LAC’s top performers lay the foundations for growth
The Latin America and Caribbean region is a habitual economic underperformer, but its most reform-minded countries are lighting the path to progress
LAC’s long-standing challenges
LAC is large and diverse, but it's possible to discern general trends that contribute to the region’s sluggish economic performance.
Investment is low
Averaging just 20% of GDP since 2000, LAC’s domestic investments are consistently below those of other emerging regions. This reflects the high costs of doing business in many LAC countries, exacerbated by political uncertainty and security issues.
Doing business is often costly
Stubborn inflation has led many central banks in the region to pause monetary easing, meaning higher-for-longer interest rates. The high cost of doing business, due to factors like excessive bureaucracy, corruption and complex tax regimes, is an enduring problem.
Extreme weather is a recurring threat
Extreme weather events are common in the region, from hurricanes in the north to flooding and droughts elsewhere. The wider worry is that more frequent El Ni?o / La Ni?a events will increase disruption to agriculture, transport and energy supply.
Political upheaval is common
A swathe of recent elections have increased political uncertainty in the region, limiting the potential for effective structural reform. At the same time, the US election - which may lead to more protectionist and anti-immigrant policies - is a risk to countries that rely on trade with the US or remittances from immigrants working in the States.
Reasons to be hopeful
Despite these fundamental challenges, the LAC region boasts significant economic advantages. The abundance of natural resources means extraction industries attract considerable foreign direct investment (FDI). In fact, non-residents have invested an average of 2.3% of GDP annually in LAC since 2000, the highest figure among emerging market economies.
To take one example, more than half of the world’s lithium reserves are located in the region. To make the most of this abundance, governments need to invest in the refining and processing facilities that add value, create jobs and grow GDP, rather than let wealth flow overseas.
There are promising signs that LAC governments are intent on pursuing more business-friendly policies, which will in turn attract greater investment. In Argentina, for example, the new Milei government has succeeded in passing flagship structural reforms, though this progress comes at the cost of swingeing cuts to domestic investment.
In Brazil, the region’s largest economy, recent reforms have led to a marked drop in labour costs and a more simplified tax regime. The current Lula administration aims to significantly increase public investment in crucial infrastructure projects.
In addition, here are three regional stars that stand out as models of progress for the region as a whole.
Chile: the benefits of stability
Chile’s economy stagnated in 2023 but we expect it to rebound in 2024 on the back of sound economic fundamentals. “The country boasts strong democratic institutions, business-friendly policies, one of the world’s most open foreign investment regimes and a highly educated workforce,” says Greetje Frankena, Senior Economist at Atradius. “The government encourages the dispersal of knowledge and technology throughout the economy.”
The result is that Chile’s investment ratios are among the region’s highest. Domestic investments averaged 24% of GDP between 2000-2023, and FDI 2.9% of GDP.
There may be some trouble ahead, with political gridlock currently slowing the passage of legislation aimed at simplifying the country’s cumbersome regulatory approval process, but Chile remains one of the region’s most progressive economies.
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Costa Rica: a stable nearshoring partner
We expect GDP growth in Costa Rica to slip from 3.5% in 2024 to 2.5% in 2025, as external demand and investments shrink. Nevertheless, Costa Rica remains a popular destination for FDI which - at an average of 4.7% of GDP - is among the highest in the region.
Most investors come from the US, drawn by a business-friendly climate, high-end manufacturing capabilities and a strong trade agreement. Costa Rica’s reputation as a renewable energy champion is also a factor, helping to seal major recent investments from companies like Intel and Johnson & Johnson.
Costa Rica is well placed to benefit further from the nearshoring trend in the US, with one proviso. A recent rise in gang-related crime needs to be tackled quickly to preserve the country’s reputation as a safe investment partner.
Dominican Republic: moving towards high-income status
The largest economy in the Caribbean, the Dominican Republic enjoys steady growth supported by a well-established reputation as a business-friendly jurisdiction.
And - after a landslide victory for the ruling PRM party in May’s elections - political stability is likely in the near-term, despite unrest in neighbouring Haiti. That augurs well for a raft of planned market-friendly reforms, including tax and fiscal measures aimed at broadening the tax base.
“The Dominican Republic has also been proactive in courting investment, first through the long-established ProDominica scheme, which aims to attract financing to the manufacturing, energy, tourism and agribusiness sectors, and more recently through the ChipDRiven initiative, prioritising the semiconductor business,” says Dana Bodnar, Economist at Atradius. “The country clearly hopes to benefit from US determination to friend shore technology supply.”
All this means the country’s domestic investments have risen to 30% of GDP, well above the LAC regional average, while net FDI inflows are up nearly 50% from the pre-pandemic average. Maintaining political stability is a must, but the Dominican Republic is an increasingly attractive investment destination.
LAC’s star performers are evidence of what can be achieved when the region fulfils its potential. While the impacts of La Ni?a are difficult to predict, successful nations in the region tend to combine political stability, pro-business policies and targeted initiatives aimed at boosting domestic and foreign investment.
Read more about how fostering investment could help reverse Latin America's structurally low economic growth in our Regional Economic Outlook for Latin America
Contributors
Greetje Frankena | Senior Economist, Atradius
Dana Bodnar | Economist, Atradius
Silvia Ungaro | Senior Writer, Atradius
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