5 Economic Challenges Facing Latin America In 2023

The slowdown in global economic growth expected this year will have a negative impact on the region, which still has major issues to resolve

Inflación
January 06, 2023 | 04:01 PM

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Bloomberg Línea — Latin America tends to be a region highly dependent on economic cycles, and the global slowdown in economic growth expected in 2023 may have a negative impact on this part of the world.

To make matters worse, the region’s countries are not exempt from challenges: in addition to the region’s historical problems, such as poverty reduction, in 2022 the fight against inflation will be added.

On the other hand, in some Latin American countries the political climate is somewhat convulsed, a fact that further complicates the business and investment climate.

Bloomberg Linea has compiled a list of the main economic challenges for the region for the year ahead.

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1. Slower economic growth

The International Monetary Fund (IMF) recently predicted that during 2023 one-third of the global economy will enter into recession.

“This year in particular, Latin American countries will face the challenge of living with a global scenario of lower growth, which is always bad news for commodities, even though raw material prices are at high levels,” said Martin Polo, strategist at Argentine broker Cohen Aliados Financieros.

“That is the big challenge: to contain a situation in which the global economy is going to have less traction, with the risk of recession. What happened in 2022 and will probably continue in 2023 is a rate hike to contain high inflation,” Polo stressed.

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In line with this view, the president of Patente de Valores S.A., Santiago López Alfaro, said: “A recession is never good for a region that has an economy that can be considered ‘old’, as is the case of Latin America. In 2013, 2014 and 2015 we saw that here the fall of commodities hit hard”.

In addition, López Alfaro recalled that the fall that was expected for commodities last year was somewhat “dirty” due to the war in Ukraine. “We don’t know how much they would have fallen if this conflict had not broken out,” he remarked.

A key factor for the region will be what happens with China: if the Asian giant pulls, Latin America will benefit. To cite an example, practically all analyses of what may happen to the Chilean economy and the Chilean peso place the Chinese factor on the table: if the restrictions on mobility caused by the coronavirus are lifted, China will demand copper and this will benefit Chile. If the opposite happens, the South American country will suffer.

The same can be replicated when thinking about soybeans on the Argentine side and there would be an example for every country in the region.

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A recent report by the Economic Commission for Latin America and the Caribbean (ECLAC) states that in 2022, Latin America presented a higher than expected growth rate during the first half of the year and a deceleration during the second half of the year. But it warns that the deceleration observed in the second half of 2022 will continue in 2023, which allows forecasting that next year’s growth rate will be significantly lower than that of 2022.

“After growing by 3.7% in 2022, the deceleration would deepen, with a growth of 1.3% in 2023″, says the ECLAC report, with respect to Latin America and the Caribbean.

2. (Dis) inflation

Many of the countries in Latin America reached their highest inflation in several decades in 2022, although in most territories the problem has begun to wane. However, this needs to be shored up and this may require further monetary tightening, which would affect the countries’ economies. For example, the central bank of Chile recognizes that the country’s economy will contract in 2023, due to the need to clean up monetary imbalances arising from the pandemic.

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“Although inflation is not expected to accelerate, it will continue to be high during 2023, conditioning monetary policy actions, especially with regard to the management of monetary policy rates in the region,” states the ECLAC report.

The document adds: “All this puts pressure on macroeconomic policy, which must reconcile the implementation of policies aimed both at achieving economic recovery based on investment and job creation and at controlling inflation and ensuring fiscal sustainability”.

The organization foresees that advanced economies will close 2023 with inflation at 4.4%, while for emerging and developing economies the projection is 8.1%. “Although these rates are almost three and two points lower, respectively, than those of 2022, they are, in any case, well above the average rates of the decade prior to the pandemic (2010-2019), which were 2% in advanced economies and 5.1% in emerging and developing economies,” ECLAC warns.

It should be noted, however, that the inflation drama is by no means homogeneous in the region. While some countries are among those with the lowest price increases in the world (Panama, Bolivia and Ecuador), there are others that suffer annual inflation of around 100% (the case of Argentina) or well above that figure (the case of Venezuela).

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3. Poverty

ECLAC forecasts that by the end of 2022 poverty would have affected 32.1% of the Latin American population and extreme poverty 13.1%, i.e., a slight decrease in the level of poverty and a slight increase in extreme poverty with respect to 2021, due to the combined effects of economic growth, labor market dynamics and inflation.

These figures imply that an additional 15 million people will be in poverty relative to the pre-pandemic situation and that the number of people in extreme poverty would be 12 million, higher than that recorded in 2019.

“The projected levels of extreme poverty in 2022 represent a setback of a quarter of a century for the region,” underscores an ECLAC report on the subject.

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Specifically, around 82 million Latin Americans would have ended 2022 in the most extreme poverty, while in 2019 there were 70 million people in that situation.

4. Political turmoil

Many Latin American countries are going through moments of high political polarization:

  • In Brazil, the main economy of the region, the bolsonarista sector was on the roads demonstrating against the triumph of Lula, the current president.
  • In December 2022, Pedro Castillo, former president of Peru, was removed from office and imprisoned, and his vice-president Diana Boluarte took his place. There were marches all over the country that left fatal victims.
  • In Bolivia, Justice recently imprisoned Luis Fernando Camacho, governor of the richest region of the country (Santa Cruz de la Sierra) and main opponent of Luis Arce’s government. He is accused of having organized a “coup d’état” against former president Evo Morales in 2019.
  • In El Salvador, President Nayib Bukele’s war against gangs continues. There are those who denounce excesses on the part of the State.
  • In Chile, polarization and the dispute over constitutional reform continue.
  • Ecuador had strikes and conflict in the streets during June 13 and June 30, 2022 and political tension escalates as sectional elections approach.
  • The President of the region’s largest economy, Mexico, Andrés Manuel López Obrador, faced strong protests and increasing polarization in 2022.
  • In 2023 there will be presidential elections in: Guatemala, Argentina and Paraguay.

“The political and social issue is an ever-present challenge in the region and politics is currently unstable, with countries quite effervescent,” according to Martin Polo.

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Returning to a previous point, Polo considered that most countries in the region will have lower inflation than in 2022, which brings some tranquility in this context of political effervescence.

5. Job recovery

The number of employed persons in the region experienced a historic contraction during the second quarter of 2020 (13.7% compared to the fourth quarter of 2019).

As economies opened up and production processes normalized, the number of employed persons increased in the region, with very significant quarter-on-quarter increases in the third and fourth quarters of 2020, and with more moderate growth in 2021.

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According to ECLAC, the number of employed persons continued to grow in the first half of 2022, although the growth rate slowed significantly in the first quarter of the year (0.3% compared to the level in the fourth quarter of 2021), and then accelerated in the second quarter (2.3%).

If we take into account the data recorded at the end of the first half of 2022 (the most recent data published by ECLAC), employment levels are similar to the pre-pandemic period.

Regarding what may happen in 2023, ECLAC anticipates that the evolution of the labor market in the region will be “highly conditioned” by the “performance of the economic activity and by the evolution of inflation”.

The international organization estimates that “the slowdown that has been evident since the second half of 2022, and that will continue in 2023, casting doubts on the possibility of continuing to see improvements in labor figures”.