How the OECD sees LatAm

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Monday, November 28, 2016

Five out of six Latin American countries included in the OECD Global Economic Outlook are expected to improve their GDP growth performance in 2016-17. Only Costa Rica is expected to present a slight drop in 2017, yet its 4.0% projected GDP growth would still be the fastest among the Latin American contingent.

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Argentina's economy is expected rebound from a 1.7% contraction this year to growth of 2.9% in 2017 and 3.4% in 2018.

The disinflation process "will increase real wages and thus boost consumption," while strong capital inflows and improved business confidence should drive a pickup in investment, the OECD said in its report.

"Exports will benefit from the depreciation of the peso and stronger growth of trading partners, especially Brazil."

While turning around the falling GDP trend of 2016, the Brazilian economy is expected to see slower progress than Argentina's. It is expected to post 0% growth in 2017, and only gradually return to expansion territory in 2018 with a 1.2% increase.

"The pace of the recovery will be limited by high corporate sector debt and significant spare capacity in some sectors," the report said.

Brazil's inflation is projected to fall below 6% in 2017. Structural reforms – particularly a new fiscal rule in combination with a planned reform of pensions and social benefits – should strengthen fiscal sustainability.

Driven mainly by exports, Chile's growth "is expected to increase to 2.5% in 2017 from 1.7%. The performance of China and other trading partners will affect the forecast.

"On the upside, a recovery of the price of copper would boost confidence and investment, and increase government revenues. New measures to boost competition and productivity could improve the business climate more than assumed. Risks for inflation remain closely tied to the evolution of the exchange rate and oil prices," the report said.

Meanwhile, the approval of Colombia's tax reform "is crucial to raise revenues, boost growth and deal with social challenges."

"The economic slowdown and the fall in oil prices have cut revenues, while peso depreciation has pushed up debt and interest spending. Revenues are projected to decrease further in the medium term as temporary taxes expire."

The OECD also says a fiscal reform is urgent in Costa Rica.

"There has been some progress on the tax reform, with 6 out of 13 projects of the reform package approved. However, two important bills to replace the sales tax with a full-fledged VAT system and a reform of the income tax are still under discussion in the legislative assembly. It is urgent to approve the tax reform."

Costa Rica's GDP growth is expected to suffer a slight slowdown in 2017 to 4.0% from 4.1%.

Rising inflation and uncertainty in the wake of the result of US elections has led to tightening monetary policy in Mexico.

"The economy will continue to be supported by a competitive exchange rate, solid credit expansion, and continuing improvements in the labor market aided by the government's structural reforms and the low inflation environment. On the other hand, declining oil production and public spending cuts weigh on the economy."

In its conclusions, the OECD warns that the global economy remains in a low-growth trap, where "fiscal, structural, trade policies need to be interwoven for gains."