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Latin America and the Caribbean

Subdued global trade, less supportive commodity markets, and domestic challenges curbed growth in 2013 in the Latin America and Caribbean region.  Real GDP grew by 2.5 percent in 2013, broadly unchanged from 2012, but sharply below preceding years.

Consistent with the weakness in global demand during the year, growth in regional merchandise exports was subdued, growing by 4.1 percent for the months January to November, compared with 7.6 percent over the same period in 2012.  In 2013, the prices of agriculture products, metals and precious metals (in U.S. dollars) fell 7.2, 5.5 and 16.9 percent, respectively.  Given the commodity intensity of the region’s exports, these price declines have severely dented the region’s value of exports, leading the regional current account deficit (as a share of GDP) to widen from 1.7 percent in 2012 to 2.6 percent in 2013.

Despite a sharp drop off in June 2013 on the prospect of QE tapering, gross capital flows to the region increased for 2013 totaling $178 billion, compared with $150 billion in 2012.  However, there was a significant decline in equity issues in the second half of the year.  With the sell-off in emerging market assets following expectations of QE tapering in May, key regional currencies depreciated, losing 3 to 13 percent of their values and have since remained below their May 2013 levels.  On the upside, the depreciated currencies have provided support to the recent strengthening of exports in some of the region's economies, notwithstanding softer commodity prices.

In addition to external challenges, domestic demand was also weak as growth moderated from cyclical highs.  At the regional level, private and government consumption growth fell from being well over 3 percent in 2012 to 2.6 percent and 2.2 percent, respectively.  This slowdown contributed to the dismal industrial production growth of a half percent for the first 10 months of 2013.

With conditions in the global economy expected to improve in 2014 and beyond, the regional economic outlook is positive, with growth strengthening steadily from 2.9 percent in 2014 to 3.7 percent in 2016.

Together with the expected increase in global trade, the region’s exports will grow from 4.0 percent in 2014 to 5.4 percent in 2016. The enhanced growth in exports will support GDP growth and improve current account balances.  On the other hand, the continued decline in commodity prices will reduce export revenues, implying less resources for consumption and investment, and also worsen trade and current account balances.

With QE tapering initiating in January 2014, global financing conditions is likely to tighten further as investors will demand higher interest rates on developing-country debts, slowing debt flows to the region.  Overall, total net capital flows will decline by 3.7 percent in 2014, on top of the 5.1 percent decline in 2013.  Weaker capital flows is likely to temper domestic demand and thus mitigate overall GDP growth.

The outlook for the region is subject to a number of downside risks.  Weaker than expected growth in the advanced countries, could affect the region’s growth prospects through a less than robust recovery in the region’s exports, tempering overall economic growth.   The outlook assumes a moderate decline in  commodity prices. Given China’s importance in global commodity markets, a sharper-than-expected slowdown in China could result in a protracted and more severe slump in commodity prices, thereby eroding regional export and government revenues, and potentially aggravating current account imbalances.

Lastly, prospects hinge on the continued incremental withdrawal of quantitative easing, along with the gradual increase in global interest rates.  Thus far markets sentiment towards the onset of tapering has been calm.  If, however in the future, markets reactions cause global interest rates to unexpectedly rise sharply, then capital flows to the region could be curtailed significantly, destabilizing current account balances, leading to disorderly depreciations of exchanges rates, and quite possibly, increasing imported inflation. These outcomes would compel local governments to tighten monetary policies and further reduce growth prospects.

Latin America and the Caribbean regional forecast
(annual percent change unless indicated otherwise)

Source: World Bank
Notes: e = estimate, f = forecast
* Unless otherwise indicated, regional aggregates are computed for low and middle-income countries in the region and do not include any of the region's high-income countries.
a. Growth rates over intervals are compound weighted averages; average growth contributions, ratios and deflators are calculated as simple averages of the annual weighted averages for the region.
b. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars.
c. Sub-region aggregate excludes Cuba and Grenada, for which data limitations prevent the forecasting of GDP components or Balance of Payments details.
d. Exports and imports of goods and non-factor services (GNFS).
e. South America: Argentina, Bolivia, Brazil, Colombia, Ecuador, Guyana, Paraguay, Peru, Venezuela.
f. Developing Central & North America: Costa Rica, Guatemala, Honduras, Mexico, Nicaragua, Panama, El Salvador.
g. Caribbean: Belize, Dominica, Dominican Republic, Haiti, Jamaica, St. Lucia, St. Vincent and the Grenadines, and Suriname.

Latin America and the Caribbean country forecasts
(annual percent change unless indicated otherwise)

Source: World Bank
Notes: e = estimate, f = forecast
World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in other Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any given moment in time.
Cuba, Grenada, St. Kitts and Nevis, are not forecast owing to data limitations.
* Published forecasts are for only low and middle-income countries in the region, hence no high-income countries are included.
a. GDP growth rates over intervals are compound average; current account balance shares are simple averages over the period.
b. GDP measured in constant 2010 U.S. dollars.

Latin America and the Caribbean net capital flows
US$ billions

Source: World Bank
Note: e = estimate; f = forecast

See the regional audio slideshow by the author.