The Inter-American Development Bank (IDB) recently stated that Latin America and the Caribbean’s economies demonstrated unexpected strength in 2023 and can enact reforms that capitalize on untapped economic opportunities.
The Washington-based financial institution said the improved economic performance allows the region to play a pivotal role in the global economic landscape.
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In a new macroeconomic report, the IDB said that the economies grew 2.1 percent in 2023, exceeding initial estimates of one percent. It said regional growth is forecast to slow to 1.6 percent in 2024 before rebounding to two percent next year.
“Growth expectations for 2024 are influenced by several factors, including lower global growth, high-interest rates, stable commodity prices, gradual fiscal consolidation, and relatively high debt levels,” according to the report titled “Ready for Take-Off? Building on Macroeconomic Stability for Growth”.
Chief economist and general manager of the Research Department of the IDB, Eric Parrado, said while countries in Latin America and the Caribbean are ready to contribute to the world’s demand in critical sectors such as food security, renewable energy, and climate change, “they need to advance reforms to increase productivity, enhance economic resilience, and promote sustainable growth”.
Among policies to boost productivity, the report recommends countries improve access to quality education, encourage small firm formalization and growth, facilitate access to global markets to all firms, take advantage of the reorganization of global value chain changes to attract Foreign Direct Investment (FDI) flows and promote a more competitive credit market for firms.
According to the report, macroeconomic stabilization policies in the region were well carried out in the aftermath of the COVID-19 crisis. Timely and robust interest rate increases by central banks made the annual inflation rate in the region decrease to 3.8 percent in December 2023. Primary fiscal deficits were brought down to balance as COVID-19 spending was curtailed.
Challenges on the fiscal and monetary fronts remain. After peaking at 9.8 percent in July 2022, interest rates have begun a declining path, but it may be difficult to do so swiftly as capital outflows may follow -particularly if interest rates in the United States remain high- and exchange rate depreciation could conspire against declining inflation. Also, overall fiscal deficits are still relatively large due to higher interest payments requiring further fiscal adjustments.
The report also cautioned that escalating conflicts in the Middle East could increase commodity price volatility and the speed of United States interest rates reduction remains uncertain.
The report stated as a result of fiscal adjustment efforts, the average country in the region experienced an 11-percentage-point decrease in the debt-to-GDP ratio from 2020 to 2023, although debt reduction decelerated in 2023.
The baseline scenario foresees a three percent reduction in the average country’s debt-to-GDP ratio, reaching 56 percent by 2026. In a scenario of intensified shocks, the average public debt could reach 62 percent by 2026.
The report also predicts that El Niño, the weather phenomenon characterized by elevated sea temperatures, could result in a three percent increase in debt as a percentage of gross domestic product (GDP) over three years, compared to the 60 percent baseline scenario.
The 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 the context of low growth, high debt-to-GDP ratios, substantial fiscal gaps, and weather-related shocks, the report recommends a swift closure of fiscal gaps for sustainability and to complement monetary policy. Policy options analyzed in the report include effective fiscal rules, strategic taxation decisions, and more efficient public spending. CMC
