Latin America and the Caribbean will grow only 1% this year, according to estimates by the Inter-American Development Bank (IDB), which published its macroeconomic report this Sunday, the 19th, a document prepared before the crisis unleashed after the fall of the US Silicon Valley Bank.
In a press conference, the bank’s chief economist, Eric Parrado, acknowledged that the figure is “very low” and that it could even drop if the financial crisis spreads, although Latin America is “solvent and resilient.”
In Latin America and the Caribbean, “the banking system has been part of the solution and not the problem” and banks are “better capitalized, more liquid, with low delinquency rates and resilience to face shocks,” he explained.
What is being seen, he added, “are a couple of weeks of financial nervousness” and “a problem of confidence in some banks”, not something similar to what was experienced in 2008 and 2009 with the “subprime” mortgage crisis (from high risk).
Parrado’s message was in line with that of the IDB president, Ilan Goldfajn, who declared at a press conference prior to the start of the bank’s assembly —that is taking place in Panama City— that Latin America has a “very resilient” financial system.
And it is also in line with that of the IDB’s own report, which, despite having been prepared before these turbulent days, addresses the main potential risks in financial markets.
According to the report, in Latin America and the Caribbean, “financial markets remain resilient” and “seem well prepared to weather the next shocks,” as bank profitability is at pre-pandemic levels and adequacy ratios capital “remain above regulatory requirements.
IDB: 1% growth for Latam
With the title “Preparing the macroeconomic ground for renewed growth”, the document was presented this Sunday in Panama City, where the 63rd annual meeting of the IDB Board of Governors is being held, which concludes on Monday the 20th.
According to the entity’s forecasts, in 2023, the region will grow 1%, in 2024 1.9% and in 2025 2.3%. These figures are below the predictions of organizations such as the International Monetary Fund (IMF), which in its latest economic outlook report estimated that the region would grow 1.8% this year and 2.1% in 2024.
“For the development challenges of our countries it is very low and that is why we send the message that we have to make efforts on issues such as productivity to generate employment and growth,” said Parrado.
The poor growth in 2023 is due to lower global growth, higher interest rates, tight global monetary policy, gradual fiscal consolidation and existing high debt levels, the IDB said. In fact, he warned of “high uncertainty” and drew a negative scenario that could occur if three existing risks materialize.
On the one hand, immunity to COVID-19 remains relatively low in China and new strains can weaken the effectiveness of vaccines, posing a risk both for China and the rest of the world. Also worrying is a possible escalation of Russia’s war in Ukraine.
And finally, there is the possibility that the United States will perform worse economically, bringing lower growth, more unemployment and persistent inflation above 2% in the world’s largest economy.
The materialization of these risks could cause, warned the IDB, that the region decrease this year to 1.5%. In this negative scenario, Latin America and the Caribbean would also decrease half a point in 2024 and in 2025 they would recover by growing 2%.
IDB: inflation, a tough nut to crack
One of the great challenges of the region is to lower inflation, especially that referring to the price of food. According to Parrado, it will continue to decline this year until reaching the “inflation targets” in 2024.
For this, he added, it is “very important” that the central banks continue to make an effort and continue with their measures to contain inflation, including the rise in interest rates.
In Latin America and the Caribbean, inflation has been noticed above all in the price of food, which has risen 30% between February 2020 and December 2022, something that has a very direct influence on the increase in poverty and extreme poverty. Another of the main challenges for the economies of the region is the reduction of public debt.
“All the governments made a fairly large effort to alleviate the effects of COVID-19 and this had a strong impact on the economies,” Parrado said. For this reason, it is necessary to carry out “fiscal plans” that manage to reduce the debt.
In the report, the IDB spoke of the “urgent need” to implement policies aimed at adjusting fiscal accounts. Some of his advice: increase the efficiency of spending and tax collection, and improve fiscal institutions and the composition of debt.
Source: Larepublica
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