05 Mar Latin America 2024 Outlook
By Amanda Perez & Alex Trueba
Following last year’s trend of tapering growth post 2022’s rebound from the pandemic, gross domestic product (GDP) for the region of Latin America is predicted to drop slightly from 2.2% in 2023 to 1.9% in 2024. Many of the same factors from 2023 will contribute to this year’s forecast, namely tight global financing conditions, social and political risks, global climate change, foreign investment, and nearshoring.
Still, tight monetary policy conditions have forced Latin American countries to make a choice: acquiesce to or diverge from maintaining high interest rates. Central banks in key economies such as Peru, Colombia, Chile, and Brazil have chosen the latter option and have begun slashing interest rates ahead of the Federal Reserve of the United States. While this may bolster short-term domestic growth, interest-rate differentials have begun applying downward pressure on the currencies of these countries, which consequentially has pushed import prices up. The persistence of these tight conditions in the US combined with a sharper-than-expected slowdown in China’s growth may also negatively impact countries in the region, primarily Mexico, that rely heavily on external demand.
In the wake of last year’s political instability brought about from the elections, crime and corruption have increased in the North Andean region. Despite the Colombian government’s attempts to make peace treaties with narco-terrorist organizations during the first year and a half of Gustavo Petro’s presidency, violence and criminality have remained steadfast, costing the country billions of dollars. Likewise, Ecuador has experienced high levels of violence caused by narco-criminal gangs as international narcotics groups from Colombia and Mexico have linked up with local criminal organizations, imposing massive security challenges. The nation also experienced a hard blow to its democracy as presidential candidate Fernando Villavicencio was assassinated last year before the election.
Latin America is entering another politically intensive year as elections in six countries – Venezuela (TBD), El Salvador (February), the Dominican Republic (May), Panama (May), Mexico (June), and Uruguay (October) – are slated to take place. Sentiments for a free election in Venezuela were timidly optimistic last year following the Barbados Agreement which would, among other things, allow all parties to select their candidates for the presidential election. However, the Venezuelan Supreme Court ruled on January 26, 2024, that the democratic opposition primary winner María Corina Machado is now banned from holding office. In Panama, former President Ricardo Martinelli (2009-2014) is making a push for reelection, despite a February Supreme Court ruling which disqualified him from participating. Last year, Martinelli was convicted of money laundering and sentenced to over 10 years in prison. The former President has received political asylum from Nicaragua and continues to deny any wrongdoing. Recent polls show he still leads the race despite this.
Meanwhile in El Salvador, despite the country’s constitution previously prohibiting presidential incumbents from re-election to a consecutive term, current President Nayib Bukele ran again this year. In September of 2021, the Supreme Court ruled that re-election would be permissible if the president leaves the post for six months. Bukele was then granted a leave of absence in 2023 following that decision and was thus allowed to run and win the election again. Many contributed the success of this affair to Bukele’s authoritarian governance style, which has greatly improved the security situation in the country, gaining him immense popularity. Another unprecedented election will be taking place in Mexico as the country will undergo the biggest election in its history, which is most likely to result in the country’s first-ever female president, former Mexico City mayor Claudia Sheinbaum from the current president’s political party the MORENA group. This presidency would align more with the current US Biden administration in terms of trade, strengthening the economic relationship between the two countries.
Amidst this political climate, El Niño is forecasted to affect Central and South America, raising sea temperatures in the Pacific Ocean, and triggering extreme weather, with positive and negative consequences varying across the region. El Niño has already brought heavy rainfall to Peru and Ecuador, producing floods and landslides which have caused damages to both the infrastructure and agricultural sectors. On the other hand, Argentina and Paraguay have benefitted from the phenomenon as the previously drought-stricken countries have received increased rainfall, supporting growth in their agricultural sectors. Colombia and Central America however will be experiencing drier weather, which will depress agricultural and energy outputs and reduce shipping through the Panama Canal. Since El Niño’s true trajectory and effects remain uncertain, it is important to monitor the phenomenon. If its effects were to prove more intense, the outlook for the region could become bleaker as domestic and global supply chain disruptions might become more widespread.
As rising geopolitical risks have begun creating shifts in the global supply-chain, Latin America may be perfectly poised to take advantage of the situation. With the increase in interest in transitioning to green energy, China has already begun investing in copper smelting facilities in Chile and Peru and in lithium extraction in the “Lithium Triangle” between Argentina, Bolivia, and Chile. As China seems to be leading the global critical mineral processing in the region, Latin America will most likely see more investment from the US and Europe as both countries seek to upend China’s dominance. For this reason, nearshoring opportunities in Mexico will prove increasingly beneficial for the US given the country’s manufacturing capabilities, cheap labor costs, and proximity. The US has already begun collaborating with Mexico on plans to develop alternative supply chains for semiconductors, electric vehicles (EVs) and pharmaceutical products. Nearshoring is also picking up in Panama and Costa Rica as semiconductor agreements are being reached with the US.
Thus, as Latin American countries evaluate their international alliances, ready themselves for the coming changes in weather patterns, assess domestic social and political concerns, and attempt to loosen the restraints on monetary policy, their individual propensities for growth will diverge from one another. The region can never be treated as one homogenous economy; however, the general outlook should remain positive overall. We will explore the varying levels of growth in key economies in the following paragraphs:
Brazil
Brazil’s GDP growth is forecasted to reduce to 1.6% this year from 3.0% in 2023. The country’s positive performance was in large part incited by agricultural production, international trade, and private consumption; however, the impact of these factors is set to decline in the coming year.
While Brazil reported record high harvests of key crops in the agricultural sector last year, the effects of El Niño this year might cost the country some of its production. Higher than average temperatures and lack of rainfall are affecting soy farmers in the north while soy farmers in the south have had to slow their planting due to excess rains. The Brazilian government however stills claims that agricultural production should be close to that of last year. Regardless of the rate of agricultural production, demand for these products internationally, which bolstered growth last year, is set to decline as the economy of the predominant importer of these goods, China, is poised to decline this year as well.
Aside from these downside risks, Brazil should be able to maintain GDP growth fueled by consumer spending as falling interest rates and a tightening labor market increase purchasing power. As annual inflation has started to slow, Brazil’s central bank has responded by slashing interest rates, most recently cutting the SELIC to 11.25% at the end of January. The unemployment rate has also fallen to around 7.5%, the lowest rate since 2015, which in turn has pushed wage growth to about 8.5%.
Mexico
Mexico’s economy expanded by 3.6% in 2023 as it experienced growth in both private consumption and investment which surpassed initial projections. In 2024, GDP is forecasted to reduce to 2.5% due to weaker external demand (primarily driven by the US) and a high interest rate environment. Despite slower growth, nearshoring will remain prominent, even in the event of a slowdown in the US, as evidenced by trends in supply chain relocation. Chinese firms are also increasingly relocating certain operations to Mexico to capitalize on advantageous access to the US market and mitigate supply chain interruptions.
As mentioned previously, the upcoming election cycle (June 2024) will play a prominent role in shaping Mexico’s economic and political future. Energy, nearshoring, security, water, migration, and Mexico’s relationship North America are some of the major issues being considered by voters. Claudia Sheinbaum of the Morena Movement, the same party as outgoing President Andres Manuel Lopez Obrador (AMLO), is pitted against opposition candidate Xóchitl Gálvez. Both women are vying to become the first female president in the nation’s history and would lead the country for the next six years. Sheinbaum, a former Head of Government of Mexico City, holds a 20-plus point lead in early polls against Gálvez. Many believe that Sheinbaum’s administration, if elected, would be more aligned with US interests than the outgoing AMLO administration, and expect the MORENA candidate to continue to push social and public reform. Beyond the presidency, voters will also elect all: 128 members of the Senate and 500 members of the Chamber of Deputies, as well as leaders in nine states, representatives to state legislatures and officials for over 1,500 municipalities.
Argentina
2023 was marked by one of the most significant elections in Argentina’s recent history. Political outsider and right-wing populist Javier Milei was elected in November on the promise of radical change, aimed at fixing persistent economic and fiscal issues. With his aggressive agenda came warnings of early shockwaves, including bracing for the nation’s highest inflation rate in over 30 years (254%), propelled by a massive currency devaluation against the US Dollar. President Milei holds years of exorbitant government spending and high debt to blame for the Argentina’s historic inflationary issues. He also cut public spending and subsidies for energy as he continues his battle against what he calls inefficient, corrupt, and over costly public entities. Just this month, Argentine state news agency Telam saw its doors close in response to criticism from President Milei.
These measures are driven by the President’s unofficial policy for the economy to essentially suffer short-term consequences for the good of long-term change. 2024 will be President Milei’s first full year in office, and he will be judged using it as a barometer. Constituents are fickle, and his popularity will be closely tied to how quickly his more radical policies can produce results. If positive trend is not shown in 2024, the chances of riots and political turbulence will increase. Although Argentina’s GDP growth is forecasted to improve to -1.0%, from -2.5% in 2023, it remains to be seen just how accurately the numbers can be relied upon. A wait-and-see approach is recommended.
Colombia
After posting remarkable post-pandemic growth (8.1% in 2022), Colombia’s GDP slowed to 0.9% in 2023 due to a decrease in domestic demand. In 2024, growth is forecasted to increase moderately to 1.7%. On an optimistic note, inflation is trending in a positive direction – down from a high of 13.3% in March of 2023 to 8.4% as of January 2024 – putting the country’s internal target of 5% theoretically within reach. This reduction will allow the central bank to cut interest rates (currently at 12.75%) and hypothetically stimulate the economy in the short-term. However, the question in many people’s mind is whether President Petro is the right leader to guide the nation back to economic prosperity.
After being elected on a leftist agenda, Petro quickly pushed tax reforms that disheartened foreign investors. Now, over a year later, public pessimism has grown. President Petro currently faces extremely low approval ratings (26% as of end of 2023), and since passing his initial fiscal reform at the start of last year, the administration has struggled to push through subsequent reforms related to pensions and the health sector. Furthermore, peace talks with the National Liberation Army (ELN) and the Revolutionary Armed Forces of Colombia (FARC) rebels have yielded limited results after promises for “total peace”. It is a situation worth monitoring closely as the year progresses.
Further working against growth for 2024 are the negative effects Colombia will feel as a result of El Niño. Drier weather will put a strain on agribusiness and energy, as well as hamper trade via the Panama Canal. This, coupled with the aforementioned political landscape, could lead to an uncertain economic future for Colombia in the near-term.
Peru
Peru’s economy grew just 0.3% in 2023, down from 2.5% growth in 2022. Political instability, social unrest, El Niño weather events, and commodity price fluctuations contributed to its underperformance versus initial forecasts. Although the mining industry experienced net export growth, it was not sufficient to counteract weak demand and foreign investment. In 2024, GDP is forecasted to bounce back to 2.4%. Peru’s central bank is predicted to continue cutting interest rates (currently at 6.25%, its sixth consecutive cut) in response to falling inflation, suggesting a stabilization of the economy.
However, the outlook is not all glowing for the world’s second largest copper producer. Continued weak external demand from China (the country’s largest trading partner), as well as El Niño weather patterns (heavy rains in the northern region & droughts in the south) still pose a threat. Moreover, foreign investment in the country’s biggest natural resource, copper production, is predicted to remain low compared to past years. Political uncertainty could also dampen prospects. President Dina Boluarte’s approval rating remains at a record low (8% as of November 2023) and the impacts from anti-government protests could pose challenges along the path to sustained long-term growth.
Chile
In 2023, Chile experienced a significant economic decline following a swift post-pandemic resurgence. The economy grappled with political headwinds and high inflation, which in turn prompted the central bank to raise interest rates. Following a year of nearly flatline growth (0.1%), Latin America’s fifth largest economy is slated to rebound slightly in 2024. GDP growth is forecasted to improve to 1.9% as Chile projects to see inflationary pressures and interest rates ease and normalize, promoting much needed stability for domestic and foreign investors alike.
However, its economic future does not remain without risk. Slowing global growth and weak demand from China, along with uncertainty related to pension and tax reforms will affect the world’s largest copper producer to some capacity. Additionally, investor confidence has also taken a hit recently due to the country’s failed push to re-write its constitution. That being said, Chile does stand to gain from the worldwide shift towards sustainability, leveraging its abundant resources of copper, lithium, and renewable energy, all of which are poised to see increased demand in the near and long term.
Puerto Rico
Although Puerto Rico is an unincorporated territory of the United States, its location in the Caribbean makes the island nation a target of interest adjacent to Latin America. Puerto Rico has endured its fair share of fiscal and economic challenges, compounded by natural disasters, over the years. Puerto Rico experienced a major economic recession from 2006 to 2017 as the government accumulated public debt obligations, until the US established the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) in 2016, which in turn established a Fiscal Oversight and Management Board (FOMB). A debt restructuring process was implemented by this entity using the PROMESA legislative framework and as of December 2023, Puerto Rico’s debt has been successfully restructured. The Puerto Rico Electric Power Authority (PREPA) remains the largest debtor but is set to exit bankruptcy sometime this year. Given this success, Puerto Rico’s government should now be able to allocate funding for improvements in other sectors, namely infrastructure and economic development in the private sector. The private sector requires a major overhaul as the island’s population is steadily declining from low birth rates, high death rates, and high migration rates.
On the other hand, private investment into Puerto Rico has been an important driver of economic growth for the island and should continue to thrive given Puerto Rico’s Act 60-2019, also known as the Puerto Rico Incentives Code, as amended (“Act 60”). Designed to stimulate the local economy by incentivizing mainland US residents to engage in business activities and reside in Puerto Rico, the legislation’s central component lies in its robust tax incentives which include: a 4% fixed income tax, 75% exemption on property taxes, and up to 100% exemption on capital gains for eligible/qualifying, individuals and businesses.
2024 also marks an election year for the island and incumbent Governor Pedro Pierluisi will try to retain his position. However, he lacks a majority in his party, the Partido Nuevo Progresista (PNP), and will face an internal challenge from rival Jenniffer González. Either candidate stands a firm chance of winning if the leadership contest does not cause the party to split. In any case, the outcome of this election will affect the relationship between the territory and the US, which will certainly have economic consequences.