Weaker world growth will affect Caribbean economies – IMF

The director of the International Monetary Fund’s (IMF) Western Hemisphere Department Nicolas Eyzaguirre is warning that weaker world growth will affect economic activity in Latin America and the Caribbean.



Eyzaguirre said that the Washington-based financial institution has “sharply marked down” its forecast for world growth, “and it now expects a mild recession in the euro area.”



The Fund expects the world economy to grow by just 3.25 per cent in 2012, three-quarter percentage points lower than its September forecasts, Eyzaguirre said.



“As for Latin America and the Caribbean, a weaker world economy and softer commodity prices translate into a gloomier outlook,” he said.



“We've marked down our growth forecasts for the region as a whole by about 0.5 per cent for this year. The overall markdown for Latin America is a bit smaller than for the globe, because much of the region's economies still enjoy good domestic momentum and stable financial systems,” he added.



Moreover, Eyzaguirre said commodity prices remain “well above their long-term trend,” despite the recent decline, stating that external financing remains “relatively cheap and readily available”.



He said that while global uncertainties have “sparked volatility in capital inflows, we have yet to observe a reversal.



“But to be sure, there is a lot of variation in our forecast revisions within the region,” said the IMF director, cautioning that growth in the Caribbean “will continue to lag, held back by weak tourism flows from advanced countries and high public debt.



“But let me emphasize – the outlook for the region hinges on policy action in Europe. Policymakers there need to intensify their efforts to contain the crisis, and put an end to the rise in sovereign spreads and the cutback in bank lending that threaten the global economy in 2012,” he said.



Eyzaguirre said these efforts should be supported by “appropriate” policy actions elsewhere in the advanced and emerging world.



Otherwise, he warned that world growth in 2012 could be some two percentage points lower, “dragging down commodity prices and heightening financial strains.



“For our region, this would mean more sluggish exports, worse terms of trade, and tighter borrowing conditions,” he said.

Eyzaguirre, therefore, urged regional policymakers to take action on three fronts.



He is recommending that they rebuild fiscal buffers, to maintain fiscal credibility and prepare for a further deterioration in global conditions and is also urging policymakers to be ready to ease monetary policy.



“Where strong institutions and low inflation would permit it, watch financial systems closely for signs of stress, “Eyzaguirre said, also recommending that regional policymakers maintain flexible exchange rates.



CMC