China: Real GDP growth (Percent, year-on-year)

2. External financial conditions

have turned less benign … EMBI and 10-year US Treasury Yield

(Basis points)

Source: Bloomberg LP.

0

1

2

3

4

200

250

300

350

400

450

Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13

EMBI Global US Treasury 10-year Yield (percent, RHS)

… as the Fed’s ‘taper talk’ has

prompted portfolio outflows from EMs.

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13

Bond flows Equity flows

Lehman Euro

Crisis I

Euro

Crisis II

LatAm-5: Mutual Fund Bond and Equity Flows, 2008-13 (US$ billions)

Sources: EPFR; and IMF staff calculations.

3. Several economies in the region

are facing supply bottlenecks …

Infrastructure Index vs. Income Level

Sources: Penn Table 7.1, IMF, World Economic Outlook; World Bank, World Development Indicators;

and IMF staff calculations.

KOR TWN

ISR PAN

CZE CHL THA

RUS CHN URY

MEX BRA

POL CRI

IDN

IND ARG PER

COL ROM

DOM

VEN

R² = 0.6719

2

3

4

5

6

7

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000

Infr

astr

uctu

re In

de

x

(7 =

be

st q

ua

lity)

PPP-adjusted Real GDP per capita (2005 I$)

… which foreshadow lower potential growth

in the absence of major new reforms ...

Latin America and the Caribbean: Real GDP Growth (Percent, year-on-year)

Source: IMF, World Economic Outlook (July 2013 Update).

Note: Averages are based on GDP (PPP) weights.

(WEO July

2013):

Avg. 2013-14

= 3.2

-3.5

-1.5

0.5

2.5

4.5

6.5

1980 1985 1990 1995 2000 2005 2010

Avg. 1980-89 = 2.1

Avg. 2003-12 = 4.1

Avg. 1990-02 = 2.7

Likely direction

of revisions

… while external deficits have

continued to rise ... Latin America and the Caribbean: Current Account Balance

(Percent of GDP)

Sources: IMF, World Economic Outlook (April 2013); and IMF staff calculations.

Note: Average for current account balance is based on GDP (market rates) weights; terms of trade are

GDP (PPP) weighted.

90

100

110

120

130

-5

-4

-3

-2

-1

0

1

2

3

1997 2002 2007 2012 2013

Current Account

Balance

Terms of Trade

(RHS)

… creating vulnerabilities as markets turn

less tolerant of large funding needs ...

CHN

SGP

TWN KOR

PHL

IND IDN

MYS THA

BRA

MEX

COL

CHL

PER

ISR

TUR

ZAF

POL

HUN

RUS

ROM

-16

-14

-12

-10

-8

-6

-4

-2

0

2

-10 -5 0 5 10 15 20 Exchange r

ate

change

sin

ce M

ay 8

(p

erc

ent)

External current account balance (percent of GDP, 2013H1)

Recent Exchange Rate Movements vs. Current Account Balance

Sources: Bloomberg LP; and IMF staff calculations.

These challenges are particularly acute in the

Caribbean, where growth remains subdued …

Real GDP Growth

(Percent change)

Source: IMF, World Economic Outlook (April 2013).

Note: Commodity exporters include Belize, Guyana, Suriname, and Trinidad and Tobago. Tourism-

dependent economies include Antigua and Barbuda, the Bahamas, Barbados, Dominica, Grenada, Jamaica,

St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines. Statistics shown are simple averages.

-5

-4

-3

-2

-1

0

1

2

3

4

5

2008 2009 2010 2011 2012 2013 2014

Tourism dependent Commodity exporters

Likely direction

of revisions

Tourist Arrivals

(Index, 2004 = 100)

Sources: Caribbean Tourism Organization; national authorities; and IMF staff calculations.

¹ECCU includes Antigua, Dominica, Grenada, St. Kitts and Nevis, St. Lucia, and St. Vincent and Grenadines.

… notably in some tourism-dependent countries who

have been facing soft US and European demand ...

80

90

100

110

120

130

140

150

2005 2007 2009 2011 2013

ECCU and Barbados¹ Bahamas and Belize

Jamaica Dominican Republic

… and long-standing competitiveness issues, as

apparent from estimated REER overvaluation ...

-20

0

20

40

60

-20

0

20

40

60

Macro balance 1/ External sustainability 2/ Purchasing power parity 3/

Perc

ent

Tourism-based Caribbean

Commodity-exporting Caribbean

Minimum - Maximum

Real Effective Exchange Rate (REER) Relative to Norm

Note: Above zero indicates overvaluation; below zero suggests undervaluation.

1/ REER adjustment required to bring current account balance in line with fundamentals.

2/ REER adjustment required to bring current account balance to sustainable level.

3/ Relative to Balassa-Samuelson prediction; average of 2007-09.

… which has given rise to persistent external

imbalances …

-250

-200

-150

-100

-50

0

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

Caribbean

Tourism-based Caribbean

Commodity-exporting Caribbean

Sources: IMF, World Economic Outlook; and IMF staff calculations.

-5

0

5

10

15

20

25

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

Capital transfers FDI Public borrowing Other

Current Account Financing (Average for tourism dependent countries,

percent of GDP)

Caribbean: Net Foreign Assets (Percent of GDP)

… that often can only be financed with

support from non-commercial sources.

0

1

2

3

4

5

6

BLZ

GT

M

HN

D

LC

A

SU

R

EC

U

BR

B

CR

I

PA

N

AR

G

UR

Y

SLV

PR

Y

AT

G

VC

T

BO

L

DO

M

GR

D

DM

A

KN

A

GU

Y

HT

I

JA

M

NIC

External Financing Provided by Venezuela to Beneficiary Countries

(Percent of GDP, 2011)

Country Average = 1.25 percent of GDP

Source: Country authorities; PDVSA; and IMF staff estimates.

General Government Primary Balance and Gross Debt

(Percent of GDP)

Source: IMF, World Economic Outlook (April 2013).

Note: Statistics shown are simple averages for the respective country groups.

High debt and weak growth have kept fiscal positions

in tourism-dependent economies under strain …

-4

-2

0

2

4

42

44

46

48

50

52

54

56

2008 2010 2012

Primary balance (right scale) Debt

Commodity Exporters

-4

-2

0

2

4

70

75

80

85

90

95

100

2008 2010 2012

Primary balance (right scale) Debt

Tourism-Dependent Economies

… and, in some cases, led to significant

financing pressures …

Central Government Financing Needs (Percent of GDP)

Source: IMF staff estimates.

Note: Data are presented on the government's fiscal year-basis and may not be strictly comparable across countries.

Data for St. Kitts and Nevis refer to the general government. Data for Guyana refer to the nonfinancial public sector.

0

5

10

15

GU

Y

SU

R

BLZ

TT

O

2013 2014

Commodity Exporters

0

5

10

15

20

25

30

GR

D

LC

A

BR

B

AT

G

JA

M

BH

S

DM

A

VC

T

KN

A

2013 2014

Tourism-Dependent Economies

Nonperforming Loans

(Percent of total loans)

2013 Q1

Sources: National authorities; and IMF staff calculations.

¹ECCU includes Antigua, Dominica, Grenada, St. Kitts and Nevis, St. Lucia, and St. Vincent and Grenadines.

… that increase the burden on financial systems

already struggling with high NPL ratios.

0

5

10

15

20

25

0

5

10

15

20

25

2008 2010 2012

ECCU¹ Jamaica Belize

A strong growth agenda is critical

for the Caribbean

Growth is essential to address fiscal, external,

and financial weaknesses

Measures to restore competitiveness would help

boost growth:

• Rein in cost pressures by reducing labor market

rigidities, addressing infrastructure bottlenecks,

and restraining public expenditure

• Improve the business environment to facilitate

trade and investment

• Strengthen laws and institutions to improve

governance, including in financial regulation and

supervision