WASHINGTON, CMC—The Inter-American Development Bank (IDB) said Monday 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.
In a new macroeconomic report, the IDB said the economies grew 2.1 percent in 2023, exceeding initial estimates of one percent. 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”.
Eric Parrado, chief economist and general manager of the IDB’s Research Department, said that 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 that countries improve access to quality education, encourage slight firm formalization and growth, facilitate access to global markets for 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 after the COVID-19 crisis. Timely and robust interest rate increases by central banks decreased the region’s median annual inflation rate 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 cautions that escalating conflicts in the Middle East could increase commodity price volatility, and the speed of US interest rate reduction remains uncertain.
The report states that due to 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 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 a context of low growth, high debt-to-GDP ratios, substantial fiscal gaps, and weather-related shocks, the report recommends swiftly closing fiscal gaps to ensure sustainability and complement monetary policy. Policy options analyzed in the report include effective fiscal rules, strategic taxation decisions, and more efficient public spending.
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