Can Latin America shift out of low gear and gain traction amid global headwinds?

Fitch Ratings sees the Latin American economy underperforming when compared to other regions of the world. But there are reasons to look on the bright side.

The region's biggest economy, Brazil, has exceeded expectations lately, while the second largest, Mexico, will have a new, perhaps more private-sector-friendly administration take over in October. 

Furthermore, two key external factors – the US elections in November and the Chinese economy's slowdown – could have a significant impact on Latin America.  

Shelly Shetty, managing director and head of Asia and Americas Sovereigns at Fitch Ratings, talks to BNamericas about the region's economic outlook and key issues.

BNamericas: What's your general view about the Latin American outlook?

Shetty: For 2024, we think Latin America's growth could be between 1.5% and 2%.

We think that the regional growth aggregates are being weighed down by Argentina's expected contraction and Mexico's weak growth, although Brazil's high growth should support regional expansion this year.

We're observing that only one country is contracting, Argentina, and that's mainly because of the macroeconomic adjustments we're seeing under the [Javier] Milei administration.

When you think about countries that are growing at a faster pace, these countries tend to be smaller, tourism-dependent countries, for example, in the Caribbean, as well as Paraguay.

Then when you look at the bigger countries, they're either in the 0-2% growth bracket.

So, for example, Mexico, Colombia, the larger economies, and then Brazil used to be in that bracket, although it's now moved to the 2.0-3.5% bracket.

I think overall, we still see that within the broader emerging market space, Latin America's growth performance still lags, despite commodity prices generally being supportive even in 2024.

BNamericas: Why is Latin America's GDP lagging?

Shetty: We think this mainly has to do with the monetary policy tightening. Even though we're seeing cuts now, it takes time to feed through the economy, and in some cases, it remains contractionary.

We're also seeing a fair degree of policy and political uncertainty in the region. In some countries, we've seen reforms that are undermining business investment or investor sentiment. We're really not seeing major growth enhancing reforms in the region.

Brazil is more of an exception where we've seen some progress on reforms in recent years.

From a medium-term perspective, not everything is gloom and doom in Latin America. There are some positives.

One is that some countries could benefit from trends like nearshoring, where global firms are looking at supply chains and considering investment destinations outside of China. Countries like Mexico and some Central American countries could benefit from this diversification.

Natural resources are always going to be in demand [and] Latin America is well-positioned for the energy transition due to its natural resources.

Finally, Latin America is away from geopolitical flashpoints, which could be supportive for investment decisions.

BNamericas: What are the potential impacts of the US presidential election on Latin America?

Shetty: I think it's turning out to be a very different race than we anticipated a few months ago.

If Vice President [Kamala] Harris wins, we expect policy continuity. If former president Trump wins, we'll be monitoring trade policies, especially tariffs on China. He's mentioned a 60% tariff or a universal import tariff, which could affect the global economy and Latin America.

Mexico, for example, sends over 80% of its exports to the US. We’ll have to see if free trade agreements like USMCA provide special exemptions for Mexico and Canada if tariffs are imposed.

We conducted a study on the global economy under such tariffs… and Mexico would be quite affected.

BNamericas: How do you see the first signs from Mexico's incoming administration?

Shetty: The new administration still has to take over. We’ve only seen the new congress, which the new president will face.

From a fiscal perspective, we'll be looking at fiscal consolidation, as Mexico is running a sizable deficit. We expect the first signs of this plan to come from the budget in November.

We've seen the passage of some reforms that have caused uncertainty around institutional quality, and that could lead to institutional erosion in Mexico.

When looking at governance indicators published by the World Bank, Mexico ranks quite low, and we’ve incorporated these weaknesses into our sovereign rating model.

The second aspect, which is important from our perspective, is what this does to macroeconomic policymaking and the macroeconomic institutions of the country, such as central bank independence, the macroeconomic framework, which still has pillars based on the fiscal responsibility law, the exchange rate, which is flexible and the inflation target regime. These are very strong underpinnings of the overall macroeconomic policy framework and macro institutions.

So far, we don't see any major impact from the reforms that have been passed in congress on these macroeconomic institutions. So whether or not this hits investor confidence and the business climate, and hence influences foreign direct investment and the growth dynamic in the region, in Mexico, these are aspects that we're going to obviously keep an eye on.

BNamericas: What about Brazil?

Shetty: The Brazilian economy has surprised us positively. We upgraded our growth projection for this year to 2.8%, up from 1.7%.

Clearly, this is a pretty significant uptick in our growth projection for this year. I think that there are clearly several drivers for that.

The impact of flooding [in Rio Grande do Sul state in May] was contained, consumers held up despite tighter monetary policy and labor market conditions improved with low unemployment and growth in minimum wages. We've also seen an uptick in public spending. Primary spending is up quite significantly in real terms. So, that has provided support to overall domestic demand.

Investment is recovering from the contraction that we saw in a few quarters of 2023.

While the IMF has improved its trend growth estimates to 2.5% from 2%, we also recognize that there are structural reforms that Brazil has made in the past, which should yield some benefits at some point, because we've seen a series of reforms, whether on central bank autonomy, previous social security reform, labor reform, reforms to the water sector and the privatization of Eletrobras.

Now we're seeing congress has passed the VAT reform, and now it's trying to make progress on secondary legislation to implement that reform, and that over time can engender greater productivity, growth and help Brazil’s prospects.

But we haven’t taken the step of increasing our trend growth that dramatically.

BNamericas: What are the main challenges ahead for Brazil?

Shetty: One area where we’ve seen less progress is fiscal consolidation, returning to primary surpluses and stabilizing debt. Progress has been slow. Public spending has been growing at a pretty fast pace, especially mandatory spending, so controlling that and improving efficiency will be key.

Administrative reform in the public sector has also not happened yet, which could help public finances and productivity in the public sector.

BNamericas: Which Latin American countries are most exposed to China, and what should we expect from the Chinese economy?

Shetty: We expect China's economic growth to slow to about 4.8% in 2024, down from last year, with a further slowdown to 4.5% in 2025.

We do think that the export sector has held up in China and that has been supportive for growth, but domestic demand has been weighed down by the property market downturn, and while the authorities are rolling out support measures, we’re still seeing significant contraction in housing sales and starts.

China's reliance on commodities like copper and oil means that any slowdown in China could impact Latin America, especially commodity-dependent countries like Brazil, which has significant trade ties with China.