WASHINGTON, CMC—The International Monetary Fund (IMF) said Friday that while growing generally faster than the rest of the region, Caribbean economies are expected to slow in 2024 and 2025 due to deceleration in tourism.
However, it also noted that growth in the Caribbean, excluding Guyana, is slowing as the post-pandemic tourism rebound fades after reaching pre-pandemic levels.
“By contrast, growth in the CAPDR (Central America, Panama, and the Dominican Republic) region is expected to remain relatively robust, reflecting strong private consumption buoyed by sustained remittances inflows,” the Washington-based financial institution said in its “Regional Economic Outlook for the Western Hemisphere” released here.
Under the theme “Rebalancing Policies and Pressing on with Reforms,” the IMF said inflation in Latin America and the Caribbean (LAC) is projected to gradually decline from 4.7 percent at the end of 2023 to 4.3 and 3.3 percent by the end of 2024 and 2025, respectively.
“While inflation is already within the target range in most LAC economies, it will take time for it to reach the target—in most cases, until 2026—partly because of the lagged effect of tight policies, the gradual process of global disinflation, and the delayed normalization of administered prices in some countries.
“Inflation is also projected to moderate in the Caribbean, from 8.9 percent in 2023 to 6.1 percent by 2025, while in CAPDR it is expected to remain low, although rising somewhat from its 2.7 percent level in 2023 to 3.3 percent by 2025,” the IMF said.
Regarding downside risks to growth, the IMF said upside risks to inflation risks to near-term growth are generally tilted to the downside, especially in the Caribbean, where downside risks largely dominate because of the possibility of climate-related shocks and weaker tourism demand.
“Throughout the region, external downside risks to growth relate mainly to tighter-than-expected US monetary policy and greater commodity price volatility. Policy uncertainty and social tensions are key domestic downside risks as these could hinder the implementation of economic policies and reforms.
“On the upside, stronger trading partner growth and a more benign global environment could boost exports and capital inflows. A pick-up in investment—reflecting greater interest in green minerals and energy and nearshoring projects—is also an upside risk to growth”.
The IMF said that risks to inflation are mostly tilted to the upside, although with heterogeneity across subregions. They stem from persistent services inflation, still-tight labor markets, and the risk of fiscal slippages in some countries.
Also, the relative price of core goods vis-à-vis services has yet to converge to its pre-pandemic trend, increasing the risk of further inflationary pressures if the adjustment occurs through rising service prices.
The Washington-based financial institution said pronounced US dollar appreciation, higher commodity prices, and an escalation of global trade tensions are key external upside risks to inflation in the region.
The IMF said that despite resilience to recent shocks, the medium-term growth outlook for LAC remains lackluster. Output is projected to expand at about 2.5 percent per year over the next five years, in line with the region’s low historical average and low compared to other emerging market economies.
It said average income per capita in the region would rise only marginally, implying limited progress in reducing the income gap with advanced economies.
The IMF noted that operating near potential following a strong post-pandemic rebound, growth in LAC has moderated, from four percent in 2022 to 2.6 percent in 2023, and at a similar pace in early 2024, as most economies are now operating near potential, although converging from different cyclical positions.
It said that despite growing global geopolitical tensions and increasing harmful trade distortion, trade interventions by systemic economies since 2017, including measures affecting LAC economies, the region’s structure of trade flows, and trade policies, have not materially changed.
The United States remains the leading export destination, with a broadly stable share of about half of all LAC exports. Meanwhile, China’s share has grown from about 10 percent pre-2017 to about 15 percent in recent years, exceeding the expected effect of China’s growing size in the world economy and its demand for commodities.
However, this increase is not a new phenomenon but a continuation of a long-term trend of increasing intensity of the region’s trade with China,” the IMF said.
It noted that despite the rise of harmful trade interventions by systemic economies until recently, comparable policy actions by LAC countries had been limited, also contributing to a lower prevalence of trade-distortive policies in LAC relative to other emerging markets or advanced economies.
Geopolitical tensions do not appear to have affected capital flows to the region, with the United States and advanced European countries continuing to be the main counterparts in foreign direct investment (FDI), the dominant form of capital flows to the region in recent years— although data on China’s investments in the area are incomplete.
“Overall, the region’s external positions have generally strengthened (after deteriorating in the aftermath of the pandemic), with current account deficits declining to below one percent of GDP (gross domestic product) and international reserves remaining at comfortable levels in most countries,” the IMF added.
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