Latin America’s fiscal consolidation at risk of slippages as plans postponed – IMF

SAO PAULO (ICIS)–Latin America’s countries high debt levels require fiscal consolidation plans which in some cases are being postponed, increasing risks for the long-term financial stability of the region, the Director of the Western Hemisphere Department at the IMF said on Friday.

Roberto Valdes, a Chilean economist, said that an important part of fiscal consolidation had to also come from growth plans which could increase Latin America’s perennial lower growth rates, when compared with other emerging regions.

Speaking at the IMF’s spring meeting in Washington, Valdes said that the post-pandemic withdrawal of stimulus continued to be a golden opportunity to reduce high debt levels.

“However, risks of slippages are increasing as consolidation plans are being postponed. Faster consolidation is needed to put public debt on a stronger footing. Timely fiscal tightening will also allow for faster normalization of monetary policy, he said.

“Moreover, to be durable, fiscal adjustment will need to include revenue mobilization and protect key social spending. Maintaining social cohesion should be a centerpiece of fiscal consolidation plans given the region’s still high levels of poverty and inequality.”

POOR GROWTH
Valdes said the IMF expects Latin America and the Caribbean’s GDP to grow by 2% in 2024, a slowdown from 2.3% in 2023.

Moreover, the region’s medium-term growth is projected also at 2%, well below the growth rates of peer economies in other regions, added Valdes, who encouraged countries to be bold with their green energy transitions.

“It will be important for the countries to identify structural reforms with high growth payoffs and work hard on building consensus to implement them durably and inclusively. For most countries in the region, boosting growth will require strengthening governance and the business environment to raise the historically low investment levels,” he said.

“Comprehensive and well-sequenced climate change strategies will be key to boost growth, including by investing in green minerals and energy sectors. Reforms should also focus on raising participation rates amid slowing population growth and aging, including by tackling gender gaps.”

The IMF director went on to say Latin America’s large workforce employed in informal jobs must be part of a comprehensive reform agenda to raise productivity.

Increasing security and reducing crime was the other large pending task, he said.

Valdes also had some positive feedback for Latin American countries, however. The inflation crisis seems to be behind the region, and this is important as Latin American prior inflation crisis easily spiraled out of control. Hyperinflation is no strange at all to the region.

POST-PANDEMIC REBOUND
Apart from “significant macroeconomic imbalances” in some countries – hard not to think in Argentina or Venezuela – Latin America has overall showed higher resilience than under previous downturns, said Valdes.

“The rebound from the pandemic has been stronger than previously expected. We see this resilience partly as a result of the countries’ progress in strengthening their macroeconomic frameworks. With most economies operating near potential, however, activity in the region has been generally moderating in recent quarters,” he said.

“On a positive side, labor markets have remained resilient, with unemployment still at historically low levels. With a weaker external environment and the effect of tight policies to bring down inflation still materializing, we expect growth in Latin America and the Caribbean to moderate further in 2024.”