Aggressive policies to contain global inflation and an increasingly fraught international environment are weighing heavily on the economic outlook for Latin America and the Caribbean, according to the International Monetary Fund, despite a slight upward revision on Friday to the region’s growth forecast.
A sharp slowdown this year from a post-pandemic rebound in 2022 reflects “the effect of tighter policies to contain inflation (…) and also an external environment that has been weakening this year,” said Rodrigo Valdés, director of the IMF’s Western Hemisphere department. It also stands in stark contrast to the Fund’s projections for other emerging regions.
The Washington-based multilateral lender projects that Latin America will expand by just 2.3% this year and next, down from 4.1% in 2022 and roughly half the pace of other developing economies, which are expected to grow about 4.5% on average.
“Long-term growth in the region has been low for a long time and continues to be low,” Valdés said at a press briefing in Marrakech, Morocco. “In the next several years, Latin America and the Caribbean is expected to expand only by 2.5%, similar to basically the pre-pandemic average.”
The IMF nevertheless raised its 2023 growth estimate for the region to 2.3% from 1.9% as it saw faster-than-expected growth in Mexico and Brazil.
The region’s largest economy is expected to expand by 3.1% this year, up from 2.9% in 2022. Although the IMF expects Brazilian growth to slow next year to 1.5%, Valdés praised the trajectory of economic policy-making in the country.
“We strongly support the commitment of the government with fiscal prudence. Differences on forecasts depend a bit on how fast one reform happens, the macro and other things. But the commitment to approve the fiscal [reforms] is mostly welcome,” the official said, although he warned against debt levels. “We will need further efforts,” he added.
“In terms of monetary policy for Brazil, we support fully the current stance and the gradual and very pragmatic and easing cycle” underway, Valdés said. The Brazilian central bank has cut its benchmark Selic rate from a high of 13.75% in July to 12.75%.
The IMF, meanwhile, warned Argentina on the prospect of dollarization, a measure touted by leading presidential candidate Javier Milei in the run up to general elections later this month.
“There are very important preconditions and policy steps that are needed for this to be successful,” Valdés said. “Dollarization is not a substitute to sound macroeconomic policies.“
The former Chilean finance minister said that while the Fund is respectful of any country’s policy choices, the right conditions have to be in place in order for a move as radical as ditching the national currency to be effective.
“We worry and we work so that we can ensure that the policy conditions for a transition to a new [foreign exchange] regime — and the conditions for an appropriate result when this new regime is working — they have to be in place,” Valdés said.