Latin America has pleasantly surprised economic analysts this year. In recent weeks, multilateral organizations such as the International Monetary Fund (IMF) and the World Bank have improved their growth outlook for regional gross domestic product (GDP) to 2%, well above what they had expected at the beginning of the year. But a closer look at the forecasts shows that the stimulus is primarily coming from the two largest economies (Brazil and Mexico). The rest of the region is facing difficulties, and one of the biggest is the political situation.
A report released last week by credit risk rating firm Fitch identified “political turmoil” as a factor increasingly constraining public finances in Bolivia, Ecuador, Panama, Peru, Chile and Colombia. A second study by the Spanish analysis company Focus Economics also identifies political instability as an obstacle to growth for the rest of the year and into 2024. This goes beyond the current electoral cycle, which includes Argentina’s presidential election this weekend (and where a change in performance is possible).
“The region’s 2023 GDP growth forecasts were further revised upwards last month, largely thanks to recent better-than-expected data in Brazil and Mexico,” economists at Focus Economics wrote in an Oct. 10 report. “Next year, Latin America’s economic expansion will slow and be well below the world average, affected by political instability and the region’s limited presence in high value-added industries,” experts say.
This was a good year in terms of public finances, Fitch noted in its report. While regional growth continued in Brazil and Mexico, “performance was uneven elsewhere, with momentum in Central America driven by remittances, sluggishness in Andean countries amid policy tightening and political turmoil, and drought-induced recession in Argentina,” says the report. So far this year, Fitch has improved the credit ratings of six of the 19 countries with sovereign debt in international markets. It was the best performing region in the world.
However, “political challenges and instability continue to weigh on ratings across most of Latin America,” Fitch analysts warned. “These issues have played a role in most of the downgrades and negative outlooks, particularly by clouding policy predictability, exacerbating fiscal pressures and/or negatively impacting growth,” as is the case in Bolivia, Ecuador, Panama and Peru . In Chile and Colombia, the authors say, governance problems have already contributed to rating downgrades in recent years.
The forecast for Argentina, the region’s third largest economy, is pessimistic. The economy will be affected by exchange controls, hyperinflation and rising interest rates, all monetary policy decisions. The drought has limited exports and economic activity. On the other hand, the country recorded revenue from increased tourism and increased energy production from the Vaca Muerta oil field. However, Focus warns: “The risks are more to the downside and include further currency collapse, possible debt default and increased political instability.”
The consensus in Peru is that GDP will grow significantly slower this year than last year. Inflation and rising debt costs are complicating the country’s financial situation. In addition, a weakened global environment caused by wars in Ukraine and the Middle East will impact the external sector. “El Niño-related weather phenomena and increasing social unrest amid political uncertainty represent downside risks,” expects Focus.
Regarding Chile, analysts see the likelihood that citizens will reject a new constitution in December’s referendum, making governance more difficult. While in Bolivia, President Luis Arce was expelled from his political party in order to choose former President Evo Morales as a candidate for the 2025 presidential election. In both cases, political uncertainty could deter investment, experts warned.
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