July 2023

Latin America’s slowing
economy shows improving
signs of resilience
Atradius Economic Outlook – Latin America & Caribbean

Atradius Regional Report Latam – May 2022 | 1

Atradius Economic Research
Greetje Frankena, Deputy Head ERD

Dana Bodnar, Economist

greetje.frankena@atradius.com+31 (0)20 553 2406
dana.bodnar@atradius.com+31 (0)20 553 3165

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Executive summary
Increased resilience. The Latin American region is dealing remarkably well with the triple shocks of the pandemic, Russia's
invasion of Ukraine and rising US interest rates. The region's GDP is now firmly above its pre-pandemic size. This
underlines the region's much improved resilience since the financial crisis of the 1980s, on the back of stronger
macroeconomic policy frameworks, improved banking supervision, and higher official reserves. Compared to other global
regions, the Latin American region is more resilient to a downward global scenario of tightening global credit conditions.
The main exception among the region's larger economies is Argentina.
Weak outlook. Meanwhile, the region's outlook has worsened. This reflects global headwinds, tight financial conditions andpolitical uncertainty in many countries. Growth will recover somewhat next year as these headwinds fade but will remain
weak due to structural impediments. The recent arrival of El Niño adds to the region's challenges. As a result, Latin America
and the Caribbean will once again lag the rest of the emerging market regions.

The region's largest economies are facing particularly weak growth prospects. As these are mainly located in SouthAmerica, this sub-region will show the poorest performance. The economies of Argentina, Chile and Colombia will contract
in 2023 or 2024. Central America is expected to see steady growth. This is also the case for Dominican Republic, making it
the exception among the region's larger economies. The smaller economies in the Caribbean will show the fastest growth,
but most of their economies, particularly the tourism dependent countries, are still below their pre-pandemic levels.

Improved robustness in the face ofmany challenges

Latin America and the Caribbean (LAC) is dealing
remarkably well with the triple shocks of the pandemic,
Russia's invasion of Ukraine and rising US interest rates.
Real GDP grew 3.9% in 2022 and the region's GDP is now
firmly above its pre-pandemic size. This underlines theregion's much improved resilience on the back of stronger
macroeconomic policy frameworks, improved banking
supervision, and higher official reserves. Since the debt crisisin the 1980s – often referred to as the lost decade, which
continued for some into the 1990s – many countries in Latin
America moved towards flexible exchange rate systems. The
latter allows the currency to be used as a shock absorber andenhances monetary policy autonomy. Furthermore, many
have introduced fiscal rules and made their central banks
independent. The fact that the region’s central banks wereamong the first movers to hike interest rate in response torising prices since 2021 is evidence of this improved policy
framework.
Figure 1 Weak global growth drag on LAC outlook

growth below its pre-pandemic annual average of 2.5% overthe coming years.
Commodity prices also pose an external drag on growth. The
price of major commodities that Latin America and the
Caribbean produce rose significantly from the pandemic
through last year as global demand recovered. Russia’s
invasion of Ukraine and adverse weather conditions raisedenergy and food prices as well. While the impact of higher
food prices on the major food exporting countries was muted
as adverse weather conditions suppressed yields, higher
energy prices provided some boost for oil exporters like
Colombia, Ecuador, Guyana and Trinidad & Tobago that will
fade in 2023 with prices more than one third lower around
USD 75 per barrel Brent. Of course, the easing of oil prices
does offer some relief, especially for those countries
dependent on energy imports like in the Caribbean. Lower
energy prices will help slow down inflation, easing pressure
on consumers. But food prices are set to remain high withrisks to the upside, especially associated with El Niño (see infocus box).
Figure 2 Commodity prices still elevatedMeanwhile, the region's outlook has worsened. We forecast
GDP growth to slow to 1.5% in 2023 and to remain sluggish at
1.3% in 2024, lagging other emerging market regions1. This
slowdown mirrors the deterioration in the external
environment, especially in key trade partners, the US andChina. Skyrocketing inflation in the US and the Federal
Reserve’s monetary tightening response both pose
headwinds to global economic activity. Although China's
economy is recovering after the late lifting of that country’s
zero-Covid policy, its industrial production remains meagre
and as such the demand for commodities. Lower demand forgoods as well as travel from advanced economies and lessproduction in China will keep Latin America’s economic

1

This brings us to internal factors explaining the meagre
growth outlook for the region: still elevated inflation and theimpact of tight financing conditions. To analyse the key
regional trends here, we focus on the largest LAC economies
with the addition of Costa Rica which recently joined Chile,
Colombia and Mexico as an OECD member in the region.
Inflation appears to have peaked in most LAC countries but
it’s clear that we are not out of the woods yet (see figure 3).
Inflation remains well above target in most markets – withthe exception of Costa Rica – and risks remain to the upside,

Data and forecasts at of 1 July 2023.
Atradius Economic Outlook Latin America & Caribbean – July 2023 | 1

particularly for food prices. This will delay monetary policy
easing.

factors that also fuel social unrest. Policy uncertainty, social
unrest combined with a challenging business environment
constrain investments and the region's growth potential.
These structural factors also explain the region's low global
integration which makes it challenging for the region tobenefit from nearshoring – a topic that we will explore morein depth in an upcoming research note.

Figure 3 Disinflation underway but prices still too high%

As mentioned in this section’s introduction, the region's
central banks hiked interest rates earlier and moreaggressively than the US Fed to fight inflation stemmingfrom rising food and energy prices which was exacerbatedby Russia's invasion of Ukraine (see figure 4). But core
inflation, which excludes food and energy, remains
stubbornly high above pre-pandemic levels and is only
expected to decrease more sharply through the year given
the lagged impact of monetary policy. On top of this, recent
global financial volatility further deters a general monetaryeasing cycle. While the central banks of Costa Rica and theDominican Republic felt confident enough about thedisinflation process to start its monetary easing cycle inMarch and May of this year respectively, the region’s otherlargest economies remain in wait-and-see mode. This willcontinue to drag on domestic demand, keeping growthprospects muted in 2023 and 2024.
Figure 4 Most LAC central banks in wait-and-see mode

All-in-all, growth prospects are particularly weak in theregion's largest economies. South America is the slowest
growing sub-region (see figure 5) and Mexico is also facing
meagre growth. Higher prices and the slowdown of the US
economy are weighing on Central America’s outlook as well.
The Caribbean will keep its place as the fastest growing subregion, with its largest economy, Dominican Republic,
continuing with steady growth. Guyana will be the fastest
growing economy in the western hemisphere over theforecast period as new oil production coming online ensures
GDP growth above 35% per year.
Figure 5 South America is the slowest growing sub-region

Percent

To end on a positive note, much improved resilience will help
most of the countries in the region to steer through thischallenging environment. In fact, our modelling in the mostrecent Atradius Global Economic Outlook2 shows that Latin
America is the most resilient region to our downside global
scenario of more persistent inflation and tighter credit
conditions. This improved shock resistance is also whatmarkets expect: the currencies of the region’s largest
countries among the world’s strongest (see figure 6), despite
a narrowing interest rate differential vis-à-vis the US. The
most vulnerable countries are Argentina, Bolivia, Cuba, El
Salvador and Venezuela – which have weak policy
frameworks and low official reserves – and the smaller, lessdiversified islands in the Caribbean.

Next to the weaker external environment, elevated prices
and tight financial conditions, the lacklustre economic
outlook is due to policy uncertainty, limited room for fiscal
support and most of all structural problems. Policy
uncertainty is related to shifts in government in many
countries over the past years. This reflected voters'
discontent about drugs-related crime and violence and highinequality in income and access to healthcare and education,

2
Atradius Economic Research, ‘It’s still all about inflation’, 4 July
2023 Economic Outlook - July 2023 | Atradius

Atradius Economic Outlook Latin America & Caribbean – July 2023 | 2

Figure 6 FX strength shows investor sentiment holding up

Box 1 Droughts contribute to social pressures
Periods of droughts are common in Latin America. They relate to
the two opposing El Niño (warming) and La Niña (cooling)
climate patterns in the Pacific Ocean that can affect weather
worldwide causing heavy rainfall or droughts. But climatechange also plays a role as it has increased the frequency,
intensity and duration of heatwaves, reducing water availability
and worsening the impact of droughts. Latin America isparticularly vulnerable to such droughts, not just for its foodproduction, but also for its electricity (mainly hydropower) andriver transportation.
Central Chile is since 2010 experiencing a ‘mega drought’ due towhich over half of its population lives in an area suffering from“severe water scarcity”. This puts Chile at the forefront of theregion’s water scarcity; Mexico is in second place.

South America: slow growth, highpolicy uncertainty
After a stronger than expected performance in 2022, we
project economic growth in commodity-rich South America
to fall from 3.9% in 2022 to 1.3% in 2023 and to ease further
to 0.7% in 2024. This makes South America the weakest
performing sub-region in Latin America. Next to amoderation of external demand and commodity prices andthe lagged effects of high inflation and monetary policy
tightening, country-specific factors weigh on SouthAmerica's growth prospects. The region continues to deal
with the effects of a wave of social unrest starting in late2019, particularly in Bolivia, Ecuador, Chile, Colombia andPeru. Higher food and energy prices contributed to socialpressures as well. This, combined with elevated policy
uncertainty and governability challenges will undermine
business sentiment and private investments in most of SouthAmerica going forward.
Table 1 Real GDP growth, % - South America
2021

2022

2023f

Argentina

10.7

5.0

-0.8

2024f
0.1

Bolivia

6.0

3.5

2.1

2.8

Brazil

5.3

3.0

2.5

0.4

Chile

11.9

2.5

-0.7

1.8

Colombia

11.0

7.3

0.2

-0.9

Ecuador

4.2

2.9

2.4

3.3

Paraguay

4.0

0.1

4.4

4.2

Peru

13.4

2.7

1.5

3.0

Uruguay

5.3

4.9

1.2

2.2

Venezuela

-4.1

12.3

0.8

0.0

South America

7.5

3.9

1.3

0.7

Sources: Oxford Economics, AtradiusA three-year – unusually long - La Niña (2020-early 2023)
resulted in a severe drought in Northern Mexico and southern
South America, home to some of the world’s largest producersof soy, corn and beef. Of these producers, Argentina was hit themost and to a lesser extent also Brazil (in 2020/21), Paraguay
and Uruguay.
While La Niña has officially ended in March 2023, El Niño has
arrived and is likely to persist until 2024, the US National
Oceanic and Atmospheric Administration (NOAA) recently
declared. This will bring – heavy - rainfall in South America's
tropical west coast and Argentina, but droughts to the northeastern part of South America, the mid-centre of Brazil (where
over 70% of its electricity is generated) and to Central America
and the Caribbean.
The upcoming drought would add to food affordability
challenges. In most of the countries affected, food price inflationis already high between some 10%-17% in Central America(Panama being the exception) and some 14%-18% in Chile,
Colombia and Peru in April 2023. Moreover, it could result infood availability problems. The most vulnerable countries arethose with relatively low income and where drier-than-average
weather conditions affect the entire crop cycle. This puts lower
middle-income countries in Central America and the Caribbean
at food security risk.
Finally, the upcoming drought could lift the region’s socialpressures. Water scarcity was an important factor driving
protests in Chile and Northern Mexico. And research shows acorrelation between droughts, food accessibility and availability,
and urban conflict in the Central American Dry Corridor, an
ecological zone stretching from Southern Mexico to Panama.

Argentina: extreme drought adds to existing woes
Following a stronger than expected expansion by 5.0% in
2022, driven by loose monetary and fiscal policies,
Argentina's crises battered economy is facing a new crisis.
The worst drought on record has severely darkened theoutlook for its agriculture dependent economy, which isalready struggling with spiralling inflation and acomplicated web of price and currency controls. We project
real GDP to contract by 0.8% in 2023 and to stagnate in 2024.
The GDP contraction already started in the last quarter of2022 due to some policy moderation under the current USD
Atradius Economic Outlook Latin America & Caribbean – July 2023 | 3

44 billion IMF programme and will deepen in 2023 due to an
estimated 36% drop in this season's corn and soybean output.
This will have serious consequences for economic growthand external accounts: agriculture accounts for some 9% ofGDP, a large part of the industrial sector consists ofprocessing of agricultural goods, and over half of the exportof goods consists of agricultural and food. Additionally,
higher food prices due to the drought pushed annual
inflation to 114% in May, despite price controls. Moreworrisome, core inflation, excluding food and energy prices,
has accelerated and hit a new record high at 146% in May.
This illustrates that recent policy setbacks have unanchoredinflation expectations. In response, the central bank hiked
the policy rate in several steps since March to 97% mid-May
from 75% since October 2022. But this will do little as long as
the root cause of high inflation, monetary financing ofgovernment spending, will not be addressed.
Stronger policies will be key to safeguard the IMF
programme and restore macroeconomic stability. At thesame time, the drought makes meeting the IMF targets all
the more challenging, especially considering upcoming
elections in October 2023. A shrinking economy and lower
export receipts will make it difficult to meet the targets forthe fiscal balance and official reserves. The latter are falling
rapidly from already worrying low levels, despite suffocating
and business unfriendly currency and capital controls (seefigure 7). This reflects a run on the currency and a loss ofconfidence in policies.
In this environment, the risk of a disorderly devaluation of
the Argentinian pesos (ARS) crawling peg to the USD is
extremely high. The informal rate is at ARS 492.5 against the
USD almost twice as high as the official rate of ARS 257. In
our base scenario, we assume the government to increase thepace of the crawl to avoid a disorderly devaluation followed
by a regime change, with the new government enacting
more ambitious policy consolidation and business friendly
policies. This, combined with a normalisation of the
agricultural sector, will set the stage for a shallow economic
recovery in 2024. But downside risks are extremely high.
Figure 7 Argentina heading for a disorderly devaluation

rates sharply from 2% in March 2021 to 13.75% in August
2022, the highest in the region. This has reduced inflationfrom a peak of 12.1% in April 2022 to 3.9% in May 2023, andwithin the target band of the central bank (1.75%-4.75% in2023). But it also slowed economic growth from 5.3% in 2021
to 3.0% in 2022. This slowdown will continue in 2023,
despite a strong GDP expansion in the first quarter boosted
by a record harvest. This is due to the lagged effects of highdomestic interest rates, lower external demand and policy
uncertainty. The latter keeps inflation expectations elevatedand will delay the start of the monetary policy easing cycle(which we expect in the last quarter of 2023). Policy
uncertainty stems from the change in government at thestart of 2023 after the left-oriented former president Lula daSilva (2003-10) narrowly won the presidential election
against the right-wing populist Bolsonaro. Economic policy
will be more state-driven with higher social spending. This
raised concerns about the credibility and future of the
spending cap, an important anchor for public finances.
Political pressure on the central bank to cut interest rates
added to policy uncertainty.
We expect macroeconomic policy to stay broadly orthodox
and the central bank to remain independent as pragmatism
and a minority position in Congress will limit the risk ofradical policies. Proposals for a new much-needed fiscal
framework have just been passed by the lower house and are
awaiting approval by the Senate. Additionally, the central
bank has kept interest rates unchanged so far and although it
acknowledged the proposals, it also indicated that an interest
rate cut is not imminent. Both the proposals and central bankactions largely reassured investors. The sovereign CDS pricehas fallen from 250 bps at end-March to 174 bps by endJune. The real is among the world's strongest currencies thisyear and has appreciated by over 9% vis-a-vis the USD andillustrating Brazil’s resilience.
Nevertheless, to put government debt (73% of GDP in April
2023) on a firm downward trajectory, the new rules need tobe complemented with tax reforms to lift tax revenues expected to be sent to Congress later this year. And as
always, the proof of the pudding will be in the eating. As theeffects of policy uncertainty and high interest rates will only
slowly fade, we expect a further moderation of GDP growthin 2024. A normalisation of agricultural output and weak
investment demand will outweigh positive effects fromrising consumer demand on the back of falling inflation andimproving global demand.

Chile: dealing with aftereffects of overheating

Brazil: challenges delay monetary policy easing
After a surprisingly robust performance since the pandemic,
we project Brazil's GDP growth to slow from 3.0% in 2022 to2.5% in 2023 and to moderate further to 0.4% in 2024. As oneof the first in the world, Brazil's central bank raised interest

Chile's economy was among the first to return to its prepandemic level, but we expect it to be among the poorest
performers over the forecast period. We project real GDP tocontract by 0.7% in 2023, before rebounding by 1.8% in 2024.
Chile's strong recovery from the pandemic came at the costof overheating and high inflation, exacerbated by Russia's
invasion of Ukraine (CPI peaked at 14% in August 2022).
Meanwhile, measures to address this – the withdrawal of
fiscal support and raising interest rates from 0.5% in July
2021 to 11.25% in October 2022 – caused a sharp economic
slowdown. Declining mining activity and policy uncertainty
Atradius Economic Outlook Latin America & Caribbean – July 2023 | 4

due to the process of rewriting the constitution added to this.
Real GDP started contracting in the course of 2022.
We expect this contraction to last well into in 2023 as still
elevated inflation (CPI at 8.7% in May 2023), high interest
rates and political uncertainty will continue to weighnegatively on consumption and investment. New mining
projects and a more supportive global environment willbolster exports (particularly copper and lithium) and lead atepid recovery. So will a gradual easing of monetary policy,
which we expect to start in July 2023, assuming disinflation
to continue and inflation expectations to fall within thecentral bank's 2%-4% target range. Upside surprises to theoutlook come from stronger than expected demand from
China (Chile’s largest trading partner) and a smooth
constitutional reform process. A more radical process ormore state intervention in the lithium sector than wecurrently assume following the president's recently unveiledplans pose downside risks to the outlook.
Table 2 CPI inflation, % - South America
2021

2022

2023f

2024f

Argentina

48.4

72.4

119.6

97.4

Bolivia

0.7

1.7

3.0

3.5

Brazil

8.3

9.3

5.0

4.2

Chile

4.5

11.6

7.9

3.2

Colombia

3.5

10.2

11.5

5.4

Ecuador

0.1

3.5

2.6

2.2

Paraguay

4.8

9.8

4.9

2.4

Peru

4.0

7.9

6.9

3.6

Uruguay

7.7

9.1

7.3

6.5

Venezuela

1588.5

147.1

45.6

38.0

South America

42.6

22.8

17.8

13.9

Sources: Oxford Economics, Atradius

Colombia: Economy heading for a hard landing
After one of the fastest GDP-growth rates among emerging
markets at 7.3% in 2022, Colombia's real GDP growth will
decelerate to 0.2% in 2023 and contract by 0.9% in 2024. The
combination of high inflation, high domestic interest rates,
policy uncertainty, fiscal consolidation and slowing external
demand, will drive the sharp slowdown. With the US being
its main trading partner, Colombia is more exposed to a US
slowdown than other countries in South America. Colombia's
economy was the first country in the LAC region to recoverfrom the pandemic. But the domestic demand-led expansion,
supported by fiscal measures and several pension
withdrawal bills, resulted in overheating. Consumer prices
jumped from less than 2% in 2021 to 13.3% in March 2023,
exacerbated by rising food and energy prices after Russia's
invasion of Ukraine. In response, the central bank tightenedinterest rates from 1.75% in September 2021 to 13.25% in April
2023. We expect the central bank to remain on hold in 2023,
as unlike in most other countries in the region, disinflation
has just started. Annual consumer prices fell to 12.4% in May,
still significantly above the central bank's 3% official target.
Elevated inflation, high interest rates and state-intervention
in the energy sector under current president Gustavo Petro,
Colombia's first left-wing president, will subdue private
consumption and investments in 2023 and push theeconomy in recession in the second half of this year. We
expect this recession to last well into 2024. Next to anecessary correction of consumer demand from overheating,this has to do with the arrival of El Niño at the end of 2023.
This will slow Colombia’s disinflation process through its
impact on food prices and delay the start of monetary policy
easing.

Peru: Political crisis, resilient economy
Amidst its deepest political and social turmoil in decades,
economic growth in Peru will slow from 2.7% in 2022 to 1.5%
in 2023, before rebounding to 3.0% in 2024. In December
2022, former president Pedro Castillo (2021-22) was ousted
and replaced by his vice president Dina Boluarte. She is thesixth president in six years, illustrating rising politicalinstability in the past years. Violent pro-Castillo protests
followed, with mine closures and protesters demanding for
Boluarte's resignation and new elections. Protests haveeased since March 2023, but social unrest will stay high at
least until the elections, which we expect to take place early2024.
Social unrest and the lagged effects of tight monetary policy
will reduce investments. Combined with a bad 2022-2023
harvest following a severe drought and fertiliser shortages
this will weaken GDP growth in 2023. The main growth
drivers are exports, albeit at a slower pace due to the global
slowdown, and private consumption, supported by early
pension withdrawals and government stimulus measures.
These are necessary to maintain consumers spending power,
considering sticky inflation resulting from protest induced
supply chain disruptions and higher food prices following
the bad harvest (CPI 7.9% in May from a peak of 8.8% in June2022).
We expect the central bank to start an easing cycle in
October 2023, provided that inflation expectations will
converge towards its 1-3% target range. This and the
expected fading of social unrest following 2024 early
elections and expanding mining output and exports will
drive the 2024 economic recovery. At an expected 30% in
2024, the GDP growth rate will be in line with its potential
growth rate. Key downside risks are more persistent
inflation due to the arrival of the El Niño phenomenon andnew bouts of social unrest. El Niño brings heavy rain andfloods in Peru's northern agricultural coastal areas, which
could result in crop failures, transport problems, higher foodprices and a delay in monetary policy easing. Upsidesurprises to the outlook might come from stronger than
expected demand from China (Peru's largest trading
partner).

Smaller markets dealing with governability andweather challenges
Of the regions smaller markets, a political crisis in Ecuador
clouds the economic outlook after president Lasso dissolved
the National Assembly, bringing forward general elections.
This followed a second impeachment attempt against thepresident in one year amid frustration about a sharp rise in
homicides in the past two years and rising food prices.
Atradius Economic Outlook Latin America & Caribbean – July 2023 | 5

Meanwhile, in Bolivia, worries about a disorderly
devaluation of its currency peg dampen its growth prospects.
Due to unorthodox policies, its official reserves continue tofall, despite higher energy prices. A severe drought andweaker growth in Argentina and Brazil will slow down
Uruguay's GDP growth in 2023. With consumer prices fallingfrom 10% in October 2022 to 7.1% in May 2023 and core
inflation under control, the central bank felt confident
enough to start its easing cycle. In April, it cut rates by 25base points to 11.25%. With rainfall returning in Paraguay,
boosting agriculture and – hydro - energy production, thiscountry will be the region's star performer over the outlook
period. El Niño however is a major downside risk to the 2024
outlook as flooding could damage harvests and raisetransportation costs. Finally, despite a strong 2022 outcome,Venezuela’s oil-dependent economy was still only a quarterof its size prior to its long depression, from 2014 to 2020.
This reflects years of economic mismanagement, a lack offinancing, sanctions and on declining oil production. Oil
production is rising since 2021, but still below its prepandemic level. Meanwhile, the outlook is poor as capacity
constraints limit future oil production, while unorthodox
polices have fuelled inflation and undermined the businessclimate.

Mexico and Central America:
exposure to US slowdown
After a reasonably strong performance in 2022, we expect
growth in Central America to moderate from 5.6% in 2022 to3.1% in 2023 and 2.1% in 2024, around the region's modest
pre-pandemic growth rate. The region has strong trade andinvestment linkages with the US, through the Dominican
Republic-Central America free trade agreement with the US(CAFTA-DR), among others. The US is also home to over 7
million immigrants from Central America. The money they
sent back home – remittances – offered a lifeline during the
pandemic and also mitigated the impact of higher energy offood prices in the past years. As a net importer of energy andfood, importing some 60% of the cereal it consumes, theregion is highly vulnerable to these higher prices. In
particularly in El Salvador, Guatemala, Honduras andNicaragua remittances grew strongly since 2020 (see figure8). This reflects altruism and improved labour conditions in
the US, and for Nicaragua mass emigration to the US due toincreased repression. However, going forward, weaker
growth in the US will weigh on remittances, exports andforeign direct investments.
Meanwhile, annual food price inflation in most countries in
the region remains elevated, trending between 10.1% (Costa
Rica) and 15% (Honduras) in April 2023, with Panama (4.8%)
being the exception. This will slow the disinflation process inmost countries, particularly in the region's poorest countries
Honduras and Nicaragua, and also weigh on the growth
outlook. We expect El Salvador and Nicaragua to be theregions weakest performers. Country specific factors also
explain their subdued growth outlook. Poor access tointernational financial markets, due to sanctions (Nicaragua)
or high risk of debt distress (El Salvador), a weak rule of law(both countries) and increasingly unorthodox policies (ElSalvador) curtail private investments in these countries. We
expect Panama to be the region's strongest performing
country, underpinned by mining and public investment.
Figure 8 Strong remittances mitigated impact of global
headwinds, but will this last?

Table 3 Real GDP growth, % - Central America & Mexico
2021

2022

2023f

2024f

Costa Rica

7.8

4.3

3.0

2.0

El Salvador

11.2

2.6

1.6

0.7

Guatemala

8.0

4.1

1.9

2.1

Honduras

12.5

4.0

2.5

2.6

Nicaragua

10.4

3.8

0.7

0.2

Panama

15.8

10.8

5.7

2.9

Central America

10.5

5.6

3.1

2.1

Mexico

4.9

3.0

1.8

1.0

Sources: Oxford Economics, Atradius

Mexico: stuck in low gear
After one of the slowest and still incomplete recoveries fromthe pandemic, we project Mexico's real GDP growth to
weaken from 3.0% in 2022 to 1.8% in 2023 and 1.0% in 2024.
As the most open and US-dependent economy among theregion's largest markets, Mexico is highly exposed to the US
economic slowdown. This will curtail exports and inward
remittances. Moreover, the lack of fiscal support during the
pandemic will leave lasting scars on Mexico's economy likepermanent business closures and lower quality jobs.
Furthermore, business unfriendly policies under President
López Obrador, in power since December 2018, will continue
to curtail domestic private investments. Finally, still elevatedinflation and the lagged effects of monetary policy tightening
will restrain domestic consumer demand and business
investment. Consumer prices rose from slightly over 2% prior
to the pandemic to a peak of 8.7% in August and September
2022; Russia's invasion of Ukraine and a severe drought inNorthern Mexico lifted food and energy prices even higher.
In response, the central bank lifted interest rates from 4% inJune 2021 to 11.25% in March 2023. Although inflationarypressures have eased to 5.8% in May, consumer prices
remain above the 2-4% target range of the central bank. Also,
core inflation (excluding food and energy), remains elevated
at 7.4% in May 2023. And with wage increases in the
manufacturing sector being relatively high as well, we
expect the central bank to remain very cautious. It also may
take up to the last quarter of 2023 before it starts an easing
Atradius Economic Outlook Latin America & Caribbean – July 2023 | 6

cycle. Combined with ongoing state intervention in theenergy sector, this will slow the economy in 2024 as well.
That said, strong foreign direct investment inflows could
result in upside surprises to the near growth outlook. Theseflows came primarily from multinationals already operatingin Mexico and illustrate that the president's business
unfriendly policies have so far not scared them off.
Table 4 CPI inflation, % – Central America & Mexico

Caribbean is generally characterised by two types of
economies: tourism-dependent like the Bahamas andJamaica, and commodity exporters like Guyana andTrinidad & Tobago. The latter group are expected to grow
12.8% this year and 15.8% next, led by Guyana’s rapidly
expanding energy sector. Prospects for tourism-dependent
countries are much more subdued on the other hand with
3.1% and 2.5% expansions expected.
Table 5 Real GDP growth, % - Caribbean

2021

2022

2023f

2024f

Costa Rica

1.7

8.3

3.9

3.1

2021

2022

2023f

El Salvador

3.5

7.2

2.6

0.3

Tourism dependent

5.6

6.1

3.1

2.5

Guatemala

4.3

6.9

6.9

4.3

Commodity exporters

3.0

20.9

12.8

15.8

Caribbean

3.1

11.2

6.9

9.7

Honduras

4.5

9.1

7.4

4.8

Nicaragua

4.9

10.5

8.1

4.8

Panama

1.6

2.9

2.6

2.0

Central America

3.4

7.4

5.2

3.2

Mexico

5.7

7.9

5.6

3.9

Sources: Oxford Economics, Atradius

Costa Rica: fiscal consolidation slows growth
After a strong rebound from the pandemic, driven by theexports of medical supplies, Costa Rica's recovery lost
momentum due to global headwinds. We expect real GDP
growth to moderate further from 4.3% in 2022 to 3.0% in
2023 and 2.0% in 2024. Slowing global demand and ongoingfiscal consolidation under the IMF-programme (2021-24) willoutweigh the positive impact of significant disinflation on
economic growth. Annual consumer price inflation fell froma peak of 12.1% in August 2022 to 0.9% in May 2023, below
the lower bound of the central bank's 2% to 4% target range.
This reflects a cooling of domestic demand and enabled thecentral bank to begin monetary policy easing.
In March 2023, Costa Rica's central bank became the first in
Latin America to cut interest rates; two more cuts followed in
April and June. These steps have brought the policy rate
down from 8.5% to 7.0%. However, at this level, financial
conditions are still tight. And we do not expect this to change
anytime soon. The central bank will be cautious aboutlowering interest rates. In June, it slowed the pace of ratecuts, stating that risks were tilted towards higher inflation.
This has to do with the arrival of El Niño. Tight financial
conditions will for some time constrain private investments
and weigh on next year's GDP growth. That said, the outlook
for private investments is overall positive, considering Costa
Rica's attractive business climate, market-friendly andorthodox economic policies and its OECD accession in 2021.

Caribbean: highest but most fragile
growth outlook
The Caribbean is the fastest growing sub-region in LAC but –with the Dominican Republic a notable exception – thisgrowth is more vulnerable to external shocks than that inCentral and South America due to lack of diversification andlimited policy room. We expect aggregate GDP growth in theregion to slow to 6.9% in 2023, from a strong 11.2% expansion
last year, dragged down by higher inflation. Economic
growth is likely to pick up to 9.7% in 2024 but this figure
headline figure masks wide disparities in growth. The

2024f

Sources: Oxford Economics, Atradius

As primarily small, island economies, the Caribbean has
been one of the hardest hit by the challenging global
developments underway. Supply chain disruptions anddependence on food and energy imports has pushed regional
inflation into double digits since 2022. High regional GDP
growth in 2022 was driven by an ongoing recovery in the
tourism sector from its deep contraction in the pandemic
while rallying global commodity prices contributed to strong
growth in commodity exporters as well. But still, regionwide tourism only reached 84% of its pre-pandemic levels
and most economies’ output levels remained below pre-crisis
levels.
Figure 9 Caribbean economies still recovering pandemic losses

Of the Caribbean’s 10 largest economies, only three haverecovered to their 2019 levels. Guyana’s economy, notincluded in the figure, already nearly doubled its pre-crisis
size in 2022 as its emerging energy sector continued topropel its GDP growth at the highest global rate. Trinidad &Tobago, the region’s other largest commodity exporter saw
its economic activity just match 2019 levels thanks to higher
global prices for hydrocarbons but production remains well
below pre-crisis levels. The Dominican Republic has alreadygrown some 10% since the pandemic and is set to continue
growing steadily. Most other economies are only expected tobarely recover to pre-pandemic levels over the forecast
period. This is especially the case for tourism-based
economies struggling with both higher domestic prices andlower demand from tourism source markets, especially the
US.
While the Caribbean leads Latin American growth rates, thepast few years highlight the intensifying need for manyisland economies to diversify, but progress here is slow. The
Atradius Economic Outlook Latin America & Caribbean – July 2023 | 7

list of countries around the world most dependent on
tourism for GDP, exports and employment is dominated by
Caribbean countries (half the top 20 of the Tourism
Dependency Index). Public debt levels are at historical highs– Suriname, Barbados and Dominica have government debt
above 100% of GDP while Antigua & Barbuda, Bahamas and
St. Lucia have debt surpassing 90% of GDP. Fiscal space islimited by narrow revenue bases and higher recent spending
to counter pandemic losses and the cost of living crisis.
Several countries operate under fiscal responsibility
frameworks and IMF programmes to help improve fiscal
discipline and improve shock resilience but progress is slow.
Overall, the Caribbean’s outlook is moderately positive, butvulnerability to global inflation as well as food security posesignificant downside risks.
Table 6 CPI inflation, % - Caribbean
2021

2022

2023f

Tourism dependent

2.2

6.5

5.0

2024f
2.8

Commodity exporters

19.5

19.6

17.4

12.0

Caribbean

6.7

11.0

9.8

5.6

Sources: Oxford Economics, Atradius

Dominican Republic: bright spot in LAC shines due
to sound policy framework
The Dominican Republic, the Caribbean’s largest economy, isalso losing some steam this year, with real GDP growthslowing to 3.8% from 4.9% in 2022. But its growth prospectsin H2 and 2024 are improving and we expect an acceleration
to 4.9% in 2024, bucking the regional deceleration trend. The
IMF flags the Dominican Republic as “one of the mostdynamic and resilient in the Western Hemisphere over thelast two decades” in its 2023 Article IV consultation,

underpinned by strong macroeconomic policies andinstitutions. The short-term slowdown is in part due toslowing tourism as the sector accounts for 17% of GDP and
16.7% of employment. While workers’ remittances inflows(8% of GDP) have surpassed pre-pandemic levels, they’re also
faltering as the US economy slows. With income strained byeasing tourism and remittances, soaring inflation –especially fuel price – has further strained purchasing
power. But the prospects for the Dominican Republic are
improving.
The most central promising development is that pricepressures are beginning to ease. The central bank (BCRD)
raised its policy rate by a cumulative 550 bps sinceNovember 2021 to 8.5% which has helped contain pricepressures by peso appreciation and kept inflation
expectations anchored. Sound policy management hashelped ease the burden of the cost-of-living shock on
consumers and the fiscal risks have remained contained.
Both headline and core inflation have shown a sustained
decline since Q2 2022 and headline inflation at 4.4% in May,is back within the central bank’s 3% to 5% target range. This
has allowed the BCRD to begin easing its monetary policy in
May this year, cutting rates twice already to 7.75%.
Furthermore, strong institutions are underpinning the
Dominican Republic’s status as an attractive investment
destination. The tourism sector’s outlook is improving
thanks to USD 3.6 billion in private investment secured to
improve hotels and open new flights to and from Europe.

Atradius Economic Outlook Latin America & Caribbean – July 2023 | 8

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