WASHINGTON, April 17, 2018— The economies of Latin America and the Caribbean (LAC) have turned the corner after a year of tepid growth and six of stagnation, providing an opportunity for countries to solidify their fiscal positions and lay the foundation for long-term inclusive growth.
In its latest semiannual report, “Fiscal Adjustment in Latin America and the Caribbean: Short-Run Pain, Long-Run Gain?”, the World Bank’s Chief Economist Office for Latin America and the Caribbean examines the quickening of growth in the region due in large part to a positive external environment including rising commodity prices, growth in the U.S. and China, and high international liquidity. However, many countries are in a fragile fiscal situation after several years of weak growth.
LAC grew by 1.1% in 2017 and is expected to grow by 1.8% in 2018 and 2.3% in 2019, according to the report. Excluding Venezuela, the estimates are for growth of 2.6% in 2018 and 2.8% in 2019.
The return to growth is being led by the large South American economies of Brazil and Argentina. Brazil is expected to grow by 2.4% in 2018 and 2.5% in 2019. Argentina is expected to grow 2.7% in 2018 and 2.8% in 2019.
Mexico is expected to increase its growth rate to 2.3% and 2.5% in 2018 and 2019, respectively. Central America is expected to post growth of 3.8% in 2018 and 2019, while the Caribbean will likely grow 3.5% in 2018 and 3.4% in 2019.
Despite these positive signs, 31 out of the 32 LAC countries ran an overall fiscal deficit in 2017 and public debt for the whole region stands at 57.6% of GDP.
“Persistent deficits and high levels of debt can jeopardize the hard-won gains made over the last decades in lowering inflation, reducing poverty and inequality, and fueling inclusive growth,” said Carlos Vegh, World Bank Chief Economist for Latin America and the Caribbean. “In the long run, lower fiscal deficits – and lower public debt burdens – would help consolidate those gains and increase growth.”
Fiscal adjustments during good times are important to build fiscal space, the report finds. This enables countercyclical fiscal policies to prepare for the next time economic headwinds come along and to protect the most vulnerable. It also frees resources to deal with potential risks stemming from natural disasters like hurricanes and earthquakes.
Several countries, like Ecuador, Uruguay, México, Colombia, Argentina, El Salvador and Panama, have started gradual fiscal adjustments. Now is the time to speed up the pace of fiscal and structural reforms and strengthen or implement fiscal rules, as needed.
However, the report says these fiscal adjustments should be gradual and not rely too heavily on cutting public investment or social transfers, which are vital to economic growth and poverty reduction. Infrastructure investment is particularly important. Inefficient and non-productive government spending should be the focus of reform.
The challenge is finding the sweet spot for just how much fiscal adjustment is needed. One crucial issue to consider in deciding on an appropriate amount public debt reduction and other fiscal reforms is the levels needed to achieve an investment grade. Steps in this direction can lead to huge savings on external debt and free up resources to support poverty reduction and inclusive growth, according to the report.