The Cayman Islands and territories in the Caribbean area are still going to experience hard times, according to a new report by the International Monetary Fund. Photo: maps.google.com

The report, Regional Economic Update—Latin America and the Caribbean, October 2013 issued by the fund, growth in Latin America and the Caribbean (LAC) remains in low gear, reflecting a less supportive external environment and, in some cases, domestic supply-side constraints.

The region’s output is projected to expand by 2.3 to 4 per cent in 2013, with domestic demand remaining the main driver. The growth rate is expected to edge up to 3 per cent in 2014 as external demand strengthens gradually, but will remain below the average growth rate of the last decade, said the IMF report on Wednesday this week.

In countries with low inflation and anchored inflation expectations, monetary policy should be the first line of defense if downside risks to the baseline materialise.

“Fiscal consolidation remains appropriate for countries with tight capacity constraints or limited fiscal space; it will also help constrain the continued widening of current account deficits. Safeguarding financial stability is a key priority in an environment of tighter global financial conditions and increased asset price volatility,” the report noted.

According to Alejandro Werner, Director of the Western Hemisphere Department of the International Monetary Fund, for many Latin American and Caribbean economies, clouds have appeared on the economic horizon. As the global growth momentum shifts from the emerging to the advanced economies, the strength of domestic economic policies will be crucial for how countries can cope with the combination of lower commodity prices and tighter external financing conditions.

Lower commodity prices have already started to affect the region’s commodity exporters. Even though prices remain high by historical standards, countries can no longer count on the tailwind from ever-improving terms of trade, which had propelled economic activity over the past decade.

For territories with financial centres, hard times will not spare them either because, longer-term US interest rates have started to rise, with knock-on effects for emerging markets.

Across all of the financially integrated economies of Latin America, bond yields have increased, equity prices have fallen, and currencies have depreciated since May, when the US Fed first mentioned the possibility of tapering its bond purchases later this year. Financial conditions remain fairly benign for now, but the strong tailwind from ultra-low external financing costs may also be gone for good.

“Against this backdrop, economic activity across the region has continued to moderate. As detailed in our latest Regional Economic Update, we project growth this year at 2.75 per cent, the lowest rate in 10 years, with the exception of 2009.

For 2014, we are projecting a pick-up to about 3 per cent, but even this rate remains well below the average annual growth of 4 per cent observed between 2003 and 2012. The outlook holds particular risks and uncertainties for those economies in the region that depend heavily on commodity exports and are less well placed to benefit from higher US growth,” the report noted.

Strong domestic policies are key

With less supportive external conditions in the offing, the strength of domestic economic policies will be crucial for how individual countries can cope, the report noted.

“Fortunately, many of the larger economies in the region are in a good position to weather more challenging times, as policy frameworks and economic fundamentals have been strengthened over the past decade. Banking systems are generally healthy and well-funded; external debt is moderate; official foreign exchange reserves are sizable; and flexible exchange rates are acting as a useful buffer for shocks, while allowing countries to adjust monetary policy within their inflation targeting frameworks,” it stated.