The ongoing economic recovery from the Coronavirus pandemic has been hampered by numerous headwinds, including the Russo-Ukrainian War, unprecedented inflation dynamics, a sharp decline in fiscal and monetary stimuli, and a softening macroeconomic environment overall. Their persistence has acutely affected emerging-market economies, whose collective annual economic growth was progressively downgraded by the International Monetary Fund (IMF) from 4.8 percent in January, to 3.8 percent in April, to 3.6 percent in July of 2022.
While these challenges have effectively paralyzed much of the international economy, the Latin American region has exhibited impressive resistance. As shown within Figure 1, annual economic growth in Latin America is expected to reach 4.5 percent this year, outpacing that of emerging market economies at 3.4 percent and the international economy overall at 2.9 percent. This analysis will examine the economic and policy-relevant idiosyncrasies that have enabled Latin America to remain relatively resilient to these emergent headwinds.
Figure 1: Annual GDP Growth by Analytical Country Group (source: IMF, Author's Calculations)
First, many of the largest economies in Latin America have been relatively insulated from the geopolitical shocks induced by the Russo-Ukrainian War due to their limited trade balance both with countries directly involved in the conflict as well as those facing significant second-order effects from the conflict such as the Eurozone. As shown in Figure 2, trade with Russia, Belarus, and Ukraine hardly registers as a fraction of Latin America’s net exports. Trade with the United States and the Eurozone similarly comprises no more than 20 percent of net exports for most of the region’s major economies excluding Mexico. Given the war’s persistence and strain on the global economy, which has caused supply chain disruptions and precluded tighter monetary policies
Figure 2: Latin American Trade Partnerships in 2021 as Percentage of Net Exports (source: World Bank, Author's Calculations)
Second, many of the region’s economies are well-positioned to address persistent inflationary pressures through increased central bank policy rates. Though some countries, including Guatemala and EcuadorFigure 3 shows that interest rates in Latin America broadly began to rise in mid-2021, when global inflation first began to accelerate in food and other select durable goods. Despite these increases, however, rates still remain at historically-low levels, suggesting that future hikes could be tolerated. By contrast, the majority of developed economies, including the United States and Eurozone, hesitated to raise interest rates until early-2022, when trickling inflationary pressures were exacerbated by the Russo-Ukrainian War. This initial delay forced those central banks to enact an aggressive series of hikes, limiting markets’ ability to adjust to a tighter monetary policy environment. Having taken action on inflation early, central banks in Latin America are therefore well-placed to safely adjust interest rates depending on the trajectory of global inflation.
Figure 3: Central Bank Policy Rates of Major Economies in Latin America (source: IMF, World Bank, Trading Economics)
Finally, Latin America is also poised to significantly benefit from positive terms-of-trade changes driven by a continued surge in commodity prices, which has enabled many countries to supplement external positions with regional and international trade partners, reduce post-COVID central government debt balances, and improve overall economic growth. As shown by Figure 4, a significant percentage of net exports from Latin America comprise fuel as well as ores and minerals, suggesting continued tailwinds to the region should commodity prices remain elevated by the ongoing surge in global inflation. These gains could be blunted as industries and countries adjust to COVID-related supply disruptions and ongoing geopolitical shocks in Europe and the Middle East by “nearshoring” their supply chains. In that case, however, the region could respond by adjusting trade patterns to concentrate more on North America and the Western Hemisphere.
Figure 4: Disaggregated Commodity Exports from Latin America in 2021 (source: World Bank)
The above-average performance of many economies within the Latin America region has several implications for the ongoing global economic recovery from the Coronavirus pandemic and beyond. First, the Latin American region could prove to be an essential lynchpin for continued economic growth within the Western Hemisphere, especially as concerns of a mild to moderate recession remain elevated within the United States and Canada. Second, Latin American economies could prove vital to maintaining international trade flows and assisting other countries – such as China, which already slipped into a recession earlier this year – in recovering from their own slowdowns and forging new, long-term economic partnerships. Third, Latin America’s performance could serve to bolster the region’s recent leftward political shift – which has seen the election of left-leaning presidents in Chile, Peru, and most recently, in an upset to its current market-friendly incumbent administration, Brazil.
While much attention has been directed toward the ongoing slowdown afflicting the United States and the Eurozone, the outstanding performance of Latin America serves as an optimistic counterweight to an otherwise murky short-term outlook. Its relative dynamism against ongoing macroeconomic headwinds is due to combination of: economic policy that has enabled most countries in the region to adapt themselves to global inflationary pressures; natural economic buffers such as a lack of direct exposure to the Russo-Ukrainian War; and the composition of its trade balances with the rest of the international economy. Although the region is not completely impervious to global financial gyrations, with many individual countries facing their own economic and political challenges, it is clear that Latin America as a whole remains poised to weather the global economic slowdown and respond appropriately should future shocks catalyze stronger macroeconomic headwinds. In remaining beacons of stability amidst continued global economic turbulence and complemented by appropriate policy responses to internal and external challenges, many Latin American economies could emerge as leaders in their own right within a new expansionary cycle for the international economy at-large.
Noah Yosif serves as Director, Regulatory Economics at FTI Consulting. He holds an MPA from the University of Pennsylvania, as well as an MA in Applied Economics and BA in Economics from the George Washington University.