While most of the major Latin American economies performed better than expected in 2022, S&P Global Ratings predicts a shift towards low-trend growth by year-end and into 2023, “as more challenging external dynamics weaken exports and waning confidence takes a toll on domestic demand.”
That is the assessment of the leading economist of the credit rating agency’s research division for the region, Elijah Oliveros-Rosen. “We now project Latin America (six major economies) to expand by 0.9 percent in 2023, compared with our previous 1.8 percent assumption,” writes Mr. Oliveros-Rosen, for whom the uncertainty over the trajectory of the US economy in the first half of next year is a major concern.
For 2022, S&P has revised its GDP growth forecast for Latin America up to 2.8 percent, from 2.0 percent previously. This result was mainly driven by resilient growth in domestic demand and an export boost, especially in food and energy-related commodities.
By the end of the year, however, the scenario will be different. By then, the effects of the monetary tightening policies around the region will have kicked in. Moreover, central banks in the region’s major economies will not lower benchmark interest rates until the second quarter of 2023.
And even when rates start to fall, it will be at a more gradual pace than usual because of the US tightening.
Also, inflation is expected to remain high for some time as higher energy and food prices are passed through to core prices, especially those in the services sectors.
“We believe (YoY) inflation already peaked in Brazil (Q2 2022); will peak in the current quarter (Q3 2022) in Chile, Mexico, and Peru; in Colombia, it will reach its highest point in Q4 2022; and in Argentina, it will peak in the first quarter of 2023,” says Mr. Oliveros-Rosen.
While developed countries had enough fiscal space to delay the withdrawal of stimulus measures as much as possible and make an effort to put the supply-demand relationship back on track post-pandemic, emerging economies were forced to ratchet up interest rates to counter soaring prices.
Low investment and a fragile fiscal situation have become constant structural challenges for Latin America over the last decade, which led the region to grow much less than other emerging markets and the rest of the world.
Both domestic demand and exports are expected to fall below 2022 levels next year. “One notable exception is Colombian thermal coal, which has been surging, arguably partly resulting from concerns over energy shortages in Europe. Colombian coal exports to Europe have doubled since the onset of the Russia-Ukraine crisis,” notes Mr. Oliveros-Rosen.
Only in 2024 would Latin America head back towards consistent growth, with S&P projecting 2.2 percent expansion.