The last two years have been a roller coaster in terms of economic performance in Latin America and the Caribbean. As detailed in the 2021 Latin American and Caribbean Macroeconomic Report, the 7% loss in GDP in 2020 was the worst recession in a single year suffered by the region since the struggles for independence in the first half of the 19th century. By contrast, 2021 has seen strong growth, stronger than was generally anticipated. An average of private forecasters suggested in January 2021 that growth would be less than 4.5% for the year, But that same average of forecasters now claims growth will end up being almost 7%. The IMF between April and October also increased its growth projections for 2021, to 6.3%, with higher growth expected for 19 of the IDB’s 26 borrowing member countries, and substantially higher growth in some.
Despite a mixed record regarding the speed of vaccinations, there were successes in dealing with the pandemic in many countries, leading to a comeback for sectors that were hit hard in 2020. Even tourism recovered to some degree. High commodity prices boosted prospects for exporters. Continued, highly accommodating monetary policy in advanced economies allowed sovereigns and firms to tap capital markets. Perhaps one of the most remarkable features of this pandemic, after the initial shock in March 2020, was the fluid access to capital markets which saved many economies from suffering a sudden stop. Meanwhile, expansionary fiscal and monetary policy continues in many countries. Despite some recent interest rate hikes, real short-term interest rates remain negative, and central bank balance sheets remain bloated given unprecedented expansions in many economies of the region.
Facing the Headwinds
But there are now several headwinds on the horizon. Highly transmissible new variants, such as Omicron, are a significant threat, especially to those unvaccinated or those that were vaccinated but whose protection has waned. The Omicron mutation emerged from an immunocompromised individual in South Africa. Other variants may appear where such patients do not receive adequate care and the virus remains in their bodies for an extended period of time. As the rapid spread of Omicron in Europe powerfully illustrates, such developments are not just a problem for a region or a country; mutations are a global menace.
Commodity prices remain high, but most commodities are in backwardation, a term signifying that futures prices are below current spot prices. This means that the market is expecting prices to decline as supply conditions normalize. We have now heard from the Federal Reserve that asset purchases will be tapered more rapidly, and that we should expect three policy interest rate hikes in the US in 2022. This move was signaled clearly and in advance, the bond market hardly budged, and the stock market rose on the announcement. Still, the move implies that emerging economies will face higher funding costs. Further, if inflation does not fall as a result, more hikes will follow possibly prompting a more serious market reaction.
Seeking More Discriminatory Policies
Policymakers are then faced with many challenges going into the New Year. Given the strong recovery in 2021 and higher inflation in most countries in the region, policies to boost demand seem more and more out of place. Policymakers may wish to think in terms of specific interventions to alleviate supply problems and to provide relief to those most affected by the pandemic. Effective policies will likely be more and more focused and targeted in their nature.
The 2022 Latin American and Caribbean Macroeconomic Report, to be published in March 2022, will contain a review of the current situation and recommendations, not only regarding monetary and fiscal policies, but also with a special focus on labor market policies. Interestingly, unlike previous crises, employment in the informal sector suffered more than that in the formal sector but has since made a strong comeback. There is a danger informality will continue to grow. Tax and labor market policies should work in tandem to increase the incentives to formalize. These and other policies to boost good jobs will be outlined in the report.
Later in the year, the 2022 Development in the Americas (DIA) report will contain a thorough review of the debt position of both the public and the private sector in the region and provide recommendations for policymakers. The debt and fiscal positions of countries in the region vary widely, so there is no one-size-fits-all diagnosis or solution.
Many firms and five sovereigns have already successfully restructured debts. Firms appear to favor extra-judicial restructurings perhaps due to failings in more formal regimes. In the five public debt restructurings, we have seen considerable innovation. In some restructurings, new generation collective action clauses likely helped, by reducing the risk a “hold-up” investor could block the process in an attempt to obtain higher payments. Sovereign debt restructurings are complex and may be costly for all concerned. These clauses may help to reduce costs. But they only apply to bond investors, and debt in the region is held by many diverse actors. In other restructurings, we have seen the addition of innovative new clauses in debt contracts that allow for the suspension of payments in the case of a natural disaster, and the conclusion of a successful “debt for nature” buy-back of a sovereign bond. Still, restructuring is not a substitute for good economic policy, and post-restructuring economic plans have been critical for success in maintaining lower debt levels and stimulating growth.
A Balancing Act
Most countries are performing a balancing act, providing targeted relief to firms and to households to assist the recovery, while maintaining debt sustainability. Clearly the most beneficial way to escape higher debt-to-GDP ratios is through growth. Unfortunately, the headwinds have reduced private sector growth projections for 2022 from almost 3% to just over 2%. While the IMF’s October projections were more optimistic, they indicate a return to mediocre pre-pandemic growth rates in the coming years. But again, there is significant variation across countries, and policies matter.
A credible medium-term fiscal program will allow interest rates to remain low and assure access to financing for a gradual transition. In addition, specific policies to ensure small- and medium-sized firms, and not only large ones, can take advantage of increases in demand and adopt new technologies; to build regional supply chains; and to mobilize greater investment in smart and productive infrastructure would all boost growth. The impacts of climate change are now more apparent, but that also provides an opportunity. Firms and governments are raising greater financing to invest in more resilient and more emissions-friendly activities that harness technological advances. Such investments if chosen well are a win-win, creating new jobs and countering climate change risks. The pandemic disrupted all of our lives and technology can do the same. But, with the right policy-framework, technology can raise living standards for all. The coming year may be another year of living dangerously, but in the famous movie of that name, the courage and tenacity of the main character in the face of much adversity resulted in a happy ending. Science and technology are helping the human race combat the pandemic; with the right policies it can also boost inclusive growth.
 This is based on the survey conducted and reported by Bloomberg of professional forecasters.
 Cavallo, González-Jaramillo, Hernandez and Powell analyze this in a forthcoming paper.
 The 2020 Development in the Americas Report “From Structures to Services” highlights scenarios where technological advances combined with the right policy framework can yield improved access and affordability for infrastructure services.