By Rodrigo Campos
NEW YORK (Reuters) – Latin America and the Caribbean will face rising poverty and food insecurity in 2023, and trust in government will remain low as long as corruption remains high and the wealthy do not pay their fair share in taxes, the International Monetary Fund said on Wednesday.
Latin America’s slowing economic growth and high inflation could intensify social unrest, as “many people in the region will see their living standards decline this year,” IMF officials wrote in a blog post.
“Finding common ground to pursue sensible economic reforms in an environment of important social tensions will be an uphill battle,” they wrote.
Nigel Chalk, deputy director of the IMF’s Western Hemisphere department and one of the blog authors, said the IMF’s focus is on what the public sector can do to ensure citizens feel their government is working on raising living standards, while also tackling corruption.
“We’ve advocated a lot for progressive tax reform in the region,” Chalk told Reuters. “I think it’s really important that rich people pay what they should pay for taxes, and rich corporations also.”
He said this did not necessarily mean higher taxes, but better ways to curb tax avoidance and loopholes.
EVEN SLOWER REGIONAL GROWTH
The IMF said on Monday the economic growth rate for Latam and the Caribbean is expected to slow further to 1.8% this year after slipping to 3.9% in 2022 from 7% in 2021, based on the IMF’s most recent World Economic Outlook. Growth is seen accelerating again in 2024, albeit at a still sluggish 2.1%.
Higher interest rates and falling commodity prices hit economic growth in the region last year and 2023 could bring a slowdown in the United States and euro area, key trading partners, the IMF said.
Government bond spreads versus U.S. Treasuries shot up across Latam after Russia’s invasion of Ukraine a year ago, but they really took off midyear when spreads widened in July to near 550 basis points from a June low of 366 bps, based on a widely-followed JPMorgan index.
There is a risk of more downward pressure on Latam growth as advanced economies are still fighting inflation. Tighter monetary conditions in developed countries could contribute to a weakening in emerging market currencies.
“Our concern would be if the advanced economies have to do more to [control] inflation, if their economies slow, if the world becomes a riskier place and risk aversion boils – for example because of an escalation of the war in Ukraine,” Chalk said.
Many Latin American countries moved early to raise rates and are have little motivation to keep raising them, “so then the system will equilibrate with more capital flowing out of weaker currencies,” he said.
“That’s not our baseline,” Chalk said, “but we’re conscious of those risks.”
(Reporting by Rodrigo Campos. Editing by Jane Merriman)