Bloomberg Línea — Latin America as a whole is experiencing an economic slowdown, with low growth forecasts for 2023, after a broad and considerable economic rebound in 2021 and 2022, after the onslaught of the Covid-19 crisis, according to the Organization for Economic Cooperation and Development (OECD).
The OECD echoes a number of international organizations and points out that the region will face weak growth that poses risks for the fiscal sustainability of the countries, with public debt that remains historically high and the interest burden that has been increasing.
“Latin America is returning to the low growth path it had before Covid-19. A sharp economic slowdown is expected by 2023, greater than in the rest of the world,” write Jens Arnold, Aida Caldera, Priscilla Fialho, Paula Garda, Alberto González Pandiella, Michael Koelle, Alessandro Maravalle, Adolfo Rodriguez-Vargas and Elena Vidal of the OECD Economics Department.
Thus, the OECD forecasts growth of 1.5% for the region this year, by weighting the forecasts of seven countries in the region, but without departing from the figures that other multilateral organizations have offered.
In early June, the World Bank (WB) forecast 1.5% growth for the region this year, while the Economic Commission for Latin America and the Caribbean (ECLAC) projected 1.2% and the International Monetary Fund (IMF) 1.6%.
What factors influence Latin America’s weak economic growth?
For the authors of the article ‘Latin America: Fiscal stability and equity, a shared path to progress’, there are several reasons to affirm that the region will return to the “low growth path of before the pandemic”.
In this list they include external demand, which has cooled, and domestic consumption hit by the loss of household purchasing power as a result of high inflation and the tightening of financial conditions, among other factors.
But they also point out that the already bleak outlook is accompanied by high uncertainty and unusually high domestic and external risks.
“Lower-than-expected global growth, especially in the United States and China, accompanied by more persistent inflation than expected, which implies a more restrictive monetary policy in the world and in the region, represent clear downside risks,” they explained.
And outside the financial area, the frequency of severe weather events has increased due to climate change. The same is true of the social tensions that were exacerbated by the pandemic.
Inflation is easing
Although prices are no longer advancing at the same rate as in 2022 and in some economies have begun to ease, inflation continues to appear as a downside risk.
This reduction is attributed to the “rapid and strong” rise in monetary policy rates and lower global fuel and food prices.
However, the pace of price declines still does not appear to be sufficient. For example, recently the president of the Central Reserve Bank of Peru (BCR), Julio Velarde, stated when presenting its Quarterly Inflation Report, that the country will return to the inflation target range at the beginning of 2024, and not at the end of 2023 as expected.
According to Velarde, Peruvian inflation at the end of 2023 would reach 3.3% and 2.4% at the end of 2024. Among the reasons are some cited by the OECD team, which relate climatic events and natural phenomena. Velarde pointed out that there were events to face in the first quarter of the year, such as the rainy season and avian flu, which affected the price of chicken and eggs.
The challenge of taking care of, and strengthening, public finances
The OECD’s economic department team explained that “the fiscal situation remains fragile in the region,” although fiscal deficits declined at the close of 2022, but with public debt remaining high.
“Pursuing fiscal consolidation is crucial to restore market confidence and reduce debt servicing costs while emphasizing social spending to support the poor and address growing needs in education, health and social protection,” the report states.
For governments to achieve these objectives, they will need to mobilize revenues in a progressive, pro-growth and equitable manner, also indicating that social support transfer programs in a context of high inflation should be temporary and targeted to the most vulnerable and reduce incentives for informality.
