As Latin American countries continue to grapple with the effects of two previous shocks – the pandemic and Russia’s invasion of Ukraine – they face a third shock: the tightening of global financial conditions.
Growth momentum is currently positive, reflecting the return of service sectors and employment to pre-pandemic levels, and the overall support of favourable external conditions – high commodity prices, strong external demand and remittances, and rebounding tourism. This has led to several upward revisions to growth this year.
But financing is becoming scarcer and costlier as major central banks raise interest rates to tame inflation. Capital inflows to emerging markets are slowing and external borrowing costs are increasing. Domestic interest rates in emerging markets are also rising as their central banks are hiking rates to battle inflation as well, but also because of reduced investors’ appetite for riskier assets.