Latin America has experienced favorable external economic conditions since 2020. Consider that the interest rate on U.S. Treasury bonds stood at 1.5 percent one year ago.
No longer: Entering 2023, unfavorable external economic conditions rule. The interest rate on U.S. Treasury bonds has surpassed 4 percent. Global food prices have decreased by more than 10 percent since March, metal prices have plummeted by nearly 32 percent and crude oil value has dropped by more than 20 percent since June.
The CERES External Factors Index represents a weighted average of the quarterly changes in international food prices, metal prices, interest rates, oil prices and gross domestic product growth for China and the United States. It maintains a strong correlation with the business cycle fluctuations in Latin America.
Unfortunately for the region, the current situation and economic forecasts until 2024 are worse than the last three-decade average, leaving Latin American nations challenged to put their economies on a sustainable growth path.
The International Monetary Fund has revised downward its growth forecast for Latin America by nearly 1 percent for 2023, relative to the IMF’s April 2022 projection. The IMF expects Latin America to grow by only 1.7 percent in 2023 — well below the 6.9 percent observed in 2021 and the 3.5 percent expected for 2022.
But, where there is pessimism, there is also reason for optimism. Despite external factors, Latin America is presented with a unique opportunity that arises from the problems in the commodity market and energy supply chain, in addition to threats to food and energy security caused by the Russian invasion of Ukraine.
In this sense, strengthening the region’s strategic position through global relationships can be pivotal in enhancing trade and investment possibilities.
Despite being home to 10 percent of the global population, Latin America lays claim to about 50 percent of the world’s sugarcane, 21 percent of the oil, 18 percent of the corn, 16 percent of the meat, and 15 percent of the fruit. The region is a major player as an exporter, and even more so now, with other exporters like Ukraine facing crises of their own. Taking advantage of a crisis abroad can further enhance Latin America’s position as a global trade partner. The same goes for encouraging private investors who understand the region’s export potential.
Similarly, Latin America is one of the world’s leading regions for renewable energy use. More than a quarter of the region’s primary energy comes from renewables — twice the global average. Primarily thanks to hydropower development, renewables make up almost 60 percent of the region’s power generation — much higher than the worldwide average of 35 percent.
Given its track record, Latin America has the potential to produce green (e.g. carbon-free) hydrogen, leading the way for a highly coveted energy alternative, as stated by the International Energy Agency in a recent report. Given Latin America’s production capacities, the region could become a strategic new energy partner to Europe, helping reduce the continent’s dependency on Russian natural gas by two-thirds in under a year.
For Latin America to weather the clouds on its horizon, structural reform is imperative. Whether or not Latin American policymakers encourage private investment will determine the region’s success or failure in seizing the opportunity.
Heading into 2023, the reform efforts should focus on improving incentive frameworks that affect investment decisions and sending strong signals of commitment with policies that can increase competitiveness on a broad scale.
Institutions need to be improved, not undermined. Enhancing the quality of human capital is critical. Tax rates and regulatory burdens need to be scaled back and kept low, making Latin America attractive to entrepreneurs at home and outside the region.
Pessimism can only turn to optimism via prudent policymaking. Anything less simply isn’t good enough for Latin Americans.