The economies of Latin America and the Caribbean demonstrated greater strength than expected in 2023. Now, with the relative macroeconomic stability they enjoy, they can undertake reforms to take advantage of untapped economic opportunities, according to the macroeconomic report of the Inter-American Development Bank (IDB) published this Monday after the organization's assembly. “The combination of stronger fiscal positions, robust financial regulation and supervision, and reaffirmed central bank strength paints an optimistic picture of macroeconomic stability in the region. This has reached a possible turning point if reforms are approved to take advantage of the opportunities of a favorable context,” the document indicates.
The IDB's chief economist, Eric Parrado, jokes that unlike in recent years, there has been no scare that has forced the report to be changed at the last minute. The pandemic in 2020, the Russian invasion of Ukraine in 2022 and the financial turbulence of US banks in 2023 changed the economic landscape. The IDB maintained a year ago that Latin American banks were well capitalized to avoid contagion and time has proven them right.
In fact, the Latin American economy performed better than expected last year. “The expectations when 2023 began were to have growth in the region of around 1%. And finally we finished at 2.1 or 2.2%, much better than expected. It is good news that it was somehow led by the large countries, Brazil and Mexico, which grew around 3%,” Parrado tells EL PAÍS.
The IDB's chief economist attributes this to several reasons, both global and within the countries themselves. Among the global ones, the United States economy, the locomotive of the region, grew by 2.5% in 2023, above what the forecasts indicated, which even flirted with recession. Furthermore, the price of raw materials remained relatively high, benefiting exporting countries, although with great volatility. And financing costs, despite being high, were relatively contained, without increases in risk premiums. What rose are the United States rates, the risk-free rate, but if they begin to fall, even a little later than expected, that should benefit the region.
Regarding local factors, countries increased spending a lot to support families and companies in the pandemic, but unlike previous crises, they were withdrawing that impulse and primary deficits (that is, not counting interest) are being reduced to zero in some countries. Fiscal deficits remain relatively high due to higher interest payments, requiring further adjustments.
Debt has also been reduced. Countries in the region experienced an average decrease of 11 percentage points in the debt/GDP ratio between 2020 and 2023, although the reduction in debt slowed in 2023. The reference scenario foresees an average reduction of three points in the debt/GDP ratio. GDP of the countries, reaching 56% in 2026. In an adverse scenario, public debt could reach an average of 62% in 2026.
In addition, monetary policy was activated to contain inflation. “The central banks of the region did their work in a timely manner, long before developed countries and in a much more significant way,” says Parrado, who explains that inflation has dropped from a maximum of 9.9% to around 3%. %. To this he adds that “the region's banking system was part of the solution and not the problem.” “Most banking systems are better capitalized, they have greater liquidity and that obviously gives them resilience in terms of being able to face these shocks externals that we have had,” he explains.
Economic slowdown
The IDB expects growth to slow in 20224 to 1.6%, then rebound to 2% in 2025, in line with the region's current potential growth. “2% is a very low growth rate in the medium and long term for the needs we have,” says Parrado, who recalls that the IDB assembly in Punta Cana has referred precisely to the triple challenge that growing social needs imply. , the scarcity of fiscal resources and the low growth that prevents those resources from increasing. “We have to think about how to face these challenges in the long term, with measures and reforms that can help increase potential growth. That is, I would say that today there are green shoots that we are doing better than expected, but we need that much firmer inflection point with the medium and long-term reforms,” says Parrado.
Growth expectations for 2024 are influenced by several factors, such as lower global growth, high interest rates, stable commodity prices, gradual fiscal consolidation and relatively high debt levels, according to the IDB report, “Ready to take off? Take advantage of macroeconomic stability for growth”.
Among policies to boost productivity, the report recommends that countries improve access to quality education, encourage the formalization and growth of small businesses, facilitate access to global markets for all companies, take advantage of the reorganization and changes in global value chains to attract foreign direct investment flows and promote a more competitive credit market for the corporate sector.
The report also warns that growing conflicts in the Middle East could increase commodity price volatility and that the pace of interest rate cuts in the United States remains uncertain.
In a context of low, high growth, significant fiscal gaps and shocks caused by meteorological factors (such as the El Niño phenomenon and others), the report recommends a rapid closing of fiscal gaps as a complement to monetary policy. Policy options analyzed in the report include effective fiscal rules, strategic tax decisions and more efficient public spending.
Parrado indicates that with geopolitical conflicts, global value chains are being transformed and Brazil, Mexico, Costa Rica and some other countries in the region are receiving a lot of foreign direct investment.
Parrado avoids commenting on the specific economic impact that the result of the presidential elections in Mexico may have, but admits that “electoral processes must be looked at with a magnifying glass because they always produce a certain amount of uncertainty in some way.” “The idea is to have a longer-term vision that avoids the short-term political cycle. That is the message that we have always tried to insist, in the sense that the structural reforms are long-lasting and that reforms are not carried out every four or five years, depending on the political party that is governing the country, but rather that national consensus be reached.” on issues of infrastructure, pensions, education and others.
Regarding Argentina, where the IDB has participated in a recent mission in which it has met with analysts and authorities to understand the details of the fiscal consolidation plan, Parrado says: “In the end there is a conviction that fiscal consolidation was necessary. Obviously, there is a need to have a fiscal anchor that was necessary in Argentina.” He believes that the adjustment will not only reduce the fiscal deficit, but will also reduce inflation, which he considers a first step in stabilizing the economy. At the same time, he sees compensation necessary for the most vulnerable segments, admitting that obviously how to focus these efforts is already the result of a political discussion.