Executive Summary
This time was different: Latin America’s post-pandemic paso doble with inflation and the exchange rate. Reactive monetary policies, supportive commodity prices and increased investor confidence have helped keep inflation and exchange rate volatility relatively in check. The region has become more resilient, thanks to lessons learned from previous crises, including reducing its reliance on foreign currency financing, improving financial regulation and supervision and maintaining the independence of central banks. For 2024, we expect a gradual economic recovery, with growth converging to around +2%, as central banks will proceed more cautiously and take a more gradual approach to further rate cuts, followed by +2.2% in 2025. Brazil's economic growth is set to slow down to +1.7% due to a less promising harvest and lower commodity prices, while in Mexico, recovering agricultural production and more modest growth in industrial production will temper economic growth to +2.0%. Nevertheless, most of Latin America will reap the benefits of the commitment to stabilizing inflation, avoiding the usual hard landing. Insolvency risk remains proportionally higher in Latin America, according to our sector risk ratings which might undermine confidence in the region's businesses and penalize them among foreign suppliers, increasing working capital requirements of Latin American companies. Allowing 30 extra days of payment on imports would free up around USD120bn in working capital, equivalent to the 2023 GDP of Ecuador, Latin America’s seventh largest economy, or 2% of the region’s GDP.
Mastering the rhythm. Latin America can be at the forefront of the new green industrial deal and the big global trade reshuffling. Latin America is a key producer of critical raw materials, accounting for more than one-third of total global production of silver, copper and lithium. In fact, the “lithium triangle” of Bolivia, Argentina and Chile collectively accounts for more than half of global lithium reserves. This puts the region in pole position to benefit from the global race to secure the supply of critical raw materials to accelerate the green transition. However, rising resource nationalism and technological difficulties, as well as local opposition, could somewhat undermine these growth prospects. At the same time, the global shift towards friend-shoring and near-shoring is already benefiting countries such as Mexico, which has emerged as one of the big winners, especially in the auto sector. To circumvent US tariffs and restrictions, Chinese auto players have increasingly invested in Mexico: in 2023, the value of Chinese auto parts manufactured in Mexico and exported to the US reached USD1.1bn (+14.9% from 2022 and +52.1% from 2021). While Canada’s share in US exports has stagnated and China’s has declined sharply, Mexico’s share has steadily risen from 12.2% in 2013 to 15.1% in 2023. But to fully capitalize on the opportunities from friend-shoring and unlock its growth potential, the entire Latin American region will need to address the low levels of intra-regional trade and improve trade infrastructure and logistics.
It takes two to tango. Managing political, social, fiscal and financial credibility remains key.
• Social risks remain contained, but the digital divide remains vast. Social unrest declined in 2023 and the first quarter of 2024 suggests that this trend could continue. However, asymmetric developments on digitization and preparedness for artificial intelligence could be a challenge for stability in the long-term. Digital inequality is acute, with only a quarter of the population in rural areas having access to the internet (compared to 75% in urban areas).
• Climate change challenges the region's growth prospects. Estimates suggest Latin America could face losses equivalent to 11% of GDP by 2050, with Argentina affected the most by flooding (projected damages equivalent to 2.1% of GDP), Chile by droughts (7.4%) and Brazil by lost productivity due to heatwaves (6%). Since the socioeconomic impacts of climate change are disproportionately distributed, the most vulnerable populations with the least resources tend to face the greatest challenges. In this context, adaptation strategies must be tailored locally but coordinated on a global scale to mitigate the most severe consequences effectively. The use of artificial intelligence could also help mitigate the effects of extreme weather events.
• Fiscal and financial risks are non-negligible either. Fiscal slippages remain likely as Brazil and Colombia are still on our fiscal policy watchlist. Mexico can enter it depending on the fiscal approach adopted by the new administration. At the same time, the increase in US bond yields is causing a drawback in foreign portfolio flows in Latin America. In this context, as in the past, being able to maintain investor confidence will be crucial to keep fiscal and financial risks in check. Brazilian non-financial corporates could feel the pinch, given their 2024 financing needs, while Mexican peers will see their financing needs peak in 2027.
• Demographic change is also a cause for concern given that the pension systems are largely unfit for purpose. Latin America’s fiscal risks could be amplified by demographic change. The number of people aged 65 and older is set to increase to 142mn in 2050, from 63mn today, and account for almost 20% of the total population. Consequently, the old-age-dependency-ratio (OADR) will sharply rise, too, from today’s 15.8% to 32.6%; in Chile, it will reach 46.2%. But Latin America’s pension systems are largely unfit for purpose, suffering from low coverage ratios and inadequate private savings, among others. In this context, policymakers should use all instruments – from direct subsidies to tax breaks – to mobilize savings (equivalent to half of those of Asia, i.e. 217% of GDP). This would yield a triple dividend: alleviating the fiscal burden of aging by reducing old-age poverty, providing another pool of capital for the green and digital transitions and mitigating the high inequality in the region.