Culled—-iMFdirect

Following a rough start at the beginning of the year, both external and domestic conditions in Latin America and the Caribbean have improved. But the outlook for the region is still uncertain.

Commodity prices have recovered since their February 2016 trough, but they are still expected to remain low for the foreseeable future. This has been accompanied by a brake—or even a reversal—in the large exchange rate depreciations in some of the largest economies in the region.

Most recently, the U.K. referendum on Brexit led to a sharp increase in volatility in global financial markets, especially in equity prices and exchange rates. While direct trade exposures of countries in Latin America and the Caribbean to the U.K are small (on average about 1 percent of total exports), the region is exposed to the broader slowdown in the rest of the world—through trade and financial linkages—and fickle investor sentiment. At the same time, however, a more gradual pace of monetary normalization in the U.S., with compressed U.S. term premium, should help contain funding cost pressures for both the public and private sector.

Taking all this into account, the growth outlook for the region for 2016 and 2017 has been revised up modestly—by 0.1 percentage points both years relative to the April 2016 forecasts (see table). Following the small contraction of activity in the region in 2015, we expect economic activity to contract by 0.4 percent this year (slightly better than the -0.5 percent envisaged in the April 2016 projections), followed by a modest rebound in growth in 2017 to 1.6 percent.

But frequent bouts of increased market volatility, even if short-lived, are a constant reminder that benign market conditions can flip overnight. Such global volatility could also feed into corporate sector vulnerabilities, given increased debt burdens and lower profitability.

In Transition—Outlook for Latin America and the Caribbean