Growth in Latin America is set to pick up to about 3½ percent in 2013, broadly in line with potential. The region continues to benefit from favorable external financing conditions and relatively high commodity prices, but these tailwinds are unlikely to last forever. The key challenges for policymakers today are preserving macroeconomic and financial stability, and building strong foundations for sustained growth in the future. More prudent fiscal policy would help ease pressure on capacity constraints, mitigate the widening of current account deficits, and prepare the economies better to deal with adverse external shocks. Exchange rate flexibility and prudential measures should continue to be used to discourage speculative capital flows. Sustaining strong output growth will require structural reforms to raise productivity growth.

Contents

Executive Summary

1.  The United States, Canada, and the World: Outlook and Policy Challenges

  Global Backdrop: Receding Risks, Three-Speed Recovery   The United States: Modest Growth, Bright Spots Appearing   Canada: Moderating Growth Amid Currency Strength 2. Outlook and Policy Challenges for Latin America and the Caribbean   Overview   Policy Challenges    Financially Integrated Economies    Other Commodity Exporters    Central America, Panama, and the Dominican Republic    The Caribbean 3. Is the Growth Momentum in Latin America Sustainable?   What Factors Drove the Recent Strong Growth Performance?   Is the Recent Strong Performance Sustainable?   Policy Implications   Annex 3.1. Data and Methodology 4. Latin America’s Fiscal and External Strength: How Dependent Is It on External Conditions?   Introduction   A Decade of Falling Public and External Debt, 2003–12   External Factors and Debt Sustainability   Conclusions   Annex 4.1. Global Variables under Alternative Scenarios 5. Is Latin America Saving Its Terms-of-Trade Windfall? A Metric   Introduction   The Terms-of-Trade Windfall—a Historical Perspective   A Measure of Windfall Saving   Concluding Remarks   Annex 5.1 References New Publications from the Western Hemisphere Department Boxes 1.1 U.S. Household Balance Sheets After Five Years of Repair 1.2 Canadian and Mexican Exports to the United States: A Tale of Two Countries 2.1 Taking Stock of European Banks’ Deleveraging in Latin America 2.2 Foreign Ownership of Local Currency Securities and Exchange Rate Flexibility 2.3 Sustaining Progress in Banking Regulation and Supervision in Latin America 2.4 The Caribbean: In Search of Lost Competitiveness 4.1 Optimal Sovereign Debt Levels: The Information in Sovereign Spreads Tables 2.1 Western Hemisphere: Main Economic Indicators 2.2 Western Hemisphere: Main Fiscal Indicators 2.3 Western Hemisphere: Selected Economic and Social Indicators 2.4 Macroprudential (MaP) and Capital Flow Management (CFM) Measures in Latin America