Macroeconomic Outlook forLatin AmericaAdriana ArreazaDirector of Macroeconomic Studies

CAF

Infrastructure ForumMelbourneMay, 2017

Latin America is coming out of a prolonged economic slowdown, supported by improved global conditions

2

GDP growth for Latin America and OECD (year on year % change)

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

2010 2011 2012 2013 2014 2015 2016 2017p 2018p 2019pNote: Weighted average for Argentina, Brazil, Chile, Colombia Mexico, Peru, Uruguay and Venezuela. The fiscal stimulus scenario is operationalized by a surge in GDP growth in the US, compared to our baseline scenario. For the protectionist scenario we assume targeted measures by the US against Mexico and China. Source: OECD/CAF/ECLAC simulations based on a Global Bayesian VAR model.

Source: OECD/ECLAC/CAF, Latin American Economic Outlook 2018

The balance of risks is tilted to the downside,

but there is a non-negligible upside

2

External Risks

Note: Weighted average for Argentina, Brazil, Chile, Colombia Mexico, Peru, Uruguay and Venezuela. The fiscal stimulus scenario is operationalized by a surge in GDP growth in the US, compared to our baseline scenario. For the protectionist scenario we assume targeted measures by the US against Mexico and China. Source: OECD/CAF/ECLAC simulations based on a Global Bayesian VAR model.

Source: OECD/ECLAC/CAF, Latin American Economic Outlook 2018

GDP growth in Latin American economies with different scenarios (%)

• Policy uncertainty in the US (fiscal stimulus, protectionism)

• Larger than expected deceleration in China (medium term)

• Financial volatility

• Geopolitical risks-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

2010 2011 2012 2013 2014 2015 2016 2017p 2018p 2019p

Protectionism Fiscal Stimulus in the US Baseline

The balance of risks is tilted to the downside

2

External Risks Idiosyncratic Risks

• Policy uncertainty in the US (fiscal stimulus, protectionism)

• Larger than expected deceleration in China (medium term)

• Financial volatility

• Geopolitical risks

• Uncertainty due to electoral processes

• Delays in large infrastructure projects

Americas Latinas: uneven cyclical positions…

2

Illustration of the position of selected Latin America economies in the business cycle (2017, deviation from trend using HP filter)

Argentina

The BahamasBarbados

Bolivia

Brasil

ChileColombia

Costa RicaRepública Dominicana

Ecuador

El SalvadorGuatemala

Honduras

México

NicaraguaPanamáParaguay

Perú

Trinidad y Tobago

Uruguay

Venezuela

Source: OECD/CAF/ECLAC based on IMF (2017), CAF, and OECD (to be adjusted with OECD Global Economic Outlook, June).

Limited space for demand stimuli, particularly fiscal, withheterogeneity

2

Gross public debt and primary fiscal balance in selected Latin American and Caribbean countries, 2016 (Central government, %GDP)

Note: Estimates for 2016. LAC is a simple average for the 17 economies used. For Mexico primary balance refers to Non-Financial Public Sector, for Peru to General Government.Source: OECD/CAF/ECLAC based on ELAC 2017 Fiscal Panorama of Latin America and the Caribbean 2017: Mobilizing resources to finance sustainable development.

2

Sources of income per capita differences, 2014

Labor productivity in Latin American countries, Australia, China and South Korea

-100

-80

-60

-40

-20

0

20

Panel A. Sources of income per capita differences, 2014

Utilisation gap Productivity Gap

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1954

1958

1962

1966

1970

1974

1978

1982

1986

1990

1994

1998

2002

2006

2010

2014

Panel B. Labour productivity in Latin American countries, Australia, China and South Korea

Australia ChinaKorea Latin America

Notes: Panel A is: Compared to the simple average of the 17 OECD countries with the highest GDP per capita in 2014 at 2011 PPPs (in mil. 2011US$). The sum of the percentage difference in labour resource utilisation and labour productivity does not add up exactly to the GDP per capita difference since the decomposition is multiplicative. Labour productivity is measured as GDP per employee. Labour resource utilisation is measured as employment as a share of population. Panel B: Percentage productivity of the United States, 5 year moving average, PPP.

Source: OECD/ECLAC/CAF based on Penn World Tables PWT 9.0, 2016 and “The Conference Board” (2016), The Conference Board Total Economy Database.

-100

-80

-60

-40

-20

0

20

Panel A. Sources of income per capita differences, 2014

Utilisation gap Productivity Gap

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1954

1958

1962

1966

1970

1974

1978

1982

1986

1990

1994

1998

2002

2006

2010

2014

Panel B. Labour productivity in Latin American countries, Australia, China and South Korea

Australia ChinaKorea Latin America

Can t́ just blame it on the cycle: potential output growth is dragged downbylowerproductivity

Closing the logistics gap is key to increase productivity

6

Logistics performance gap to the best performing OECD country

Note: The Logistics Performance Index (LPI) has a scale of 1 to 5, where 5 represents the best logistics performance. The gap refers to the difference for each logistics component with the best-performing OECD country, which is Finland for the LPI and for customs, logistics quality, and tracking and tracing; Germany for infrastructure and timeliness; the Netherlands for international shipments. Latin America and the Caribbean (LAC) consists of 19 countries. LAC7 refers to the seven largest economies as measured by GDP: Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela (Bol. Rep. of). The OECD countries with the lowest GDP per capita in 1990 were Chile, Czech Republic, Estonia, Hungary, Korea, Mexico, Poland, Slovak Republic, Slovenia and Turkey.Source: OECD/CAF/ECLAC (2014), Latin American Economic outlook

Investment shortfall to close the infrastructure gap of about 2% of GDP: need more private sector engagement

6

Investment in infrastructure in Latin America (millions, USD)

Source: CAF, Ideal 2014

10