Latin America in 2024Q3: Financing Decompression and 2.1% Regional GDP Growth

Authors¹:

Christian Alcarraz, FLAR, Bogotá, Colombia. – calcarraz@flar.net
Daniel García, FLAR, Bogotá, Colombia. – dgarcia@flar.net
Carlos Giraldo, FLAR, Bogotá, Colombia. – cgiraldo@flar.net
Andrea Villarreal, FLAR, Bogotá, Colombia. – avillarreal@flar.net
Liz Villegas , FLAR, Bogotá, Colombia. – lvillegas@flar.net

¹ The opinions and visions are the responsibility of the authors. They do not necessarily reflect the opinion of FLAR or its administrative bodies.

In the past three months, Latin America has faced reduced external and domestic financing constraints, supported by lower interest rates driven by easing inflation in most countries. This context has enabled us to revise the region’s annual growth projection to 2.1% for 2024. However, inflation remains above target in several countries, and public debt continues to rise as a percentage of GDP, underscoring the need for greater fiscal consolidation efforts. These efforts, however, will need to be tailored to the diverse economic conditions across the region.

Reduced restrictions on access to external financing, combined with the continued strong performance of remittances, have helped mitigate the impact of deteriorating terms of trade on the region’s external accounts (see Graph 1). This deterioration has been driven by declining prices for key commodities, including oil, copper, and soybeans. In this context, central banks have accumulated international reserves over the past three months, achieving a quarterly increase of 5% in the average reserve balance.

Graph 1. External sector indicators

Latam includes Bolivia, Colombia, Costa Rica, Ecuador, Mexico, Peru, Paraguay and Uruguay. Aggregated by GDP in USD PPP. Chile is excluded because it is a large net remittances sender to the region. Main origins: Bol = Spain, Chile, USA and Argentina; Col = USA, Spain and Chile; Mex = USA; Par = Argentina, Spain and Brazil; CR = USA; Ecu = USA and Spain; Per = USA, Spain and Chile; and Uru: Argentina, Spain and USA.

Source: Central banks and own calculations and estimations.

According to the latest data, GDP growth has risen in the region’s major economies (see Graph 2), and we estimate this trend will continue into the third quarter of the year. This growth is largely driven by strong private consumption and, to a lesser extent, by gross capital formation.

Graph 2. Quarterly real GDP growth

Data for the second quarter of 2024 is an estimate considering Brazil, Chile, Colombia, Costa Rica, Mexico, Peru, Paraguay and Uruguay. Aggregated by GDP in USD PPP.

Source: Own calculations based on information from central banks.

Inflation has continued to decline across most countries, though it remains above target levels, with inflationary pressures—particularly from service prices—persisting in many economies (see Graph 3). While short- and medium-term inflation expectations remain relatively anchored, they have recently rebounded in some countries, notably Brazil and Chile. In response, most central banks have paused further reductions in their policy rates during recent meetings. For example, Brazil’s central bank decided to raise its policy rate by 25 basis points in September.

Graph 3. Ratio of the price of goods to the price of services in Latin America

Latin America includes Brazil, Chile, Colombia, Costa Rica, Ecuador, Mexico, Paraguay and Peru. Aggregated by GDP in USD PPP.

Source: Own calculations based on information from central banks.

In this context, the region’s financial systems have shown resilience and appear to be decompressing within a context of lower market interest rates. Credit to the private sector has accelerated, and non-performing loans have stabilized, though they remain elevated in several economies. Despite these challenges, banks maintain solvency levels above minimum requirements (see Graph 4) and provisioning above 100%, providing a buffer to navigate potential loan portfolio deterioration.

Graph 4. Financial sector indicators

Latin America Includes Bolivia, Brazil, Chile, Colombia, Costa Rica, Ecuador, Mexico, Peru, Paraguay and Uruguay. Aggregated by GDP in USD PPP.

Source: Own calculations based on information from central banks.

From a fiscal perspective, total deficit as a percentage of GDP have risen across most of the region (see Graph 5), driven by both higher primary spending and increased interest payments. Consequently, public debt exceeds 60% of GDP in several economies.

Graph 5. Primary and fiscal deficit in Latin America

Includes Bolivia, Brazil, Chile, Colombia, Costa Rica, Ecuador, Mexico, Peru, Paraguay and Uruguay. Aggregated by GDP in USD PPP.

Source: Own calculations based on information from ministries of finance.

In the short term, the region’s GDP is projected to grow by 2.1% in 2024 (see Table 1), a 0.1 percentage point increase from our June forecast. Inflation is expected to continue its downward trend through the end of 2024 in most countries, although it will likely remain above target in many inflation-targeting economies.

On the external front, current account deficits as a percentage of GDP are anticipated to be below the decade’s average in most countries, suggesting a reduced vulnerability to sudden stops or reversals in capital flows.

Table 1. Estimates of real GDP growth in Latin America

Source: Aggregated by GDP in USD PPP. Calculations: Department of Economic Studies – FLAR.

Key risks to these projections include the possibility that inflation’s convergence toward target levels could stall or even reverse due to persistent price pressures on services and wages in several economies. This risk is further amplified by the recent upward trend in fiscal deficits. In such a scenario, central banks may need to raise policy rates or maintain them at elevated levels for an extended period to anchor inflation expectations. Additional inflationary pressures could arise from factors related to geoeconomic fragmentation or climate-related effects.

The combination of elevated inflation, interest rates, and fiscal deficits could activate several risk channels. Notably, there is the possibility of a large-scale sell-off of local public bonds held by foreign creditors. Additionally, the banking sector may face losses in the value of its investments in local public bonds, which represent over 10% of total assets in most countries.

In summary, a macroeconomic policy mix that promotes fiscal consolidation, curbs inflationary pressures, and continues to ease both domestic and external financial conditions is essential for maintaining macroeconomic and financial stability.