Article 24 minute read · 18 January 2023

Latin America economic outlook,

January 2023
A global economic slowdown will dampen Latam’s growth
prospects, but a reconfiguration of the global economy
following the war in Ukraine may give rise to unexpected
opportunities for the region

Daniel Zaga Alejandro Mina

Mexico Colombia

Daniel Gonzalez Sesmas Federico Di Yenno

Mexico Argentina

See more

Broad Contours
The far-reaching impacts of the ongoing war in Ukraine, such as persistently high energy and food costs,
have further weakened a global economy already reeling under the lingering economic challenges of the
COVID-19 pandemic. Most economic forecasts in recent months have reflected this sentiment. The
International Monetary Fund, for example, recently downgraded its global growth forecast for 2023 to
2.7%—0.9 percentage points lower than its April 2022 estimate. This bleak panorama also involves
negative economic perspectives for the United States (1.0%, down from 2.3% in April) and China (from
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5.1% to 4.4%)—two of the world’s largest economies.

Such weakening economic activity is bound to dampen

growth prospects in Latin America (Latam). Consequently,
we at Econosignal (the economics unit at Deloitte Spanish-Latin America) have revised our forecast for
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the region’s growth in 2023 from 2.0% to 1.7%.

Moreover, aggressive monetary tightening in advanced economies to rein in inflation could spell trouble
for Latam, mainly through the effects of higher borrowing costs and a more expensive US dollar. The
latter could in fact worsen the region’s inflation woes.

In this article, we take a closer look at these issues and try to answer two questions: Is Latam heading
toward a recession? And how likely is Latam to face a debt crisis? We will also discuss the potential
growth opportunities on the horizon for Latam economies that could help the region withstand a global
economic downturn. Our forecasts for individual Latam countries can be found in the appendix.

Is Latam heading toward a recession?

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In 2021, Latam rebounded from a pandemic-induced economic contraction. The region benefited from a
surge in commodity prices driven by strong demand when the global economy reopened. The result: The
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region grew by 6.8% in 2021, with GDP of half of its countries surpassing prepandemic levels. Then, in
2022, the war in Ukraine broke out, which has decelerated this recovery. However, we still forecast an
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economic expansion of 3.4% for Latam in 2022. Highlights of this overall recovery include countries
such as Chile, Colombia, Costa Rica, and the Dominican Republic, which witnessed better postpandemic
recovery than the rest of the world. Conversely, economic growth in the three largest Latam economies—
Argentina, Brazil, and Mexico—lag the rest of the globe. Furthermore, GDP growth for Mexico, Ecuador,
and Venezuela, from 2019 to the end of 2022, is not likely to be sufficient to bring those economies back
to their prepandemic levels (figure 1).

Prospects for 2023 are less rosy than those for 2022, as several headwinds cloud the regional outlook.
There is an increasing belief that a recession (or a larger slowdown) is set to hit the US economy within
the next 12 months: A survey by Bloomberg in October pins the odds of a downturn in the United States
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at 60%. This has tapered global demand, which in turn has depressed the prices of oil and other
commodities (figure 2). For example, compared to 2022 peaks, oil is down 27%, copper 24%, zinc 28%,
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nickel 33%, silver 25%, gold 14%, wheat 29%, soybeans 10%, and maize 10%. The conspicuous exception
is gas, whose price has soared since the start of the war in Ukraine—up 79% in the US market and 109%
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in Europe.

A drop in commodity prices is usually a harbinger of economic hardship in Latam because commodities
are the region’s main exports and constitute a crucial source for incoming international reserves and
government revenue.

Nevertheless, are these factors enough to lead to a recession in Latam? Not necessarily. In fact, Chile is
the only Latam country where a slight contraction of GDP is forecasted.

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Although the expected decline in prices may spell the end of the commodity-led boom in Latam, it could
also help moderate inflation. The war in Ukraine, by creating a shortage of key agricultural inputs, has
triggered food inflation the world over, while the economic reopening after the COVID-19 crisis signaled
the beginning of strains in global production networks, manifested by delivery delays and expensive
maritime transport costs. As a result, several Latam countries are now experiencing inflation rates not
seen in decades (figure 3).

However, these challenges have somewhat subsided in recent months: Commodity prices, as discussed
above, have come down substantially. Supply chain disruptions, too, are easing, as various economic
indicators show. For example, the global supply chain pressure index—a metric that estimates how
backed up supply chains are worldwide—decreased in September 2022 for the fifth straight month and
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reached its lowest value in 22 months. This is largely due to a drop in Chinese supply delivery times.

Despite these recent trends, price pressures are proving quite stubborn, and inflation has remained high
worldwide. It is estimated to have peaked in late 2022 but will remain elevated for longer than previously
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anticipated.

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This is, for example, the case for the United States, where inflation is easing more slowly than expected. It
has shed 1.96 percentage points since its peak in June, and currently the annual inflation rate stands at
7.1%. The Federal Reserve increased its funds rate several times in 2022, and Fed Chair Jerome Powell
recently stated that the Fed will keep raising interest rates until inflation is under control. Powell
indicated that the Fed may have to raise interest rates as high as 4.6%—or maybe even higher—in 2023 to
beat inflation. This announcement and the rate gap between the US dollar and other currencies increased
the value of the US dollar. The DXY index—a benchmark to measure the gap between the US dollar and
other advanced-economy currencies—reached a two-decade high of 114.10 in September 2022. It has
receded since mid-November but has remained high, currently standing at 103.4. 

Is a debt crisis in Latam likely?

Central banks of most advanced economies, such as the Fed and the European Central Bank, are currently
going through a monetary-tightening cycle. The rate hikes make US and European assets more attractive
to investors and, consequently, have apparently led to capitals outflows from emerging market
economies. Data from the Institute of International Finance (IIF) partially supports that argument. It
shows that, as of September 2022, Latam had already witnessed two months of negative capital flows,
compared to one month last year. 

In addition, the Economic Commission for Latin America and the Caribbean (ECLAC) concurs that
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capital inflows to Latam have declined in 2022. It reported that in the first quarter of 2022, the four-
quarter moving average of total capital inflows was down 13% year over year (YoY) from 2021. This was
driven by a decline in portfolio investment, particularly bond-related flows. The ECLAC also reports that
during the first four months of 2022, sovereign debt issuances declined 42% YoY from 2021. This has led
to a shortage of US dollars in some economies, as central banks use international reserves to defend their
currencies against the surging dollar. This forces down local currencies and most have lost ground to the
US dollar since the start of 2022. Colombia and Chile are noteworthy examples as their currencies have
contracted 22% and 8%, respectively, by November 2022. Only a handful of currencies appreciated in
2022, such as those of the Dominican Republic, Costa Rica, Uruguay, Mexico, and Brazil. 

A strong US dollar is a concern for Latam for several reasons: It drives up inflation due to more expensive
imports, makes borrowing more onerous, and increases the cost of servicing dollar-denominated debt.

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The combination of a tight monetary policy in the United States and a strong dollar has sparked
comparisons to the early 1980s. Back then, Fed Chair Paul Volker pursued an aggressively restrictive
monetary policy—through rate hikes—to contain mounting inflation in the United States, which,
afterwards, fell from 11% in early 1980 to 4% by the end of 1983. It, however, came at the cost of two
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recessions—a short one in early 1980s and a deeper and more far-reaching one over 1981–1982.

This had profound consequences for the nations of a heavily indebted Latam. The region had seen a
period of considerable borrowing in the 1970s, because of low interest rates and liquidity excesses
worldwide. According to the World Bank, the external-debt-to-GDP ratio increased from 22.6% in 1975 to
42.9% in 1982. Then, in the aftermath of the 1981–1982 recession, economic growth rates of indebted
Latam countries slowed down and international interest rates rose, as a result of Volcker’s policy. Interest
payments on external debt rose from 15% of exports in 1975 to 33% in 1982 for Latam. What became
known as the debt crisis was triggered in 1982, after Mexico announced it could no longer service its debt
and several sovereign defaults ensued. All in all, 16 Latin American countries had to restructure their
debts, including the four largest debtors, Mexico, Brazil, Venezuela, and Argentina. Consequently, loans
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to the region decreased by more than 20%, and sharp devaluations followed.

Fast forward to the present: Latam’s debt has risen over the past decade as global interest rates have
dropped since the 2008 financial crisis. The government-debt-to-GDP ratio increased from 47% in 2012
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to 69% in 2021, peaking at 74% in 2020. However, Latam’s policy framework is different this time
around, thanks to the changes that the 1980s crisis brought about, especially for the independence of
central banks.

The 1990s saw a wave of reforms that modernized central banks. Most notably, most Latam countries
passed laws aimed at reducing central banks’ financing to governments and adopted new policy regimes,
such as inflation targeting. In general, the results proved satisfactory as countries achieved price stability,
and inflation rates converged to a single digit within a decade.

Another key difference has to do with the return to monetary policy normalization, a return to precrisis
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levels of interest rates. Like in many other countries and regions of the world, all Latam central banks
were compelled to implement interest-rate hikes to defend local currencies against a surging US dollar.
The higher rate not only avoids the outflow of capital, because local assets are more profitable, but also
helps to ease inflation. The timing of these hikes has also been crucial: Latam central banks started
raising rates much before advanced economies (figure 5). With this move, Latam central banks signaled
that fighting inflation is a key priority, anchored expectations, and saved valuable international reserves.
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However, that does not mean that there are no concerning signs. First, higher interest rates will dent
economic growth. It remains to be seen what path rate hikes take after the Fed announces its policy
decisions in its future meetings. Second, international finance markets are becoming skittish toward
Latam. The emerging markets bond index (EMBI), a benchmark for emerging market sovereign bonds,
has risen 6% for Latam since November 2021, reflecting that borrowing in dollars has become more
expensive, especially in Venezuela, Argentina, El Salvador, and Ecuador. Moreover, countries such as
Colombia have seen an increase in their risk premiums and refrained from issuing bonds in 2022.

This leads to a third concern—the need to adjust fiscal balances. As of 2021, all countries in Latam
exhibited a negative fiscal balance, averaging –4.44% and ranging from –1.48% in Ecuador to –9.26% in
Bolivia. A tighter fiscal policy may prove to be a daunting task for policymakers. During the pandemic,
governments substantially increased their spending to support affected households and businesses. In
some countries, financing this additional spending ate away some of their fiscal space—as is the case for
Costa Rica. According to the World Bank, current debt repayments  are mainly concentrated in 2023 and
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will surge to 2.1% of GDP. Moreover, some governments are subsidizing consumer spending in this
current inflationary stage. Eliminating those subsidies could be unpopular and may even spark social
unrest.

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What opportunities have arisen?
Not everything, however, is gloomy. Disruptions caused by the pandemic and the war in Europe have also
given rise to some growth opportunities for Latam.

Nearshoring
The strain on global production chains over the pandemic exposed the risks of the offshoring strategy.
The prime example of such risks is the delays and suspension of exports after China implemented
stringent lockdowns in January 2020. Since then, companies have internalized these risks and adjusted
accordingly, for example, by moving their global value chains closer to end markets—in other words, by
adopting the “nearshoring” strategy. The result is a reshaping of global economic activity around three
regional production hubs: North America, Europe, and East and Southeast Asia. 

Geographical proximity to any of the three hubs is of prime importance in nearshoring. Naturally, among
Latam countries, Mexico stands to gain the most from this new development, because of its vicinity to the
United States. In fact, it has already started to reap the benefits, reflected in high foreign direct
investment (FDI) inflows into Mexican states bordering the United States. While Mexico as a whole
reported a 4% decrease in FDI in 2021 against the average from 2015 to 2019, its northern states of Baja
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California, Chihuahua, and Nuevo León recorded increases of 54%, 6%, and 4%, respectively. The Inter-
American Development Bank estimates that nearshoring could add US$78 billion to Latam’s exports
every year, from which US$35 billion would go to Mexico and US$7.8 billion to Brazil. Industries such as
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automobile, textiles, pharmaceuticals, and renewable energy could benefit the most.

Digital nomads
Digital nomads are remote (and mostly self-employed) workers whose flexibility allows them to work
from different cities and countries. They work on their laptops or phones and use wireless networks in
places such as coffee shops, libraries, or coworking spaces. Such a lifestyle was already trending before
the pandemic, but it has exploded since then. There are an estimated 35 million digital nomads
worldwide, and half of them come from the United States alone, where their numbers doubled from 7.3
million in 2019 to 15.5 million 2021. They are seen as a potential source of additional income to the
economy because they stay longer and spend more money than regular tourists. Ever since the number of
international tourists dropped because of pandemic-related restrictions, countries have been actively
targeting digital nomads. There were 21 countries with digital nomad visa programs in February 2021—
the number is now 49. Argentina is the latest country in the Latam region to introduce such visa
programs, joining six other nations—Costa Rica, Mexico, Panama, Brazil, Ecuador, and Colombia. The
migration office in Argentina estimates that a digital nomad spends US$3,000 per month—twice as much
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as the average tourist.  
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Latam offers several advantages to digital nomads, such as proximity to the United States, low cost of
living, and warmer weather during winters in the northern hemisphere. Four Latin American countries,
according to website Two Tickets Anywhere, feature in the list of top 10 destinations for digital nomads in
the world: Mexico (no. 1), Colombia (no. 4), Costa Rica (no. 8), and Brazil (no. 9). As for cities, Mexico
City (no. 3), Medellin (no. 5), and Buenos Aires (no. 9) are among the top ten destinations. There is room
for expansion in the other countries that are yet to implement digital nomad visa programs, but
international competition is steep. Countries such as Thailand or Malaysia offer tropical weather with
substantially faster mobile internet. For example, Thailand’s mobile internet speed of 67.35 Mbps is
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almost the double than Mexico, at 34.63 Mbps.  

Latam’s opportunity to replace Russia’s exports 

The wave of sanctions on Russia’s products in the wake of its invasion of Ukraine has opened the door for
several Latam countries to step in and supply select commodities to international markets. For example,
in the fossil fuels market, Russia has been the main supplier of petroleum oil and natural gas to the
European Union. The latter is now preparing to stop importing Russian gas from 2027 on. This
development would open up opportunities, for example, for Argentinian gas, among others. 

Vaca Muerta, located in the Patagonia region of Argentina, is the world’s second-largest shale gas
reserve and fourth largest in terms of shale oil. Even in a conservative scenario, this reserve alone could
position Argentina among the top 20 oil-exporting countries within the next 10 years, may reduce natural
gas imports by 60% in the next two years, and would help the country achieve self-reliance in gas in the
next 10 years. To realize this potential, Argentina needs more infrastructure spending to move its natural
gas reserves to cities and ports. This is a major challenge since the country has a very unstable
macroeconomic environment. However, after various roadblocks—some political in nature—and several
years, the much-needed gas pipeline “Nestor Kirchner” will be completed in mid-2023. It is expected to
save LNG imports close to US$3,000 million, which would significantly alleviate the country’s balance of
payments.

Because of the geopolitical divisions created by the war in Ukraine, the increase in demand for gas from
Southeast Asia, and the global transition to cleaner energies, LNG consumption and imports will keep
increasing in the near term, which is an opportunity for Argentina to become an important supplier. If a
specific regulatory framework is developed in the sector, to protect investors from changes in local
legislation and ensure the availability of their dividends, it could raise investments to generate up to
US$27 billion in export revenues starting 2027–29 (30% of projected exports for 2022). Considering the
estimated resources of Vaca Muerta, the uninterrupted supply of unconventional oil and gas in Argentina
would be greatly benefitted for a long time to come. The rate of fossil fuel extraction, both gas and oil,
from the Neuquén basin (where Vaca Muerta is located) has been growing. In 2022, the cumulative
volume of oil exports grew by 178% annually compared to the previous period.

New trends in consumption 

Lithium-ion batteries are a key part of the world’s clean-energy transition, particularly in the electric car
and consumer product industries. An estimated 106,000 metric tons of lithium was mined in 2021 alone
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—an all-time high and a 258% increase from 2015. And almost half of the world’s lithium comes from a
region in the Andes Mountains known as the “Lithium Triangle,” jointly governed by Argentina, Bolivia,
and Chile. 

Global lithium production is expected to grow up to 420,000 tons by 2031. With an increase of 250%,
Australia, with an output of 141,000 tons in 2031, will remain the largest lithium-producing country in
the world. Chile and China will more than double their outputs, and Argentina’s production will rise nine-
fold to 57,000 tons, making it the second-largest global producer between 2027 and 2028. If these
projections materialize for Argentina, the credit will go to increased foreign investment in the sector and
better economic policies compared to its neighboring countries.

In addition, Argentina could become the world’s leading exporter as it has 13 projects in its pipeline in
different salt-flat brine basins with proven lithium content, more than any other country in the world. The
focus behind these projects is potential high-grade, large-scale lithium extraction with favorable access
and infrastructure. Looking to encourage investment, the Argentinian government lowered export taxes
for the mining sector. In the coming years, this industry is expected to generate US$4 billion in exports
annually (4.5% of 2022 exports). 

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What about the other two countries of the Lithium Triangle? Production in Bolivia is not expected to
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skyrocket despite being the country with the world’s largest resources of the metal. In Bolivia, state
control over lithium has long been prioritized, and recently, contracts with foreign companies were
canceled due to protests in Potosí demanding higher royalties for the country. According to the vice
minister of Altas Teconología Energéticas de Bolivia, the country extracted only 0.2 tons of lithium
(compared to 6,000 tons by Argentina or 26,000 by Chile in 2021). Chile is currently the world’s second-
largest producer of lithium. However, considering the many challenges the country’s mining sector faces,
such as increased regulation and protests by environmental and indigenous groups, lithium production is
expected to grow at a slower pace in the coming years. Moreover, business confidence is low and many
companies, including major Chilean producers, are seeking tax incentives and a friendlier regulatory
framework outside the country, especially in Argentina.

Conclusion
Latam continues to be affected by the seemingly unending wave of global economic setbacks, such as
logistical difficulties caused by the pandemic, inflation resulting from the war in Ukraine, and capital
outflows due to the global monetary tightening. As such, 2022 was a year of decelerating growth for
Latam, with the prospects for 2023 being even more moderate. Inflation, although showing signs of
improvement in recent times, is expected to remain above central banks’ targets. Much will now depend
on what the Fed decides next, because that’s what will determine the path of the current global monetary
tightening.

In the short term, the main challenge for Latam countries is coordinating public policies to ensure
inflation subsides. Central banks have already done their part, but the external lag of monetary policy
means that price increases will remain above the inflation targets, even though most countries may have
already experienced their inflation peaks. Going forward, policymakers  should continue policy tightening
until inflation is brought under control. Governments, meanwhile, will benefit from fiscal discipline, to
keep inflation expectations down and to keep debt ratios under check. At the same time, it is crucial to
avoid an extreme contraction of monetary and fiscal policies to prevent Latam from entering a deep
economic slowdown.

Nonetheless, there are glimmers of hope in the form of unexpected opportunities. A reconfiguration of
the global economy could: first, help Latam increase its manufacturing exports to the United States;
second, generate additional sources of revenue by attracting digital nomads (although not as sizable as
the first one); and third, increase oil and gas exports to the world, as well as inputs associated with the
world’s transition to clean energy (such as lithium).

Appendix: Country forecasts

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 Endnotes

1. Santiago Acosta-Ormaechea et al., “Latin America faces a third shock as global financial conditions tighten,” International
Monetary Fund (IMF) blog, October 13, 2022. View in Article

2. Econosignal forecast. View in Article

3. Acosta-Ormaechea et al., “Latin America faces a third shock as global financial conditions tighten.” View in Article

4. Econosignal forecast. View in Article

5. Vince Golle and Kyungjin Yoo, “Odds of US recession within next year climb to 60%, survey shows,” Bloomberg, October 14,
2022. View in Article

6. World Bank, “Commodity markets,” accessed October 19, 2022. View in Article

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 7. Ibid. View in Article

8. Federal Reserve Bank of New York, “Global supply chain pressure index (GSCPI),” accessed October 14, 2022. View in
Article

9. Vince Golle and Molly Smith, “Charting the global economy: Inflation winds keep blowing strong,” Bloomberg, September 17,
2022. View in Article

10. Economic Commission for Latin America and the Caribbean (ECLAC), Economic survey of Latin America and the
Caribbean, November 2022. View in Article

11. Federal Reserve Bank of Saint Louis, “FRED economic data,” accessed November 22, 2022. View in Article

12. M. Ayhan Kose et al., Global Waves of Debt: Causes and Consequences (Washington, DC: World Bank, 2022). View in
Article

13. Author calculations using data from the IMF. View in Article

14. Federal Reserve Bank of Saint Louis, What is monetary policy normalization?, accessed September 9, 2022. View in Article

15. World Bank, New approaches to closing the fiscal gap, October 2022. View in Article

16. Econosignal based on information from the Mexico’s secretary of economy, June 2022. View in Article

17. Inter-American Development Bank, “Nearshoring can add annual $78 bln in exports from Latin America and Caribbean,”
news release, June 7, 2022. View in Article

18. Craig Dempsey, “Digital nomad visas are sprouting in Latin America and the Caribbean,” Nearshore Americas, accessed
October 26, 2022. View in Article

19. Two Tickets Anywhere, “Digital nomad statistics: How big is the nomad movement?,” November 10, 2022. View in Article

20. British Petroleum (2022), Statistical review of world energy, accessed November 1, 2022. View in Article

21. US Geological Survey, Mineral commodity summaries 2022, accessed November 2022. View in Article

 Acknowledgments

Cover image by: Jaime Austin

Deloitte Global Economist Network

The Deloitte Global Economist Network is a diverse group of economists that produce relevant,
interesting and thought-provoking content for external and internal audiences. The Network’s
industry and economics expertise allows us to bring sophisticated analysis to complex industry-
based questions. Publications range from in-depth reports and thought leadership examining
critical issues to executive briefs aimed at keeping Deloitte’s top management and partners abreast
of topical issues.

Daniel Zaga
Economic Analysis Director | Deloitte Spanish LATAM
dzaga@deloittemx.com
+(52)1 55 5080 7231

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