Energy transition demand, nearshoring the 'bright spots' in LatAm outlook: Fitch

Although Fitch Ratings expects Latin American growth to be about 1.5% in 2024, down from around 2.2% last year, there are some "positive bright spots" for the regional economic outlook, particularly in demand for energy transition commodities and nearshoring.

According to Shelly Shetty, the agency's managing director of sovereigns, there are diverse GDP growth forecasts for the different countries in the region, with smaller economies like Costa Rica and the Dominican Republic advancing “at a decent pace,” but others, like Argentina, which are going to suffer recession this year. 

In the middle part of the group, economies such as Brazil and Colombia are expected to grow between 1% and 2%, while Shetty mentioned that Mexico's expansion would be closer to 2%.

"So, the question really is, why are we seeing this slowdown in Latin America? One of the reasons, obviously, is that the global economy is slowing down,” Shetty said during a Fitch event on Mexico's outlook in Mexico City. 

“The other thing is that the entire economic policy that we've seen in Latin America for quite some time is also well-placed to resist,” she noted. 

The analyst also pointed to the fact that the fiscal stimulus in the region is not that significant – which she said was good because there is not much fiscal room – and political and reform gridlocks exist. 

“There’s a lot of political and policy uncertainty on the one hand. This is particularly true for the atmosphere in the region, and that has weighed on investor confidence in the region,” she said.

From a structural perspective, Fitch has also observed that the investment-to-GDP ratio has trended downward in several Latin American countries. 

“That is mainly due to this political polarization, fragmentation of politics, political stagnation because reforms cannot be passed... Very few countries have done that,” Shetty added, citing Brazil as an example.

But not everything is negative for the Fitch analyst. “I would say that there are some positive bright spots,” highlighting the nearshoring trend that could help not only Mexico's but also some Central American countries. She also underscored that Latin America is far away from the geopolitical hotspots that exist around the world at present.

“I believe that the region is very well positioned to supply some of the commodities needed for the energy transition, as well as for food security in the world. So... if things go well, if reforms are implemented, maybe there is some positive news that can come in the future,” Shetty said.

The analyst also highlighted that, globally, Fitch is seeing many countries running high fiscal deficits and there is a complex environment for fiscal consolidation. "Looking at the median Latin American debt, that's up by 8% to 9% of GDP of 2024 compared to 2019. And among the emerging market regions, that's the highest increase that we've seen," Shetty said.

“Globally, we're seeing that it's a very difficult and tough environment out there to do fiscal consolidation because spending pressures continue to build, whether it's high defense spending, whether it's social spending pressures, whether it's a pressure to provide incentives," the analyst added. "I think these are factors that are really limiting the appetite for fiscal consolidation globally."