The annual meetings of the World Bank and International Monetary Fund wrapped up over the weekend in Marrakech, Morocco, under the shadow of spiraling violence in the Middle East and against the backdrop of a global economy wracked by debt as the threat of prolonged higher inflation and borrowing costs loomed large.
The gloomy prognosis weighed heavily on the outlook for the economies and markets of Latin America and the Caribbean, as many countries grapple with how to boost their anemic growth prospects.
Bond market turmoil
Last week’s meetings in Morocco coincided with a bout of extreme turmoil in bond markets as a continuing surge in global borrowing costs has led to a spike in financial market risk – a development that was front and center of discussions among finance ministers and central bank governors in Marrakech for the annual meetings.
The US government bond market had a tumultuous week, as higher-than-expected September inflation data and weak demand for a bond auction triggered a surge in 30-year yields.
The 30-year Treasury yield rose as much as 19 basis points last Thursday, its biggest increase since the market turmoil unleashed by the onset of the pandemic – chasing the multiyear highs reached the week prior, when 10-year yields neared 5%.
Fresh inflation data prompted markets to price in higher odds of another Fed interest-rate increase this year. In Marrakech, a growing chorus of experts, including the governor of Brazil’s central bank, Roberto Campos, warned that borrowing costs are likely to remain stubbornly high as a result of an unprecedented debt burden in advanced economies – a fact which has already seen US Treasury yields soar.
“You have the fiscal situation of some advanced economies that has worsened, and now you are starting to see the effect on debt, on the long yields of interest rates in some of these countries,” Campos told LatinFinance.
Chile’s finance minsiter Mario Marcel was quick to draw a distinction in terms of funding costs and access to capital between investment grade sovereigns and their lower-rated counterparts in the region.
“In Latin America at this point, investment grade countries include Uruguay, Mexico, Chile and a couple more. And then most of the others are below investment grade. So we access different markets for funding,” Marcel told LatinFinance.
“It is important to make the distinction between countries that have investment grade compared to others that do not, because the access and the cost of funding is completely different.”
Plans shelved
The market turbulence has nevertheless complicated the policy stance for many countries in Latin America, leading some, such as Colombia, to hold off lowering domestic interest rates even as inflation has eased; or elsewhere, to hold off on issuing sustainable bonds, as is the case for Brazil.
Brazil’s finance minister Fernando Haddad told LatinFinance that “a very large increase in US long-term interest rates” has forced the ministry to think twice about issuing a sustainable bond in the near term.
Aside from anxiety over recent bond market turbulence – and broader fears over the fallout of the sharp increase in interest rates over the past two years – the list of possible trouble spots on the minds of policy-makers in Marrakesh was long: an escalation of the war in the Middle East; a global recession as the impact of higher borrowing costs comes into focus; a financial crash as investor confidence collapses; an emerging market debt crisis; and a catastrophic climate event.
The global economy has been struggling to bounce back after a series of shocks in recent years – the Covid pandemic, the war in Ukraine and the highest inflation many countries have experienced in 40 years. Growth over the coming years is expected to average 3% annually, compared with almost 4% before the pandemic.
“We are doing all we can to get things right, but the shocks keep coming,” Barbados’ finance minister Ryan Straughn told LatinFinance.
For the region, the shocks in the wake of the pandemic – local, regional and global – have been relentless. They have come in the form of climate events, such as drought in Argentina and Uruguay, fire in Chile and flooding in Ecuador and Peru, rising food and fuel prices caused by wars in Ukraine and now the Middle East, pressure from higher interest rates and a sharply slowing China.
Complicated policy stance
Countries, whether small Caribbean islands or regional giants Brazil and Mexico, have been adopting policies and programs they hope will help put their economies on a firmer footing.
Uruguay announced a novel arrangement with the World Bank for $350 million loan linked to climate action and Colombia wants to follow suit. Meanwhile, Barbados is working on a climate change debt swap that could be finished in early 2024. Jamaica has a new agreement with several multilateral institutions to help it generate public-private partnerships.
Despite faltering efforts to tackle climate change at the global level, climate bonds are nevertheless fast emerging as a mechanism of choice for issuers and investors – with evidence aplenty at the meetings in Morocco. The World Bank, for instance, structured a new sustainability-linked loan for Uruguay featuring a “pause clause” that will allow the country to stop principal and interest payments in the case of major natural disasters.
Against a challenging global financial backdrop, multilateral institutions meanwhile redoubled their own cooperation efforts: ten institutions – including the Inter-American Development Bank, New Development Bank and World Bank – announced at the annual meetings a plan to join forces to better address the “polycrisis affecting human and economic development at an unprecedented scale.”
Growth challenged
Yet, even as countries try to insulate themselves, there is no denying that Latin America and the Caribbean, as a region, is struggling to grow.
The World Bank and IMF have dour forecasts for the region’s expansion. The Bank estimates output with grow by 2% this year, while the Fund pegs it at 2.3%.
This compares to global economic growth which the IMF sees slowing from 3.5% last year to 3% this year and 2.9% next year and an average expected growth rate of 4.5% for other emerging markets.
“Long-term growth in the region has been low for a long time and continues to be low,” said Rodrigo Valdés, director of the IMF’s Western Hemisphere department. “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.”
Felipe Jaramillo, the World Bank’s Vice President for Latin America and the Caribbean, agreed, saying that “growing at 2% means it will have the slowest growth (of a region) and poverty, social tensions and exclusion will persist.”
Indian Finance Minister Nirmala Sitharaman, speaking on behalf of the G20, said growth would contribute to reversing the trend of weaker investment flows.
“Investment flows are not going to be influenced only by interest rates remaining high. There needs to be a very clear signal towards growth momentum, wanting growth to push and spread as a positive contagion,” she said.