According to the new macroeconomic report, the region grew by 2.1% in 2023, exceeding initial estimates of 1%.
The economies of Latin America and the Caribbean demonstrated unexpected strength in 2023 and can implement reforms to capitalize on untapped economic opportunities, allowing the region to play a fundamental role in the global economic landscape, according to the new macroeconomic report from the Inter-American Bank Development (IDB).
According to the report, the region grew 2.1% in 2023, exceeding initial estimates of 1%. That growth is expected to slow to 1.6% in 2024 and then rebound to 2% in 2025.
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 report 'Ready to take off? Take advantage of macroeconomic stability for growth'.
"While Latin American and Caribbean countries are prepared to contribute to global demand in critical sectors such as food security, renewable energy and climate change, they need to advance reforms to increase productivity, improve economic resilience and promote growth sustainable," said Eric Parrado, chief economist and general manager of the IDB Research Department.
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.
According to the report, the region's macroeconomic stabilization policies were carried out correctly after the Covid-19 crisis. The timely and forceful increases in interest rates by central banks caused the region's average annual inflation to fall to 3.8% in December 2023. Primary fiscal deficits were balanced by reducing the spending generated by the Covid-19.
But challenges remain on the fiscal and monetary fronts. After peaking at 9.8% in July 2022, interest rates have begun a downward path, although it may be difficult for them to do so quickly as capital outflows could occur. This is especially true if interest rates in the United States remain high and the depreciation of the exchange rate conspires against reducing inflation. Furthermore, fiscal deficits generally remain relatively high due to higher interest payments, requiring further fiscal adjustments.
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.
Public debt and El Niño
As a result of fiscal adjustment efforts, countries in the region experienced an average decline of 11 percentage points in the debt-to-GDP ratio between 2020 and 2023, although debt reduction slowed in 2023 according to the report.
The reference scenario foresees an average reduction of 3% in the countries' debt/GDP ratio, reaching 56% in 2026. In a scenario of intensification of shocks, public debt could reach an average of 62% in 2026.
The report also predicts that El Niño, a meteorological phenomenon characterized by high sea temperatures, could lead to a 3% increase in debt as a percentage of GDP in three years compared to the reference scenario of 60%. This forecast highlights the importance of integrating public investment in adaptation and mitigation into the climate change agenda as a complementary policy option for countries.
In a context of low growth, high debt-to-GDP ratios, significant fiscal gaps and shocks caused by meteorological factors, the report recommends a rapid closing of fiscal gaps for the sake of sustainability and as a complement to monetary policy. Policy options analyzed in the report include effective fiscal rules, strategic tax decisions and more efficient public spending.
