Latin America market report 2023: resilient growth despite headwinds

We forecast Latin America's gross domestic product (GDP) to grow by 1.7% in real terms in 2024, a slight slowdown from our 2% growth estimate for 2023. After solid growth last year, the 2023 slowdown has been milder than anticipated given high inflation and tight monetary policy. However, varying internal economic and political conditions have created diverging growth trajectories in different countries. Brazil and Mexico have performed better than initially expected. Economic activity in Chile, Colombia and Peru, on the other hand, has been sluggish, reflecting political difficulties and policy uncertainties. The Latin American region overall has shown considerable resilience over the last two years, with growth keeping pace with global economic growth. Heading into next year, we expect the region to fare better than advanced economies. But less so versus emerging Asia, where inflation and interest rates never reached the same heights. We project that Peru will outperform (2.9% growth) its regional peers, and Colombia and Chile to see stronger growth (about 2% each). We expect growth in Brazil and Mexico will slow (growth of 1.5% and 1.3%, respectively). Global headwinds, tight financial conditions and political uncertainty are downside risks.

Inflation is trending down, but we expect it to remain above pre-pandemic levels in the near term, likely exceeding central bank targets into the second half of 2024. El Niño conditions could reignite inflationary pressures via disruptions to agricultural output. Falling food and energy prices have contributed most to the cooling of headline inflation in Latin America. However, in the region's five largest markets, core price rises have also slowed notably in recent months. In Brazil, headline inflation was 4.6% in August, almost half the pace of a year back. With some of the highest real interest rates globally, currencies in the region have been among the top performers this year, leading to positive net capital flows and less inflation (through lower import prices), and making for a monetary policymaking success story.

With disinflation underway, some central banks in the region have started to cut interest rates well before their advanced market peers. The central banks that raised quickest and firmest in 2021 are ahead of the curve and have more space to cut. We expect the policy rate in Brazil to end this year at 11.75%, while Mexico's central bank is expected to move in lockstep with the path of the US Federal Reserve (Fed). Policymakers will continue to watch the Fed's forward-looking statements to avoid extra pressure on local currencies and risk import inflation.

Domestic political uncertainties will continue, but policy credibility has improved. After a troubled start to year, the political landscape in Latin America seems to be stabilizing, except in Peru. More robust and effective macroeconomic frameworks (eg, reforms in Brazil and central bank independence) have improved policy credibility. This is critical for the region, as persistent uncertainty regarding economic policy has jeopardised growth prospects in the past. Public debt levels in the region have improved over the last two years but are likely to remain elevated. This, paired with high interest rates, limits fiscal space.

We expect total premiums in Latin America to grow by 3.4% in real terms in 2024, up from an expected 6% in 2023. Insurance markets have been relatively resilient, despite economic headwinds from high inflation and tight monetary conditions. We expect total premiums for the region to outperform GDP in 2023-24. We forecast 3.3% growth in Life and Health (L&H) premiums in real terms for the region in 2024, down from an estimated 5.1% in 2023. We expect non-life (excluding health) premium growth to moderate to 4.5% in 2024 from a projected 7% this year, with rate hardening continuing to provide support. Disinflation, more stable FX rates, and higher equilibrium interest rates should support insurer earnings.

We expect rates in commercial insurance will continue to rise. In the second quarter of 2023, the composite commercial insurance prices index rose by 8% in Latin America, above the global average (3%). Pricing increases were driven by casualty lines of business (12%), particularly motor liability due to higher high inflation and labour costs. Property prices increased by 7%, with reduced capacity in catastrophe-exposed countries. With inflation still high, we expect hard market conditions in commercial and personal lines will likely continue.