Bogotá — Latin America faces a series of structural challenges that limit its growth and set it apart from the trends in other regions. Therefore, the expected mediocre performance in 2023 should not be viewed as a temporary issue but rather as “a long-term problem,” stated the Chief Economist of the World Bank (WB) for the region, William Maloney.
The question of why the continent is performing poorly is crucial. In the short term, it has something to do with the performance of advanced economies, China’s performance, interest rates in advanced countries, and commodity prices. However, it is also a long-term problem.
Nevertheless, effective macroeconomic management has allowed the region to navigate through adverse conditions, and this is the second global crisis in which the situation in Latin America did not become worse than the rest of the markets, he affirmed.
Maloney’s statements coincide with the release on Wednesday of a new WB estimate for Latin America and the Caribbean’s GDP growth in 2023, with the economy expected to grow by 2%, above the initial projection of 1.4%.
“It’s roughly the same pace we experienced in the 2010s when we grew by 2.2%, while the rest of the world grew by 3.1%. So, we have to see it as a long-term problem... there are deeper challenges that we have to face,” he said.
He hinted that the multilateral organization will likely continue adjusting growth estimates for the economy of Latin America and the Caribbean this year amid the changing global macroeconomic landscape.
He particularly warned about the effects of the El Niño phenomenon, which is already impacting some countries in the region with droughts, affecting infrastructure and agriculture: “What is known is that El Niño will probably be serious and probably will have negative impacts.”
In fact, a reduction of 0.8 percentage points in growth is anticipated for countries located in tropical and humid areas. Meanwhile, for countries in temperate and arid areas, a reduction of 0.7 percentage points is expected.
According to the World Meteorological Organization (WMO), there is a 90% probability that the El Niño phenomenon will continue during the second half of 2023.
In its latest report, the WB urges governments to implement a series of measures, including the use of predictive tools to anticipate weather patterns, facilitating better resource allocation to strengthen water infrastructure and reinforce vulnerable structures.
“Likewise, authorities should also focus on improving resilience through long-term strategies, weighing short-term recovery against sustainable preparedness for future El Niño occurrences,” according to the document.
Better growth requires urgent actions
According to William Maloney, the actions that Latin America and the Caribbean need to take to stimulate growth will take time: “We are approaching a traditional growth rate, which is much lower than what East Asia or even Europe is experiencing. The interesting thing is that South Asia is also growing; it is 27% or 28% above what it was before the pandemic. So, we have some significant structural problems preventing our growth,” he emphasized.
In contrast, GDP in Latin America is only 11% higher than its pre-pandemic level in 2019.
Among the deep structural challenges, he mentioned deficiencies in infrastructure, low educational levels, fragile investment in research and development, logistical problems, and a lack of international business competition.
“Our companies do not face much competition from abroad, and at the same time, they are not projecting themselves much in the international market. We will have to have much higher levels of trade,” he said, referring to the need to better leverage free trade agreements and proximity to larger markets.
Asked about the factors that contributed to an upward adjustment of the growth estimate for Latin America and the Caribbean, he specifically mentioned a better performance of the U.S. economy compared to what was expected six months ago.
The other decisive factor “is that we have had some success in terms of fighting inflation. So, for example, we see that in Brazil and Chile, interest rates are decreasing. Both of these factors help stimulate the economies.”
In fact, the economist praised the region’s macroeconomic management in combating rising living costs, highlighting that inflation estimates for 2023 are lower than those of the OECD.
“Our inflation this year would be 4.4%, while in the OECD, it would reach 6.4%. The reason is obviously that central banks in countries like Brazil and Chile started (raising interest rates) very early, a whole year ahead of the Federal Reserve (Fed) in Washington. The reason, obviously, is that we have that history we don’t want to repeat (of uncontrolled inflation),” he commented.
Latin America’s growth by markets In the interview, the Chief Economist at the World Bank referred to the different growth estimates for Latin America and the Caribbean, with Guyana expected to have the best performance, with a GDP expansion of 29% in 2023, 38.2% in 2024, and 15.2% in 2025.
Among the largest economies in the region, Panama is expected to have the best performance, with an estimated growth of 6.3% in 2023.
“Panama has a well-diversified economy with several sources of income. We are currently dealing with El Niño-related issues in the Canal. So that could bring more problems in the future,” said Maloney.
In Central America, Costa Rica stands out with an estimated growth of 4.2% for this year. In North America, Mexico would grow by 3.2% in 2023.
In South America, after Guyana, the highest growth would be registered by Paraguay (4.8%), followed by Brazil (2.6%), Suriname (2%), Bolivia (1.9%), Colombia (1.5%), Uruguay (1.5%), and Peru (0.8%).
In contrast, Argentina’s economy would contract by -2.5%, Chile’s by -0.4%, and there are no available data for Venezuela.
As for nearshoring in Latin America, William Maloney expressed optimism about Mexico, recognizing that “it has a lot of potential with all the nearshoring effort” and emphasized that “there is a lot of interest from Chinese investors and others around the world.”
However, he considered that there are “structural problems to take advantage of that tomorrow,” specifically referring to logistics challenges and the quality of ports, which “are not very strong.”
“There are opportunities to further connect with the U.S. economy, but there must be determination and a vision. Clear plans on how to remove the obstacles that exist, and so far, I haven’t seen that,” he emphasized.
And although he highlighted that Central America also has opportunities to benefit from nearshoring, with concrete examples like Costa Rica, he once again referred to infrastructure and stability issues in some sectors.
In South America, he pointed out that there is investment interest in northern Colombia, so the country “has to think about how to attract it.” Currently, the initiative proposed by the Colombian ambassador to the U.S. to bring some American companies is a good start, he said.
He explained that while there is optimism about what happened between 2021 and 2022 with foreign investment in Latin America when there was a significant rebound, if you analyze the total flows from last year, “they are almost the same as they were a decade ago.”
“So, we are not experiencing an investment explosion. But we also need to disaggregate a bit by region. The fact is that Mexico is indeed receiving more investment and more interest, while investment in the rest of Latin America has been declining over the past 10 years. And we need to ask ourselves why. There are several reasons,” he pointed out.
The outlook for 2024 Maloney indicated that expectations for 2024 will depend on various factors, such as the evolution of monetary policy in advanced countries, China’s performance amid global slowdown, and the fight against inflation in Europe.
“All these aspects have direct impacts through our exports and our investment, but also on the rise in commodity prices that several countries have felt,” he said.
He emphasized that China is key because it absorbs many regional exports, especially in primary resources, and is also a significant source of investment in infrastructure, mining, among other areas: “When China grows more slowly, we do too.”
“So, to the extent that the Chinese economy becomes more complicated, there are fewer resources to invest,” he concluded.
Furthermore, investment decisions for the next year may also be influenced by political noise in different markets amid political transitions: “Any national or international investment wants confidence in the rules of the game for 20 years. Investments are substantial, and the return period is long. So, any disruption in the system that implies changes in the rules of the game in any country, be it mine or Latin America, will have the same impact of reducing interest in the country.”
