Latin America Is Facing Commodity and Demographic Shocks

What is far more worrying is that several countries increased fiscal spending in response to the 2009 recession and then failed to reverse the increases as the recession receded.

latin america

A vast majority of Latin American countries need to trim fiscal spending and undertake fundamental reforms while urging its borrowers not to cut capital investments, according to the Inter-American Development Bank.

The regional economies will remain weak until 2020 unless the countries reform their fiscal policies immediately, the bank said in an annual report released in Bahamas. Weak global growth, a fading demographic boom, lower commodity prices, and deteriorating fiscal positions have hit Latin America hard, plunging countries like Brazil and Venezuela into deep crisis.

What is far more worrying is several countries increased fiscal spending in response to the 2009 recession and then failed to reverse the increases as the recession receded.

“Fiscal adjustments are never easy,” said IDB Vice President Santiago Levy. “Many countries are in the difficult position of having to act now or face more painful adjustments later on. The good news is that there is room to increase spending efficiency and rebalance fiscal policy to improve growth and protect the many social gains that have been achieved over the past decade.”

Although the bank believes that the region will experience flat to slightly negative growth in 2016, its Chief Economist Jose Juan Ruiz noted in the report that almost a quarter of the IDB’s 26 borrowing countries are registering growth of 3.5% or higher.

But fiscal reforms are urgently needed because the commodity prices will unlikely bounce back anytime soon. “Commodity prices are virtually impossible to predict,” said Andrew Powell, IDB’s principal economic advisor. “Countries need to find better ways to manage commodity price uncertainty.”

Besides lower commodity prices, the region faces a demographic shock, too. “An aging population and other demographic trends mean that in 2011-2020 the increase in the employment share may only contribute 0.6% to growth rather than 2% in the 2000s — a potential loss of 1.4%.”

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In the post-commodity boom period, from 2014 to 2020, average annual growth is expected to be 1.7%, far below the 4% registered during the exceptional commodity boom from 2003 to 2013.

According to IDB calculations, every 1% in slower growth in China reduces growth in Latin America and the Caribbean by 0.6%. Every 1% reduction in the growth of the U.S. economy trims additional 1.5% off growth in the region.

The bank said there is an opportunity to rebalance spending in favor of public investment such as maintenance and infrastructure repair programs. Developing nations should invest at least 5% of GDP in infrastructure to boost growth.

The report has praised reform programs in Jamaica, Honduras, Mexico, and Chile, saying such programs will promote sustainability over the longer term.

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