Latin America: challenges and obstacles to stabilizing prices and promoting growth potential

Gonzalo de Cadenas Santiago, director of Macroeconomics and Financial Analysis at MAPFRE Economics

Latin America is facing a crucial challenge: achieving price stability while driving growth potential in the region. In this regard, the question arises as to how address this dilemma effectively. To do so, it is necessary to reverse the question and ask ourselves: How can we increase growth potential without accelerating inflation in times of economic expansion?

As was made clear to us in the 17th Latin American Analysis Forum, held on Friday, June 23 at the Banco de España, one of the first strategies is to address fiscal responsibility. Adopting the Fiscal Theory of the Price Level will ensure that fiscal policies will not have a negative impact on inflation. It is essential to find a balance between boosting economic growth and maintaining control over prices.

Another key aspect is facing structural problems that affect growth potential in the region. Low capital intensity and insufficient investment are obstacles to overcome. Latin America needs to increase investment by an additional 10% to 30% to reach the level of developed countries that stand at 25%. This is a significant challenge, but it is necessary to converge toward more solid and competitive economies.

The underlying problem in this matter is savings. Latin America presents worryingly low and low quality savings ratios. Total gross savings stand at 20%, whereas business savings are practically non-existent, unlike ASEAN countries, which reach 10%. Although family savings reach 21%, they are mostly maintained in cash and are not appropriately channeled towards investment.

In addition, demographics also have an influence on the region's growth potential. Latin America has exceeded its demographic window, which means that the growing middle class and life expectancy has led to a rise in dependency and reduces production possibilities. This raises the need for innovative solutions to make the most of the available resources.

A core element that contributes to low productivity in Latin America is the lack of investment in intangible assets. Improving skills and investing in research and development are essential to boost productivity and promote long-term growth.

To achieve stability and growth, it is imperative to increase private savings brokered by the finance sector, especially in local currency. This will enable long-term investment that will avoid falling into the trap of bank and institutional credit. In addition, improving the institutional framework, strengthening legal certainty, and creating a favorable business environment are essential aspects to boost growth and sustainable investment.

In short, Latin America is facing important challenges to stabilizing prices and promoting growth potential. Adopting strategies that address fiscal responsibility, structural problems, insufficient savings, demographics, and low productivity are essential. An increase in private savings, improving the institutional framework to boost insurance activity, and creating an adequate environment for sustainable growth in the region are also required.