Latin America and the Caribbean’s economies demonstrated unexpected strength in 2023 and can enact reforms that capitalize on untapped economic opportunities, allowing the region to play a pivotal role in the global economic landscape, according to the Inter-American Development Bank’s (IDB) new macroeconomic report.

The region grew 2.1% in 2023, exceeding initial estimates of 1%. Regional growth is forecast to slow to 1.6% in 2024 before rebounding to 2% in 2025.

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 “Ready for Take-Off? Building on Macroeconomic Stability for Growth”. 

“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,” said Eric Parrado, Chief Economist and General Manager of the Research Department of the IDB.

Among policies to boost productivity, the report recommends that countries improve access to quality education, encourage the formalization and growth of small firms, facilitate access to global markets for all firms, take advantage of the reorganization of global value chain changes to attract foreign direct investment 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 median annual inflation rate in the region decrease to 3.8% in December 2023. And primary fiscal deficits were brought down to balance as COVID-19 spending was curtailed.

Challenges in the fiscal and monetary fronts remain. After peaking at 9.8% 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 cautions that escalating conflicts in the Middle East could increase commodity price volatility and the speed of U.S. interest rate reduction remains uncertain.

Public debt and El Niño

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 report finds.

The baseline scenario foresees a 3% reduction in the average country's debt-to-GDP ratio, reaching 56% by 2026. In a scenario of intensified shocks, average public debt could reach 62% by 2026.

The report also predicts that El Niño, the weather phenomenon characterized by elevated sea temperatures, could result in a 3% increase in debt as a percentage of GDP over three years, compared to the 60% 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 a 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.