Meanwhile , after withdrawal of pandemic stimulus , fiscal policy in most countries largely shifted into a neutral stance in 2022 . This , said the IMF , should help put fiscal balances on a more sustainable footing and support monetary policy in containing inflationary pressures .
Tightened financial conditions
With inflation on the rise around the world and central banks in advanced economies tightening financial conditions , global demand is weakening . Amid global monetary tightening and greater economic uncertainty , external financial conditions for Latin America and the Caribbean are worsening , leading to rising borrowing costs and currency pressures .
Adding to this , and partly reflecting the global slowdown , some commodity prices have fallen and are expected to soften further . This could bring some welcome relief to global inflationary pressures with time , but at a cost of further challenges to the region .
Global financing is becoming scarcer and costlier as major central banks raise interest rates to tame inflation . Capital inflows to emerging markets are slowing and external borrowing costs are increasing . Domestic interest rates in emerging markets are also rising as their central banks are hiking rates to battle inflation as well , but also because of reduced investors ’ appetite for risker assets .
“ For Latin America , these factors result in a deceleration in activity as higher borrowing costs weight on domestic credit , private consumption and investment . Earlier in 2022 , surging commodity prices and solid growth momentum helped to offset the effects of tighter global financial conditions , as investors were attracted by a region that hosts major commodity exporters amid global needs for food and energy supplies . But higher interest rates are pushing commodity prices down as the global economy decelerates , reducing their cushioning effect . The slowdown may also reduce exports , remittances and tourism to the region ,” commented the IMF .
Uncertainty about global interest rates and whether inflation can be brought back under control smoothly — a so-called ‘ soft landing ’— means spikes in volatility and investor risk aversion are also possible . In other words , the transition to higher global interest rates may be bumpy .
“ Commodity exporters — South American countries , Mexico and some Caribbean economies — are likely to see their growth rates halved next year , as lower commodity prices amplify
Santiago in Chile .
Among the largest economies , Chile and Colombia have seen a particularly dynamic rebound the impact of rising interest rates . The economies of Central America , Panama and the Dominican Republic will also slow as trade with the United States and incoming remittances weaken , though they will benefit from lower commodity prices . Tourism-dependent Caribbean economies will continue recovering , albeit slower-than-anticipated in July , amid weaker tourism prospects ,” added the IMF .
Despite slowing growth , Latin America will continue facing high inflation for some time . The swift response of major central banks in the region , which hiked interest rates ahead of other emerging market and advanced economies , will help bring down inflation , but this will take time as monetary policy needs to tame domestic demand to exert downward pressure on prices .
“ Price pressures have recently broadened , affecting items in the consumption baskets beyond food and energy . This has been the case in Brazil , Chile , Colombia , Mexico and Peru , where inflation recently reached a two-decade high of ten per cent and is testing the hard-won credibility of inflation targeting frameworks . We have , therefore , raised our inflation forecasts . Price increases for those five countries will reach around 7.8 per cent by year-end 2022 and remain elevated at about 4.9 per cent — still above central banks ’ tolerance bands in most cases — by the end of 2023 ,” cautioned the IMF .
Rising global interest rates will also test the resilience of private and public balance sheets . The region ’ s generally healthy banking systems mitigate the risk of financial distress , and regulation and supervision have improved in many countries . However , pockets of vulnerabilities remain .
While the region ’ s high levels of international reserves and strong central bank credibility will help mitigate the impact of tighter financial conditions , rising borrowing costs will test public finances through higher interest payments , as public debt and financing needs remain elevated .
Caribbean economies .
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ismr . net | ISMR December 2022 / January 2023