Article
40 minute read 23 June 2022

Latin America economic outlook, June 2022

The war in Ukraine has brought in a new a set of challenges for Latin America. Beyond these challenges, however, lurk opportunities for realizing long-term economic goals.

Daniel Zaga

Daniel Zaga

Mexico

Alejandro Mina

Alejandro Mina

Colombia

Daniel Gonzalez Sesmas

Daniel Gonzalez Sesmas

Mexico

Alessandra Ortiz

Alessandra Ortiz

Mexico

Executive summary

In 2021, Latin America (Latam) rebounded from the pandemic-induced economic contraction of the last two years. Growth prospects, however, remain moderate this year, because of a less favorable base effect and a series of domestic and international challenges.

Inflation is showing no signs of abating, which runs contrary to what we expected at the end of 2021. The lingering disruptions caused by strained supply chains globally are now compounded by the aftermath of Russia’s invasion of Ukraine. The most visible fallout of this situation has been a spike in commodity prices, which has heterogeneously affected trade balances and fiscal accounts within the region. However, in terms of GDP growth, most Latam countries have been barely affected.

High commodity prices have also forced the region’s central banks to accelerate the upward trend of interest rate hikes—this is true not only for Latam and other emerging regions but also for the developed countries such as the United States and the United Kingdom. This policy response to high prices will make financing more expensive and economic growth slower.

Nonetheless, the prevailing economic environment, shaped largely by high commodity prices, presents an opportunity for many Latam countries, especially for major exporters of commodities, to invest the additional incoming dollars in productivity-increasing capabilities and, in the process, lay the groundwork for long-term economic development.

The first half of this report, building on the aforementioned topics, presents an overall analysis of the current economic situation in Latam. In the second half, we present a brief overview for each economy of the region.

Introduction

Russia’s invasion of Ukraine—by contributing significantly to the sharp rise in energy and commodity prices globally—has impacted the economic performance of nearly all countries in Latam, albeit to a lesser degree compared to many other regions of the world.

Even though the price rise is boosting the region’s exports, it also poses several critical challenges. For instance, the region faces a deficit in gasoline global trade, which in some cases offsets the positive effect generated by increased revenue from exports. In addition, the rise in food and energy prices, by impacting consumption and production costs, has accentuated inflationary pressures.

This has, in turn, forced the region’s central banks to accelerate interest rate hikes, jeopardizing growth and making private and public financing more expensive. This situation may prove to be risky for the macroeconomic stability of the region, considering the debt-to-GDP ratio in Latam has reached its highest level since the early 1990s, as many countries were forced to implement a substantial and necessary fiscal expansion during the pandemic.

The current scenario in Latam countries, therefore, resumes the debate about the region’s high dependence on commodities.1 The debate focuses on how public policy can address the long-term adverse effects of such dependency, and how to profit from periods of high commodity prices.

An unresolved historical problem

Revenues from Latam exports have historically depended on commodities. In 1995, the exports of primary products represented 32% of overall exports. In 2020, this figure had come down to only 29%.2 Moreover, most Latam countries’ export baskets lack high added value products. This partly explains why economic growth for Latam lags behind other regions such as Asia.3

At present, approximately half of the exports of Brazil, Argentina, and Colombia are classified as primary products. In the case of Chile and Peru, their main exports are copper ore and refined coppers, which are classified as primary products and resource-based manufactures, respectively. The big exception in the region is Mexico, where two-third exports, mainly destined for the US market, are high- and medium-tech manufacturing products (figure 1).

Export commodity dependence, referred to in the economic literature as the “The Natural Resource Curse,”4 is a source of economic vulnerability for the Latam region. Reasons include: (1) extreme weather events affecting crop yields; (2) exploitation of minerals depending on the maturation of mines; (3) reliance of oil production on the discovery of new deposits and on shifts in geopolitical realities; (4) fluctuating commodity prices in international markets affecting macroeconomic stability; and (5) increases in government spending discouraging private investment (the so-called crowding-out effect).5

Furthermore, the primary sector does not create as much employment as manufacturing does, hence exacerbating the overall unemployment woes for the region.6 Finally, the revenues from exports of volatile commodities—such as sugar, coffee, soy, and oil—are big contributors to tax revenues, thus posing a continued risk to fiscal and economic stability.

These issues do not necessarily suggest that Latam should turn its back on natural resources. On the contrary, the region should take advantage of the revenue derived from natural resources to invest in productivity-boosting capabilities, which in turn can help the region achieve the goal of long-term economic development.

Currently, because of the ongoing conflict in Ukraine, the region once again is experiencing a commodities boom. This situation comes with its benefits as well as challenges. In the following sections, we will take a closer look at them.

How the war is slowing down growth and disrupting trade

Ever since Russia invaded Ukraine in February, economic growth predictions have turned more pessimistic for 2022. The International Monetary Fund (IMF) lowered the 2022 growth forecast for the global economy from 4.4% in January to 3.6% in April.7 This downgrade was a response to the fallouts of the war—economic sanctions on Russia by Western powers, uncertain geopolitical realities, surge in key input prices, and accelerating interest rates.

The economies of Russia and Ukraine are crucial suppliers of raw materials for many countries and regions around the globe—ranging from energy products and metals used in technology industries to basic agricultural commodities. As a result, the prices of several commodities have soared since February, reaching multi-year highs or even record levels in some cases (figure 2).

The EU has emerged as the most affected region, due to its heavy dependence on Russia to meet its energy needs (24.7% of its oil and 46.8% of its natural gas).8 The EU also depends on Russia for its supply of metals such as aluminum, gold, and platinum. Moreover, Russia and Ukraine are major exporters of grains and fertilizers, as a result of which the prices of agricultural commodities such as wheat, corn, and seed oils have shot up.9

Latin American trade, on the other hand, has not been severely affected by the conflict, because Ukraine, Russia, and Belarus receive merely 0.6% of the region’s exports.10 Affected products include butter, salmon, cheese, apples, pears, and quinces11 (figure 3). Paraguay, Jamaica, and Ecuador have the highest stakes. In 2020, their exports to these three countries comprised 4%–6.6% of their total exports.12

Meanwhile, imports from Russia, Ukraine, and Belarus accounted for merely 0.7% of all Latam imports in 2020. Brazil is the biggest partner as it receives 1.8% of its imports from these three countries. However, despite their small proportion, imports from those countries are concentrated in key industries. In 2020, for example, 88% of the region’s mineral fertilizer purchases came from Russia (figure 4). Additionally, critical inputs for the automotive industry originate in Russia. These include isoprene rubber plates (76%), aluminum (35%), and butadiene rubber (21%). Thus, agriculture, manufacturing (e.g., automotive), and construction industries are directly affected by the decline in the supply of raw materials from those countries.13

Impact on select Latam countries

The surge in the prices of raw materials may likely benefit net commodity exporter countries. Some of their imports, in contrast, are considerably affected. To understand what this means in detail, let’s take a closer look at Argentina, Colombia, and Mexico.

Commodity prices, given their impact on trade and fiscal balance, play a significant role in the Argentine economy. While the trade effect is positive, the fiscal one is negative. As regards the former one, the rise in commodity prices is boosting agricultural exports (the country’s main source of foreign currency), but it is making gas imports more expensive during the winter. According to Deloitte estimates, the trade net effect is positive and slightly more than US$5 billion (1.0% of GDP). As for public finances, tax revenues will benefit from a higher collection of withholdings. However, higher energy subsidies can be problematic, if the tariff adjustment scheme contemplated in the agreement with the IMF remains unchanged. If this is the case, the net impact on public finances would be negative, at around 0.6% of GDP, because the increase in subsidies would exceed that of withholdings.

Colombia stands to benefit from the commodity price increase. Colombia exports crude oil and imports refined fuel, but exports are approximately two times bigger than imports. So, the trade surplus for oil-related goods in the first quarter of 2022 is 68% larger compared to the previous year. When it comes to public finances, the result is also positive, but not as straightforward. The price of petrol in Colombia is regulated and has not increased as much in the midst of the ongoing trend of rising oil prices internationally. According to Global Petrol Prices,14 out of a sample of 170 countries, the local oil price in Colombia is the 19th cheapest in the world. A petrol subsidy, which amounts to roughly US$5 billion per year (COP 20,000 billion) with the current prices, explains why the local value is only 55% of the international price.15 Despite the cost of the subsidy, the country is a net winner when oil prices go up. Estimates vary, but for every dollar increase in the price of oil, the Colombian government receives an additional US$130 million per year.16 Since the government budgeted a Brent price of US$70 for 2022, considering the current price is US$114, the added revenue would be US$5.7 billion and would offset the size of the subsidy.

Finally, Mexico is a net importer of crude oil and its derivatives. In 2021, hydrocarbon exports (mainly crude oil) reached US$28.9 billion.17 However, the imports of gasoline and other petroleum products totaled US$53.9 billion during the same period. The net balance has been negative since 2015, reaching US$24.9 last year, approximately 1.9% of GDP.18 Thus, the recent increase in oil prices and derivatives may induce an additional deficit in the country’s oil trade balance in 2022, of around US$7.48 billion (0.58% of GDP). The agribusiness trade balance, meanwhile, has remained in the positive territory since 2015. Its surplus in 2021 was US$7.19 billion, and the additional price effect would total around US$1.77 billion (0.14% of GDP) in 2022. All this implies that the net effect of the price increases on the Mexican deficit trade balance, at least for crude oil, its derivatives, and agribusiness, would be around US$5.71 billion (0.44% of GDP).

As for public finances, Mexico enjoys higher revenues from the export of crude oil, but also larger subsidies for gasoline consumption. A local policy dictates that gasoline price variation must be kept below inflation. So, when prices are high, the government stops charging an excise tax on gasoline and even subsidizes it, which runs a risk of becoming a tax burden. Assuming an average annual price for 2022 of US$70 per barrel for the Mexican blend, and a stable oil production (1,687 thousand barrels per day on average for 2021),19 the negative net effect of this growth in prices on public finances would be MXN 119.3 billion,20 approximately 0.5% of GDP.

Big picture of the region

In 2021, Latam economies rebounded from a dismal performance in 2020, but this was insufficient to make up the lost ground. After contracting 7% in 2020, the economy expanded 6.8% the following year. However, disruptions emerging from the war in Ukraine have dented the economic outlook of the region and the shape of its public finances.

We forecast the Latam region to grow by 2.1% in 2022 and 2% in 2023. Notably, the two largest economies, Brazil and Mexico, are expected to underperform in 2022, as their growth is expected to be 0.7% and 1.8%, respectively.21 In 2023, however, these two countries will post a slightly better economic performance (figure 5).

Another challenge for the region comes in the form of global surge in inflation (figure 6). Major reasons for this surge include the supply logistics disruption caused by pandemic-induced lockdowns, China’s recently implemented zero-tolerance policy toward COVID-19, and the conflict in eastern Europe. In light of this, governments are spending more on trying to stabilize those prices.

Higher inflationary pressures have prompted central banks worldwide to accelerate interest rates hikes (figure 7). This tighter monetary policy and higher interest rates are making financing more expensive for governments, which in turn compromises debt sustainability.

As far as public finances go, the higher spending during COVID-19, mainly through economic and health transfers to families and firms, had led to high deficits and increased government debt. Consequently, public debt in the Latam region, as a ratio of GDP, reached 71.6% in 2021, its largest ratio since early 1990s (approximately 80%).22 The World Bank estimates the ratio to be 69.8% by the end of 202223 (figure 8).

According to the World Bank’s development indicators, the region’s unemployment rate was 9.9% in 2021, down only 0.1 percentage points from 2020 and up 2 percentage points from 2019. In fact, in most countries, the unemployment rate is still above prepandemic levels. Higher unemployment together with inflation pressures risk to curb consumption.

Conclusions

Latam had just begun to leave behind the disruptions caused by the pandemic when Russia invaded Ukraine in February of this year, which brought with it a set of new pressing challenges. Now, the region has to deal with stronger inflationary pressures, weakening global economic growth, and higher interest rates.

This juncture prompts the need to make good use of the windfall from high commodity prices, in the countries where it has a net positive effect (the majority of Latam countries). This external shock generates the accumulation of additional inflows of foreign currencies that would be directed towards: i) investment in capacity creation and in the development of higher added value products in innovation-intensive industries that generate productivity gains; and ii) the creation of countercyclical funds, so as to finance public policies in periods of economic stress and keep debt within manageable levels.

To do so, healthier public finances are needed. Expanding the tax base and tackling tax evasion are pending tasks in several countries. Success on these fronts may reduce the dependence of public revenue on primary products. And despite the fiscal challenges, public investment needs to persist so that the economic recovery does not lose momentum. One critical area is infrastructure, such as ports and roads, and a continued investment on this side could mitigate potential disruptions in supply chains or trade logistics.

Finally, central banks in many Latam countries have been increasing interest rates to fight inflation. It is paramount to keep restricting monetary policy during this period of high worldwide inflation; however, an excessive interest rate correction might hurt economic recovery.

Country briefings

Argentina

Recent developments
  • In March 2022, the government reached an agreement with the IMF.24 The new program includes disbursements of US$44.5 billion over a period of 30 months that will cover principal payments until 2024, including a net financing component of US$4.4 billion equivalent to the amortization payments made in 2021 and early 2022.
  • The IMF agreement targets an increase in reserves of US$5.4 billion for 2022, and a cumulative increase of US$15.0 billion by year-end 2024. It also seeks to narrow the primary fiscal deficit to 2.5% of GDP in 2022 and to 0% in 2025, with a decreasing share of central bank financing (from 1% of GDP in 2022 to 0% in 2024).
  • Consistent with the IMF agreement, the government accelerated the depreciation of the Argentine peso (ARS) (to 4.0% in mid-April 2022, from 1.5% in December 202125) and raised nominal interest rates (by 900 basis points to 47.0% over the past few months). Hikes in public utility rate are also expected,26 but any increases there will likely not be enough to reduce energy subsidies.27
Economic outlook
  • GDP growth would moderate to 3% year over year (YoY) in 2022 (after an expansion of 10.3% in 2021) and would remain constrained because of tight macro-financial conditions (both domestically and globally).
  • Inflation is expected to reach approximately 60% by year-end due to rising food and fuel prices, increases in the price of regulated goods, and the acceleration of the official exchange rate depreciation in the context of an already high and sustained inflation dynamics.
  • Two factors will be key for Argentina’s macroeconomic scenario in 2022: the government’s ability to maintain the agreement with the IMF to ensure dollar inflows and expectations anchoring; and the evolution of commodity prices in the context of the Russia-Ukraine war.
  • Although the rise in prices would boost foreign exchange earnings through agricultural exports, it will in all likelihood generate additional pressure on inflation and public accounts.

Bolivia

Recent developments
  • The economy rebounded strongly in 2021, expanding 6.1% YoY,28 the fastest pace since the height of the commodities boom in 2013. Despite last year’s broad-based recovery, GDP grew only 0.2% annually in the fourth quarter of 2021.29
  • Annual inflation in March 2022 was merely 0.8%,30 substantially below the level seen a year ago (1.2%). The monthly variation was negative (–0.1%), which can be explained by the decrease in the price of food and nonalcoholic beverages (–0.6%), transport (–0.09%), clothing and footwear (–0.05%), and education (–0.02%).31 This figure contrasts sharply with the inflationary acceleration observed globally and regionally, and can be attributed to the presence of a fixed exchange rate with US dollar (considering the appreciation trend of the American currency) and energy and food subsidies.32
Economic outlook
  • Bolstered by elevated international commodity prices, the economy will likely continue to grow at a solid pace of 4.5% YoY in 2022. Higher gas revenues will contribute by increasing net exports and tax revenues, but production-capacity constraints will limit the gains. GDP growth will be supported by government consumption and gross fixed investment, given that the government is aiming to maintain its public works agenda.
  • Higher international energy prices will boost fiscal revenue and give the government enough room to delay fiscal and currency adjustments until 2023. But those adjustments will eventually be necessary to prevent a balance-of-payments or a debt crisis, as Bolivia’s international reserves are scarce (US$4.73 billion in 2021,33 equivalent to 12% of GDP) and public debt high (nearly 80% of GDP). Additionally, president Luis Arce Catacora will continue to seek debt relief on Bolivia’s multilateral and bilateral debt obligations—about 60% of the country’s external debt is owned by multilaterals and 14% by bilateral lenders.

Brazil

Recent developments
  • Inflation jumped to 11.3% YoY in March 2022, surpassing the official target of 2%–5%.34 This surge was broad-based, with greater price pressures recorded in the transportation, food and beverages, and housing categories. This marks the highest inflation rate since October 2003, and the seventh consecutive month with rates above 10%.35
  • In a bid to keep inflationary pressures within manageable limits, the Central Bank of Brazil (BCB) adopted a more hawkish monetary policy stance by increasing the Selic rate by 100 basis points (bps) to 12.75% in April 2022, taking it to its highest level during the last five years.
  • The privatization of Eletrobras, the state-controlled power company and biggest energy firm in Latin America, was implemented as planned after the Federal Court of Accounts gave its approval in February 2022.36 President Jair Bolsonaro hopes to have the company privatized by May or June 2022. Legal and political obstacles, however, remain.37
Economic outlook
  • Jair Bolsonaro and Luiz Inácio Lula da Silva, the current and former presidents, respectively, are the main front-runners in the presidential elections scheduled for October 2022. They gather more than 70% of the voting intention.38 Political polarization is expected to increase sharply in the run-up to the elections, amid a challenging economic environment aggravated by the ongoing Russia-Ukraine conflict.
  • Although GDP returned to prepandemic levels, its growth will grind to a halt in 2022 (+0.7% YoY) because of high inflation and positive real interest rates, as well as uncertainty stemming from presidential elections.
  • As the elections approach, the government is adopting an increasingly expansionary fiscal stance. We expect the fiscal deficit to widen for 2022 (to 7.5% of GDP) after contracting in 2021 (4.4% of GDP).
  • The policy interest rate is expected to rise another 150 bps over the rest of the year, reaching a peak of 13.25% in December 2022. This would help anchor inflation expectations. However, inflation is expected to surpass the BCB’s inflation target again in 2022, but then it will likely come down within the range the next year.

Chile

Recent developments
  • Hugely popular Gabriel Boric of the left-wing “Apruebo Dignidad” (AD) coalition took office in March 2022,39 having won the presidential run-off held in December 2021 by a considerable margin.40 However, his ability to advance his agenda will be constrained by an evenly divided Congress.41 It is widely believed that Boric will need to build consensus to avoid gridlocks. However, in this process, any policy moderation on his part could cause friction within AD’s member parties (Frente Amplio and Partido Comunista).42
  • A constituent assembly is currently drafting a new constitution for Chile.43 The next step in the larger process is a mandatory referendum to either approve or reject the new constitution. The vote is due to be held in September 2022,44 but there is a growing risk that the assembly will seek an extension for the drafting process until end-2022.
Economic outlook
  • Economic growth is expected to slow down in 2022 to 1.5% YoY, after a 11.7% rebound last year, due to a weakening base effect (as much of the expected gains have already occurred), a sharp monetary-tightening cycle, a roll back of fiscal stimulus, and a drop in business confidence amid a high level of political uncertainty surrounding Boric’s administration and the drafting of a new constitution.
  • Inflationary pressures will remain elevated during the first half of 2022, fueled by commodity price increases and supply chain disruptions, exacerbated by the Russia-Ukraine conflict. However, inflation is expected to ease in the second half of 2022 amid a rapid economic slowdown, on the back of the Central Bank of Chile’s aggressive monetary-tightening cycle, and as supply chain disruptions normalize. On the whole, Consumer Price Index (CPI) inflation will end this year above 2021 figures.

Colombia

Recent developments
  • In 2021, Colombia, helped by a low base effect, experienced the highest GDP growth in its economic history—10.6% YoY.45 This economic growth stood out among Latam countries by exceeding its prepandemic size: By the end of 2021, the economy was 2.8% larger compared to 2019.46 Household consumption led the way by increasing 14.6% YoY,47 as lockdowns were lifted after a successful vaccination campaign. Economic growth in the first quarter was robust at 8.5%.48
  • Colombia has benefited from high international prices of oil and coal, its two main exports.49 The additional export revenue helped improve country’s fiscal metrics. Government deficit, for example, shrank from 8.6% of GDP at the start of 2021 to 7.1% by the end of the year.50
  • Annual inflation hit 9.23% in April 2022, the highest in almost 21 years.51 Food inflation contributed the most considering key input prices have soared.52 In response, the Central Bank of Colombia began raising its benchmark rate in October 2021, which reached 6% in April.53 In turn, the government has resorted to trade policy to curb inflation: A recent bill exempted tariffs on 165 imported goods.54
Economic outlook
  • Growth is expected to moderate after witnessing stellar improvement last year, but at 6.3% this year, growth in Colombia will be one of the highest in Latin America. Rising inflation and higher interest rates, meanwhile, could limit consumption growth. The year-to-date inflation is currently 4.36%, which is above the central bank’s upper bound of 4%. We anticipate inflation to subside in the second half of the year and end at 6.5%. Monetary policy is expected to tighten as the central bank recently hinted at policy interest rate hikes in the future. We forecast the benchmark rate to reach 7.75% by ending 2022.
  • The biggest risk for Colombia remains the uncertainty stemming from the upcoming election. The leading candidate, Gustavo Petro, seeks to increase spending by expanding welfare programs and government intervention in the economy. However, any reform by the new government is likely to stall in a highly divided Congress. Other downward risks include low investment and high unemployment. At the end of 2021, investment was 14.7% lower than the corresponding figure in 2019,55 mainly due to a delay in the construction of civil infrastructure. And, at 12.9% in February 2022,56 unemployment rate was still above prepandemic levels. We forecast unemployment rate to close 2022 at a yearly average of 11.6%.

Costa Rica

Recent developments
  • The country recorded a strong recovery in 2021, with a GDP growth of 7.6% YoY. Economic growth has continued on an upward trajectory so far this year albeit at a slower pace, due to a weakening global economy and domestic inflationary pressures.
  • Inflation accelerated in the first months of the year, from 3.5% YoY in January to 5.8% in March. Consequently, the Central Bank of Costa Rica increased its policy interest rate to 4% in April 2022.
  • Unemployment rate decreased to 13.6% in the first quarter of 2022,57 but it still hovers above the prepandemic level (12.4%).
  • Costa Rica recorded a primary surplus of 0.8% of GDP in the first quarter of 2022, the highest in 14 years.58
  • In April 2022, Rodrigo Chaves, of the Social Democratic Progress Party, won the presidential election for a period of four years. Chaves would propose a broadly market-friendly and orthodox economic agenda that would ensure policy continuity. He will also seek to renegotiate the terms of the IMF Extended Fund Facility to reinclude more ambitious fiscal targets and greater structural reforms (such as reducing tax exemptions on the wealthiest individuals and lowering payroll spending).59
Economic outlook
  • Deloitte expects an economic growth of 3.5% YoY for 2022, led by the recovery seen in services and manufacturing sectors. However, lower growth from trading partners, especially the United States, which accounted for 42% of Costa Rica’s exports in 2021, dampens the prospects for economic growth.
  • We estimate that inflation to be 6.4% YoY in 2022, given the persistent increase in raw materials prices and logistic costs. The policy interest rate will likely reach 6.5% by ending 2022, as the US Federal Reserve (Fed) hikes its interest rates during the year. The exchange rate, meanwhile, is expected to close the year at CRC 663 per US$. 

Ecuador

Recent developments
  • GDP expanded 4.2% YoY in 2021. Although it is the highest growth rate the country has seen in eight years, it is still not enough to offset the contraction of 7.8% YoY witnessed during the height of the pandemic in 2020.60 Furthermore, in December 2021, an episode of headward erosion in the Coca River disrupted oil pumping in the region, which significantly dented fourth-quarter growth.
  • A combination of rising oil prices and a sound budget policy has prevented a deterioration of important fiscal metrics. For instance, the budget balance has improved from –6.1% of GDP in 2020 to –3.5% in 2021.61 Although inflation has risen (in April 2022, inflation was 2.84% YoY,62 and by ending 2021, it stood at 1.96%), it is not a serious concern, unlike other Latam countries.
  • President Lasso’s government is keen to attract foreign investment and has implemented multiple reforms to this end. An example of such a reform is the progressive elimination of tax on capital outflows, which are expected to drop by 0.25 percentage points each quarter in 2022 to reach 4% by year-end.63 Other policies aimed at improving the country’s business climate include the elimination and, in some cases, simplification of tariffs, as well as the negotiation of new trade agreements.64
Economic outlook
  • We expect GDP to grow 3.1% YoY in 2022. This reflects the combined effects of increasing oil prices and a spurt in foreign investment. Leading indicators also show an uptick in economic activity in oil as well as nonoil sectors.
  • Although the external business environment has somewhat improved, sanctions by Western powers against Russia could be a blow to Ecuador’s economy as Russia is a key destination of several Ecuadorian exports: Russia buys 21% of Ecuador’s banana, 11% of its flower, and 2.7% of its shrimp exports.65
  • The Ecuadorian budget largely depends on financing from multilateral entities, which makes the country’s economy vulnerable to adverse shocks to international financing markets. However, being a dollarized economy softens that risk.

El Salvador

Recent developments
  • Economic growth in El Salvador reached 10.3% YOY in 2021, after a 7.9% YoY drop in 2020. However, during the first two months of 2022, growth has been slower, largely due to uncertainty in the global economy. In February 2022, economic activity grew 2% YoY, supported by an uptick in professional services, and financial and manufacturing activities.66
  • Exports maintained a good performance, registering a 17.7% YoY growth in the first quarter of 2022. Meanwhile, remittances, which represented 26.2% of GDP in 2021, grew 5.9% YoY in the same period.67
  • Inflation has remained elevated in 2022 so far—in March 2022, the inflation rate was 6.69% YoY, a level not seen since 2011.
  • El Salvador’s credit risk has increased in recent months, primarily because of lower investor confidence about debt and fiscal sustainability. At the end of April, the credit risk as measured by JP Morgan’s Emerging Markets Bond Index (EMBI) stood at 2,280 points; this is the second highest in the region, just below Venezuela.68
Economic outlook
  • Country's economic growth would moderate in 2022 to a rate of 2.5% YoY. This is attributable to a declining economic activity in the United States (El Salvador’s main trading partner), investors’ concerns about debt sustainability, and a lower dynamism of domestic demand.
  • Yearly inflation is expected to come down to 4.5% by the end of 2022, from 6.1% in 2021.

Guatemala

Recent developments
  • Annual economic growth for 2021 is estimated to have reached 8% YoY, after a fall of 1.8% YoY in 2020. The recovery was mainly supported by remittances, exports, credit expansion, and domestic consumption.69
  • Remittances have maintained their momentum and, during the first quarter of 2022, registered an increase of 25.6% YoY. In 2021, remittances accounted for 17.79% of GDP.70 Similarly, exports have posted a favorable performance with an annual increase of 25% in the first two months of 2022.71
  • Yearly inflation has accelerated from 2.87% in January to 4.62% in April, a direct result of an increase in fuel, input, and logistics costs that affect domestic production. The country’s central bank decided to hike its policy interest rate from 1.75% to 2.0% at its meeting in May.
Economic outlook
  • We estimate Guatemala to post an economic growth of 4.0% YoY in 2022, supported by improved performance seen in commercial trade, manufacturing, agriculture, and construction. Other key indicators expected to perform well include remittances and foreign direct investment.
  • Inflation, due the rise in the prices of fuel and production input, and the challenges posed by the seasonality of agricultural products and climatic conditions, will remain around the upper limit set by the central bank (4% to 5%).
  • We consider that the central bank will close the year with a monetary policy interest rate of 2.5%, as the Fed continues to adjust its interest rates, and as inflationary pressure continues to mount. We estimate an exchange rate of GTQ 7.74 per US$ by the end of 2022.

Honduras

Recent developments
  • The economy recorded a surprising, but reassuring, recovery of 12.5% YoY in 2021, after a 9% YoY drop in 2020. During the first two months of 2022, the economy accumulated a 6.6% YoY growth, led by financial intermediation and improvement in manufacturing and trade.72
  • Inflation, meanwhile, has continued its upward surge. In March 2022, it showed an uptick of 6.96% YoY, the highest rate since November 2014. Inflation will likely generate pressure on household spending and will undermine private consumption. Nevertheless, the Central Bank of Honduras has maintained the level of the policy interest rate at 3% since November 2020.
  • In the first quarter of 2022, remittances grew 21.9% YoY. In 2021, they represented 25.87% of the country’s GDP.73
Economic outlook
  • We expect the economic growth to moderate by 2022 to 3.8% YoY. This can be attributed to a deacceleration of economic growth in the United States (Honduras’ main trading partner) and economic uncertainty caused by the Russia-Ukraine conflict.
  • Inflation will remain high in a context of monetary normalization and food and energy price hikes. We expect it to end at 6.5% YoY in 2022. Given such inflationary pressures amid highly uncertain geopolitical context, we expect an increase in the policy interest rate, reaching 4% by year-end.

Mexico

Recent developments
  • After months of negotiation, the energy reform bill proposed by the Mexican president, Andres Manuel Lopez Obrador, was repealed in Congress. The reform had aimed at transforming the regulatory landscape for electricity in the country, including canceling power generation permits and prioritizing CFE (Comisión Federal de Electricidad) power over private generators. In months before it was repealed, the proposal had resulted in a dampening effect on investor confidence.
  • At the start of May, the government presented a plan to limit price increases on basic food items. The plan, which would be in place for at least 6 months, seeks to boost the production of grains by giving companies some support for distribution, and set a zero-import tariff on certain inputs, among others.
Economic outlook
  • The Mexican economy, although remaining below its prepandemic level and potential, is slowly recovering. After experiencing a sharp contraction in 2020 (–8.2% YoY), the economy grew by a mere 4.8% YoY in 2021. In 2022, the economy is expected to grow by 1.8% YoY, which implies a complete recovery is not expected until 2023. Manufacturing and services will benefit from increasing exports and improving consumption. Also, high commodity prices suggest mining may contribute to the overall growth. However, tight monetary and fiscal policies, coupled with depressed investment, will weigh on the outlook.
  • Inflation in March 2022 reached its highest level in 20 years (7.5% YoY), with its core component continuing on an upward trend. Advances are being generalized within the core component, led by food prices, while the noncore component is being put under pressure by external shocks. We expect inflation to ease in the second half of the year, but still conclude 2022 around 6.6% YoY.
  • The Central Bank of Mexico is trying to tackle inflation expectations and has been raising its benchmark rate since last June, going from 4.0% to 7% (its current level). We anticipate that the rate hike will continue and will close the year, at least, at 8.25%.

Nicaragua

Recent developments
  • Nicaragua’s economic growth was 10.3% YoY in 2021, which more than offset the slight drop of 2% suffered in 2020. This broke a three-year period of declining economic activity. In 2022 so far, the pace has been more moderate, with a growth of 6.1% YoY in the first two months of the year, supported by mining, services activities, and fishing.74
  • Inflation has increased, due to disruptions caused by uncertainties in the global economy. It reached 8.74% YoY in March 2022,75 the highest level since June 2013. Consequently, the Central Bank of Nicaragua raised the policy interest rate from 3.5% to 4% in April 2022.
  • Tax collection improved in 2021, growing 26.5% YoY, thanks primarily to the improved economic activity. Similarly, public debt fell to 64.2% of GDP in 2021, from 68.8% of GDP in 2020.76
  • During the first two months of 2022, remittances grew 28% YoY. In 2021, they represented 15.3% of GDP.77
Economic outlook
  • Growth is expected to unwind after last year’s rebound, dropping to 2.5% YoY in 2022. The lower dynamism can be explained by a lesser degree of public spending and private investment, moderate growth of its main trade partner (the United States), and a challenging international economic context.
  • As for inflation, we expect it to remain elevated and close the year at 7.5% YoY, stressed mainly by high international commodity prices. Meanwhile, the policy interest rate, due to restrictive monetary policy globally, would end the year at 4.5%.

Panama

Recent developments
  • A significant economic recovery in 2021 of 15.3% YoY was insufficient to recover the ground lost during the pandemic in 2020 (–17.9% YoY). In the first two months of 2022, the country’s economy, led by improvement in services, construction, and fishing, has performed well and has accumulated a 12.83% growth compared to the same period in 2021.78
  • In the first two months of the year, the sale of new vehicles and fuel have increased, which reflects that domestic demand has maintained its dynamism.
  • Inflation, as a result of rise in the prices of fuel and certain food products and beverages, increased during the first quarter of 2022 and stood at 3.2% YoY in March.
Economic outlook
  • The economic recovery witnessed in 2021 will likely continue this year. Growth would be supported by progress in the transportation sector and uptick in tourism. However, like in many other Latam countries, the conflict in Ukraine, by impacting global trade and commodity prices, has dampened the country’s the economic outlook—we estimate an economic growth of 6.3% for 2022.
  • The increase in food and energy prices would harm the good performance of private consumption. Inflation would close the year at 4.0%, according to our estimates, 1.4 percentage points higher than in 2021.

Paraguay

Recent developments
  • Economic activity, at the beginning of 2022, was hit by a severe drought that affected agricultural production and hydroelectric generation. As a result, the monthly GDP proxy fell by 0.8% YoY during January–February 2022.79
  • Inflation overshot the Central Bank of Paraguay’s (BCP’s) target range (3%–7% YoY) in the fourth quarter of 2021, driven by demand recovery, disrupted supply chains, and stronger international oil prices. Upside pressures persisted during the first quarter of 2022, due to a surge in the prices of fresh fruits and vegetables. In contrast, lower meat prices—given higher supply in the domestic market due to export restrictions to Russia—are partially offsetting the increases in fruit and vegetable prices. On the whole, annual inflation surpassed 10% in March 2022.80
  • In light of elevated inflation, the BCP accelerated the pace of interest rate hikes in April 2022, increasing the policy interest rate by 50 bps (reaching 6.75%).81 The tightening rate cycle has accumulated 600 bps since August 2021.82
Economic outlook
  • The recent drought is expected to negatively impact fiscal revenues from the Itaipú and Yacyretá hydroelectric dams and the 2021–22 harvest, although the current wet season and high commodity prices should partly mitigate this negative effect. Growth, on the whole, will slow down in 2022 to 0.4%, after a 4.2% expansion last year.
  • A key growth driver of 2022 will be gross fixed investment, as the public sector continues to boost infrastructure and public-works projects. On the supply side, this will continue to dynamize the construction sector. Meanwhile, private consumption is expected to slow down this year, after recording a strong postpandemic recovery in 2021 (+5.9% YoY).
  • Inflation is expected to start declining by the end of 2022, as international prices normalize and due to the BCP’s monetary-tightening cycle. Additionally, the BCP’s aggressive monetary-tightening cycle would help to prevent a sharp depreciation of the local currency, considering the trend of monetary normalization in the United States this year.

Peru

Recent developments
  • Thanks to a strong performance seen in household consumption and exports, the economy grew 13.3% YoY in 2021.83 This was the highest growth in the Andean region and helped the economy rebound after a dismal 2021 in which GDP shrank 11% YoY.84
  • Prices of Peru’s key exports, such as industrial metals, were already high before the Russia-Ukraine war and have continued to rise since. An increased export revenue has helped reduce the government deficit to 2.6% of GDP in 2021.85 Throughout 2022, the Peruvian sol continued to strengthen against the US dollar. The current exchange rate hovers around the S/3.7–S/3.8 range, deemed to be an equilibrium by some local analysts.
  • Inflation, after receding in January, reached 6.82% YoY in March 2022.86 The Central Bank of Peru (BCRP) responded by raising its policy interest rate from 0.25% to 4.5% in April 2022,87 and further increases are expected in the future. Inflation will likely stabilize in 2023.
Economic outlook
  • We expect GDP growth to moderate to 3.5% YoY by year-end 2022. We had to downgrade our forecasts after monthly GDP contracted in February. Consumer and business confidence, meanwhile, are showing signs of sluggishness.
  • High ministry turnover remains a downward risk for the Peruvian economy.88 President Pedro Castillo maintains a fraught relation with Congress, dominated by opposing parties. Castillo survived a second impeachment trial in March 2022.89
  • Once impervious to political turmoil, some Peruvian economic indicators are reflecting the country’s internal difficulties. Recent talks about a referendum to redraft the constitution negatively impacted the exchange rate and the country’s bonds risk premium.90 We expect the exchange rate to end the year at S/3.8 per US$. Moreover, recently the rating agency Fitch warned against an approval of more withdrawals from pension funds.91

Dominican Republic

Recent developments
  • Economic growth was 12.3% YoY in 2021, after witnessing a plunge of 6.7% YoY in 2020. This economic dynamism will continue this year, as reflected in the monthly index of economic activity, with an accumulated growth of 6.1% during the first quarter of 2022.92
  • The external sector has performed well: Exports are up in the first two months of 2022 (15.2% YoY) and so are tourist arrivals (171% YoY). Remittances, although down in the first quarter (–6% YoY), still remain above the same period in 2020 and 2019.93
  • Inflation has accelerated due to lingering external shocks, such as an increase in commodity prices and logistics costs. Inflation in March reached 9.05% YoY. This prompted the central bank to raise the policy rate to 5.5%, from a prior level of 3.0% in October 2021.
Economic outlook
  • Economic growth is expected to moderate this year and hover around 5% YoY by year-end 2022—still a better performance compared to many other Latam countries.
  • Inflationary pressures persist, and consequently, inflation will close 2022 at 8.3%.
  • The central bank will in all likelihood tighten the monetary policy to control inflation; the policy interest rate should reach 7.0% by the end of 2022. We expect the exchange rate to weaken to DOP 59.0 per US$, as the Fed raises interest rates.

Uruguay

Recent developments
  • The government of president Luis Lacalle Pou narrowly defeated an opposition-led referendum to repeal 135 articles of the Urgent Consideration Law (LUC).94 The law is the main legislative initiative of the president and mainly includes the fiscal, energy market, and labor reforms. This will give the government the momentum it needs to focus on passing social-security reform this year. 
  • In March 2022, inflation figures once again surprised on the upside. Prices stood at 9.4% YoY, way above the Central Bank of Uruguay’s (BCU’s) target range (3%–7%). Upward pressure on inflation came mainly from elevated food prices driven primarily by volatility in fruit and vegetable costs, while grain and fuel prices added to the woes.95
  • The BCU raised the policy interest rate by 125 bps to 8.50% in April 2022.96 The tightening cycle accumulates a rise of 400 bps since August 2021. The BCU board indicated that the adjustment would continue as long as the uncertainty about the duration of the external shocks on prices continues.
Economic outlook
  • In 2022, the government, with plans to prioritize the normalization of economic activity, is expected to pursue fiscal consolidation, social security reform, and the completion of free-trade agreements with China and Turkey (announced by president Lacalle Pou in December 2021). As result of this agreement, relations with Argentina could get strained, raising risks to bilateral cooperation between the two countries.
  • Uruguay will experience brisk economic growth in 2022 (4.2% YoY in 2022, after a postpandemic rebound of 4.4% YoY in 2021), as the country benefits from the normalization of economic activity. However, surging commodity prices due to the war in Ukraine will lead inflation to hover above the BCU’s future target range of 3.0%–6.0% YoY (the current target range is set to change in September 2022).
  • The recovery in 2022 will be driven by private consumption (+3.7% YoY), strong export growth driven by global demand for its agricultural goods (+6.5% YoY), and investment related to a new pulp mill and associated infrastructure (+4.3% YoY). However, weak activity in Brazil and Argentina, and less expansive macro policies, poses downside risks to the growth forecast.

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Cover image by: Jaime Austin

Deloitte Global Economist Network

The Deloitte Global Economist Network is a diverse group of economists that produce relevant, interesting and thought-provoking content for external and internal audiences. The Network’s industry and economics expertise allows us to bring sophisticated analysis to complex industry-based questions. Publications range from in-depth reports and thought leadership examining critical issues to executive briefs aimed at keeping Deloitte’s top management and partners abreast of topical issues.

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