Latin America 2024 Outlook
An analysis of the political, economic and regional dynamics that will shape the region in 2024.
Photo: Luis Astudillo C. - Cancillería del Ecuador
Introduction
In Latin America and the Caribbean, 2024 is set to be another year of turbulent political life in which new political figures struggle to push through their reforms. The slowdown in the region’s GDP growth (2.2% in 2023 and 1.9% in 2024) could turn into a long-term trend given the deterioration of external conditions and in particular the deceleration of China’s growth. Consequently, Latin American governments will have to find the necessary levers to consolidate key sectors in which the region has undeniable comparative advantages. The US election in November 2024 is expected to bring its share of uncertainties and shed light on migration, an increasingly important issue in the region’s political agenda.
Political renewal at the expense of reform
On the political front, the different elections in 2023 put an end to the illusion of a “left turn” announced by some analysts after the election of Petro in Colombia and Lula’s return in Brazil. On the contrary, they have confirmed the anti-incumbent tendency and have instead brought right-wing personalities to power in 2023 such as Daniel Noboa in Ecuador, Javier Milei in Argentina (as well as Santiago Peña in Paraguay). In Guatemala the election of Bernardo Arévalo, a left-wing politician, also reflects the demand for political renewal in the region.
The election of new political figures, more or less populist (and opportunistic), has overturned the hegemony of certain traditional parties in the region, to the benefit of individual figures and outsider candidates, not supported by traditional political movements. This development may have obscured the importance of parties. Indeed, several political figures elected on a promise of renewal found themselves elected without a majority in Congress (because they often do not have a local presence) or limited by the country's institutions. These leaders who offer radical changes have little room for maneuver to pass the promised reforms and are either forced to adopt a more moderate stance or are “kept in check” by the parliamentary or judicial powers.
In the region, only Nayib Bukele (El Salvador), AMLO (Mexico) and Luis Abinader (Dominican Republic) continue to benefit from surprisingly high popularity rates. Three heads of state who share several common features: they all represented a rupture with the political establishment in their country and have a strong majority in Congress. Luis Abinader was elected on a campaign against corruption and a firm response to immigration from Haiti. AMLO significantly increased social spending towards lower classes and Nayib Bukele has implemented an ultra-repressive policy against organized crime. Another common point, and coincidence of the electoral calendars, their presidential term will end in 2024. In Mexico, Claudia Sheinbaum seems to be in a good position to take on AMLO’s legacy. In the Dominican Republic, Luis Abinader will run for a second term, just like Nayib Bukele in El Salvador (despite being originally prohibited by the country’s Constitution which does not authorize two terms in a row). Other presidential elections will take place in 2024 in Panama and Uruguay.
Political normalization versus authoritarian drift
The popularity of Abinader and Bukele illustrate an increasingly strong demand for order and authority. A trend also observed with the elections of Daniel Noboa in Ecuador and Javier Milei in Argentina, elected on programs of firmness towards drug trafficking and delinquency. In this context, also marked by the attacks in Brasilia by Bolsonaro supporters and demonstrations against the government in Peru, one could fear a rise in authoritarianism in the region. Nevertheless, the year 2023 showed that political institutions in many countries were fully playing their role as counter-powers. A“political normalization” which is illustrated by greater control of the different powers between them and a more independent functioning of institutions, whether it be the legislature, the judiciary, the media, central banks or electoral processes.
The new figures at the head of Latin American states indeed see their ambitions come up against more assertive institutions. In Colombia, Gustavo Petro is forced to negotiate with Congress to pass ambitious and sometimes radical reforms. In Chile, attempts to amend the Constitution have been rejected twice in referendums. In Peru, the political crisis at the start of the year has eased and Dina Boluarte remains in a vulnerable position. In Argentina, Javier Milei had to moderate his position over his bold economic reforms upon his election. Like many of his counterparts in the region, the Argentine president does not have a majority in Congress. In Guatemala, the top electoral court has confirmed repeatedly the validity of Arevalo’s election, despite attempts from several prosecutors to block the president-elect. Thus, even in cases where they are threatened, as in Guatemala or Ecuador, electoral processes always seem to bend without breaking, indicating a certain resilience of democracies in the region.
However, institutional clashes between the different powers hinder the advancement of political agendas and the vote of major reforms. In 2024 and beyond, this trend should continue until we witness a real upheaval of political forces and the emerging figures can build a solid political base. Until then, political life in Latin American countries is expected to continue to be hectic and somewhat unpredictable. Political uncertainty calls for caution, but this “normalization” could gradually reduce the impact of political risk on economic activity.
Slow growth in a delicate external environment
In 2023, the Latin America and Caribbean region is expected to see a GDP growth of 2.2% according to recent data from the ECLAC. A slowdown compared to 2022 (4.1%) which reflects a global trend. Among the sub-regions, South America is experiencing the lowest growth (1.5%), the Caribbean sees its growth almost halved in one year (3.4% in 2023 compared to 6.4% in 2022). while the Central America and Mexico area records a 3.5% growth.
This slowdown is explained by several factors which particularly weigh on the region’s exports. First of all, falling commodity prices, after an increase in 2022 linked to Russia's invasion of Ukraine, have penalized Latin American countries - although the rise in energy prices since April 2023 has allowed certain countries to moderate this. Moreover, the rise in key interest rates, initiated since 2021 in the region to fight inflation, has led to a drop in internal demand as well as an appreciation of national currencies, penalizing the competitiveness of Latin American exports. Inflation and monetary tightening in developed economies (Europe, United States, United Kingdom) have hindered consumption in these countries and therefore the demand for products exported by Latin American countries. Finally, climate events, particularly in South America, have also impacted local economies and especially agricultural production intended for export. In the first half of 2023, the region saw the value of its exports decrease by 2.7% at an annual rate. A decline in both price and volume, and mainly concentrated on extra-regional exports.
In a region which therefore remains highly exposed to the international situation and external shocks, many countries will record a lower growth rate than expected in 2023: Argentina, Bolivia, Colombia, Dominican Republic, Ecuador, Honduras, Peru, Uruguay and Venezuela. Nevertheless, Brazil and Mexico (and Costa Rica to a lesser extent) are distinguished by growth rates above expectations. The two countries together represent around 60% of the region's GDP.
The Mexican economy kept outpeforming in 2023 with a growth forecast around 3.18%. The government's good budgetary and fiscal management, the control of inflation, the nearshoring boom and the strength of the Mexican peso are the factors explaining Mexico’s economic dynamism. The country is less and less dependent on commodity prices and sees its manufacturing sector strengthened with significant foreign investments in the north.
In Brazil, economic activity also surprised observers. Despite pessimistic forecasts by the end of 2022 (1% growth forecast), Latin America's largest economy should experience a growth rate between 2.8% and 3%. Brazil has seen its agricultural exports (and particularly soy beans) increase, sometimes replacing Ukraine or Russia and benefiting from the lifting of import restrictions in China. The good management of inflation, the strength of the Brazilian real and the prospect of a major tax reform, recently adopted, have favored the influx of capital into the country.
Towards a cycle of moderate growth?
In 2024, GDP growth in the region is expected to remain positive but should slow down again, to 1.9% according to ECLAC estimates. A level which would also correspond to an unfavorable external situation for the region. Central banks in the region will have to gradually lower their interest rates, as inflation falls and depending on the evolution of monetary policies in developed countries.
Although the gradual decline in interest rates should revitalize domestic consumption, the international context will remain complex. China's growth slowdown (4.9% year-on-year in the third quarter of 2023) will be a determining factor which could strongly impact Latin American economies, as the Asian giant has become the region's second largest trading partner over the last twenty years. Countries exporting metals and agricultural products to China are expected to be the most affected: Chile, Argentina, Brazil, Peru.
In 2024, the nearshoring phenomenon should continue to unfold in Mexico but not only. Mexico attracts many companies, mainly Asian, thanks to its proximity to the United States and the good quality/price ratio of its workforce. However, challenges related to logistics (congested road traffic), security and electricity supply require significant investments from the Mexican government. These challenges could push certain companies to favor maritime routes or to establish themselves further south of the country, or even in Central American countries (particularly for the textile industry) where labor is even cheaper.
The slowdown of China’s economic growth, a bleaker global environment but also ecological imperatives suggest that the region could experience a more moderate period economically,with growth rates around 2%. This trend should push Latin American countries to rethink their economic models and favor internal dynamics. The region remains attractive in certain key sectors such as health, agro-industry, ecotourism and renewable energies. However, public investment remains low. In order to attract more capital, Latin American states must focus on three pillars: improving the business climate, promoting strategic sectors and developing infrastructures. A better targeting of social spending and the development and regulation of certain sectors (digital economy, gig employment, last mile logistics) could also help increase formal employment and tax revenues.
Latin American regionalism called into question
Across the region, the year 2023 was once again characterized by a lack of unity, favored by the different political alternations. By returning to power in January 2023, Brazilian President Lula still tried to breathe new life into regional initiatives, taking the center stage on many topics. However the positions of the Brazilian president have rather divided the region. Refusing to clearly condemn Russia's invasion of Ukraine while supporting Nicolas Maduro, Lula seemed to discover a region much more divided than he had left it in 2010 at the end of his second term.
Political alternations, the development of commercial relations with China, the crisis linked to Covid-19 and the apathy of certain regional projects such as Mercosur have favored a withdrawal of Latin American states from regionalism but also greater autonomy and flexibility in their diplomatic positions. A trend illustrated by the differences of opinion from heads of state on the conflict between Ukraine and Russia, the Israeli-Palestinian conflict and the rehabilitation of Nicolas Maduro in Venezuela. The trade war between China and the United States in the region has also weakened diplomatic cohesion. After failing to obtain a trade treaty with the United States, Uruguay is now seeking to develop its trade relations with China, even if it means turning its back on Mercosur.
The year 2023 was that of Venezuela's return to the regional scene. Rehabilitated by Lula as well as by Gustavo Petro, Nicolas Maduro has regained a strong political place in the region, notably thanks to the gradual lifting of US economic sanctions. The Venezuelan president has committed to organizing democratic elections in 2024 in which the opposition will participate. A subject that should make the news in the region in the coming months. Many uncertainties remain regarding the candidacy of the new opposition figure, Maria Corina Machado, the vote of Venezuelan emigrants and tensions rising around the Essequibo region in Guyana.
Migration and energy transition: the two regional challenges of 2024
In 2024, migration issues should be at the heart of diplomatic relations between the United States and Latin America. The US presidential elections will make this subject a priority, while migratory flows have seen a record increase this year: over the first eight months of 2023, Mexico saw a 62% increase in migrant arrivals compared to the same period in 2022. Migrants arriving in Mexico mainly come from Central American countries but also increasingly from Haiti, Venezuela and Ecuador.
The migration crisis in Central America also concentrates at the Darien Gap, a jungle between Panama and Colombia which is the main crossing point from South America to North America. The number of migrant crossings at the Darien Gap has almost quadrupled since 2021. The explosion of migratory flows in this area has become a political issue in the United States. The US Congress is pushing Joe Biden to adopt more restrictive measures on asylum and visa policies.
Finally, the most ambitious but also the most pressing challenge for the region is certainly the response to global warming. Deeply affected in recent years by severe climatic episodes, Latin American states must concede significant investments for the protection of resources, energy infrastructure and the transition to cleaner modes of transport. And the region is well placed to do so. In Latin America and the Caribbean, hydrocarbons represent two thirds of the energy mix, less than the world average (80%). The region has significant comparative advantages in the hydroelectricity, lithium and biofuels industries which can enable a transition towards a greener energy mix and make the region the “supplier” of green energy on a global scale. This transition will require a lot of investment from states which often have little budgetary margins.
By disengaging from hydrocarbons, as Gustavo Petro announced in Colombia, by developing solutions such as the issuance of green bonds and multilateral initiatives in favor of the protection of natural resources, the region could be at the forefront of the energy transition, which could then become the basis for a new sustainable economic model.