The five economic challenges that Latin America will have to face in 2023

Latin America is usually a region that is highly dependent on economic cycles, given the high degree of primarization of its economy. That is why, very possibly, the slowdown in economic growth that is expected for 2023 could have a negative impact on this part of the world.

To make matters worse, it is not that the countries are exempt from challenges: to historical problems in the region, such as the reduction of poverty, in 2022 the fight against inflation was added.

On the other hand, in some Latin American countries the political climate is somewhat convulsed, a fact that makes the business and investment climate even more complex.

Below, Bloomberg Línea lists the main economic challenges for the region for the year that is beginning.

1. LOWER GLOBAL GROWTH

Recently, the International Monetary Fund (IMF) predicted that by 2023 a third of the world economy will go into recession.

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

“That is the great challenge: contain a situation in which the global economy is going to pull less, with the risk of recession. What happened in 2022 and will probably continue in 2023 is a rise in rates to contain high inflation,” Polo stressed.

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

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

A key factor for the region will be what happens with China: if the Asian giant pushes forward, Latin America will benefit. 

To cite an example, practically all the analyzes regarding what can happen with the Chilean economy and with the Chilean peso place the Chinese factor on the table: if the restrictions on mobility arising from the coronavirus are lifted, China will demand copper and that It 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 each country in the region.

A recent report by ECLAC reports that in 2022, Latin America presented a higher-than-expected growth rate during the first half of the year and a slowdown during the second half. But it cautions that the slowdown seen in the second half of 2022 will continue into 2023, which suggests that next year’s growth rate will be significantly lower than in 2022.

“After growing 3.7% in 2022, the slowdown would deepen, with growth of 1.3% in 2023,” says the ECLAC report, regarding Latin America and the Caribbean.

2. (DIS)INFLATION

Many of the Latin American countries reached their highest inflation value in several decades in 2022, although in most territories the problem has begun to abate. However, it is necessary to shore up this course and this may require more 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 purify the monetary imbalances arising from the pandemic.

“Although an acceleration of inflation is not expected, 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,” says the ECLAC report.

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

The organization predicts 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 3 and 2 points lower, respectively, than those of 2022, are, in any case, well above the average rates of the decade prior to the pandemic (2010-2019), which were 2.0% in advanced economies and 5.1% in emerging and developing economies,” warns ECLAC.

It should be noted, in any case, that the drama of inflation is not at all homogeneous in the region. Just as there are countries that 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).

3. POVERTY

ECLAC projects that by the end of 2022 poverty would have affected 32.1% of the Latin American population and extreme poverty 13.1%, that is, a slight decrease in the level of poverty and a slight increase in extreme poverty compared to 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 compared to the situation prior to the pandemic and that the number of people in extreme poverty would be 12 million, higher than that registered in 2019.

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

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 UPHEAVAL

There are many Latin American countries that are going through moments of high political polarization:

• In Brazil, the main economy in the region, the pro Bolsonaro sector was on the roads demonstrating against the triumph of Lula da Silva, the current president.
• In December 2022, Pedro Castillo, former president of Peru, was removed and imprisoned, and his vice president, Dina Boluarte, took his place. There were marches all over the country that left fatalities.
• 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 the government of Luis Arce. He is accused of having organized a “coup” 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 the constitutional reform continue.
• Ecuador had strikes and conflict in the streets during June 13 and June 30, 2022 and the political tension escalates as the sectional elections approach.
• Andrés Manuel López Obrador, president of Mexico (the second largest economy in the region) also 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 the countries quite effervescent,” explained Martín Polo.

Going back to a previous point, Polo considered that most countries in the region will have lower inflation than in 2022, which, according to his point of view, brings a blanket of tranquility in this context of political effervescence.

5. EMPLOYMENT RECOVERY

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

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

If the data recorded at the end of the first semester of 2022 (latest data published by ECLAC) are taken into account, the occupancy levels are similar to the pre-pandemic period.

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

The international organization estimated: “The slowdown that has manifested itself since the second half of 2022, and that will continue into 2023, sows doubts about the possibility of continuing to observe improvements in labor indicators.”

With information from Bloomberg

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