Latin America’s Aggregate Growth Will Slightly Decelerate in 2025 as Challenging Domestic and External Conditions Slow Growth in Many Countries Across the Region

By Dr. Rafael Amiel, Director of Latin American and Caribbean Economics, and Alejandro Duran-Carrete, Senior Economist Banking Risk, S&P Global Market Intelligence

S&P Global Market Intelligence projects that Latin America will see a decline in annual real gross domestic product (GDP) growth in 2025, falling to 1.9 percent from 2.1 percent in 2024. Brazil and Mexico are anticipated to experience slowdowns in growth, which will be partially mitigated by Argentina’s expected recovery from a deep recession, bolstered by the substantial macroeconomic-policy adjustments made in 2024. We project that only 5 out of the region’s 43 economies will record growth rates that are half a percentage point higher than those achieved in 2024, with the vast majority decelerating. (Argentina, Ecuador, Colombia, Panama and Jamaica are those five economies.) The slowdown will be driven by lower private and government consumption. Labor markets will likely remain tight, limiting the potential for employment growth, and we expect credit expansion to decelerate. A potentially adverse external environment will compound downside risks. The possible application of tariffs by the new administration in the United States would negatively impact trade and weaken many of the region’s currencies, while forced repatriation of illegal workers from the US implies reductions in remittance flows.

Mexico will be among the most affected. We project a 0.8-percent growth rate in 2025 (versus 1.5 percent in 2024). Downside risks are increasing due to the threat of 25-percent tariffs on Mexican exports to the US, uncertainty over the renegotiation of the United States-Mexico-Canada Agreement (USMCA) and a deterioration in the country’s institutional environment. Lower remittances, triggered by a potential US remittance tax and deportations of illegal migrants, would increase the risk of recession in Central America. Brazil, the region’s largest economy, is projected to grow 2.3 percent in 2025—a slower pace than the 3.2 percent forecast for 2024. Thanks to its booming oil industry, Guyana is estimated to have grown 43.9 percent in 2024, remaining the world’s fastest-growing economy, but this pace of expansion will decline in 2025 to an expected growth rate of 10.2 percent.

Slower inflation in 2025 will continue to provide room for cautious monetary-policy easing

Inflation across the region, excluding Venezuela and Argentina, is forecast to decline by 0.3 percent to 4.4 percent in 2025. We expect lower price pressures based on S&P Global Market Intelligence’s global assumption that prices for agriculture-related commodities and oil prices will fall by 8.5 percent and 12 percent, respectively, in 2025. Argentine President Javier Milei’s successful implementation of a stabilization program will bring one of the most impactful results in 2025. He inherited an inflation rate of 210 percent when taking office in 2023, and our forecasts indicate that this will decline to 20.4 percent by year-end 2025. Venezuela, Cuba and Bolivia will continue struggling to contain prices in 2025, with our forecast pointing to inflation rates of 84.2 percent, 21.6 percent and 8.6 percent, respectively. Inflation will likely remain in the 4.1-to-4.7-percent range for Mexico and Brazil.

The region’s inflationary outlook will support a less restrictive monetary stance in 2025. We expect most countries to maintain positive monetary-policy rates in real terms (more than 2 percent after inflation). However, Mexico and Brazil will have restrictive monetary-policy stances, with real policy rates above 5 percent, compared with the US Federal Reserve’s (the Fed’s) 1-percent real rate by end-2025. We also expect Brazil’s central bank to raise its policy rate in the first half of 2025. Chile and Peru will continue easing their monetary policies but at slower paces in 2025. We forecast Colombia to reduce its policy rate to 6.0 percent by end-2025, from 9.25 percent at end-2024, given declining annual headline inflation—moving toward the central bank’s target range; there will also likely be changes to the board setting the monetary policy, increasing its alignment with President Gustavo Petro’s desire to lower policy rates.

Fiscal imbalances will narrow in 2025, but sustainability will remain fragile

We forecast that most Latin American governments will strive to uphold or progress toward fiscal sustainability in 2025. There is limited room and political willingness across most of the region to return to the aggressively expansionary spending policies of past decades. Our aggregate figures project the region’s fiscal deficit as a share of GDP decreasing to 4.6 percent in 2025 from 5.1 percent in 2024, reflecting reduced debt-service costs as policy rates decline. President Milei’s commitment to fiscal austerity will keep Argentina among the region’s best performers (Argentina’s fiscal deficit is forecast to decline from 4.7 percent of GDP in 2023 to 0.8 percent in 2025), with improving fiscal metrics also likely in Chile, Guatemala, Nicaragua and Jamaica.

Brazil, Colombia, Mexico, Bolivia and Costa Rica still face significant deficits exceeding 5 percent of GDP. In Brazil, proposed spending cuts for the coming year are unlikely to reduce a fiscal deficit forecast at 7.8 percent of GDP for 2025 significantly. Colombia and Peru are unlikely to comply with their fiscal rules, and both countries will face fiscal challenges from slower growth in fiscal revenues. They will likely reduce public-investment expenditures in 2025 in their efforts to narrow their fiscal deficits. Mexico has proposed a budget aimed at reducing the fiscal gap from nearly 6 percent of GDP to 3.9 percent, but this looks ambitious. Cuba and Bolivia will remain on unsustainable fiscal trajectories, with deficits above 9 percent of GDP.

Asset quality will slightly deteriorate in most banking sectors, and Argentina will see large structural changes

Nonperforming loan (NPL) ratios are expected to continue trending upward in the region’s main economies, reflecting credit-risk accumulation over the past five years. Restrictive monetary policies in Brazil and Mexico will constrain borrowers’ capacity to refinance, potentially increasing impairment. Profitability is also expected to decline more broadly in the region, mostly as loan-loss provisioning costs increase. In spite of profitability pressures, the risks of new windfall taxes being implemented (Mexico) or existing windfall taxes extended (Ecuador) will remain as local sovereigns are under pressure to close fiscal gaps. In contrast, if the impacts of US protectionism slow monetary-policy easing, the risk of lower rates generating temporary liquidity strains will be reduced. A potential replication of Colombian banks’ liquidity strains in 2023—whereby lower rates led to reductions in the renewals of long-term deposits, eroding banks’ funding bases—would be more likely under this scenario.

Argentina is expected to be an exception to this trend, with banks slowly reducing their exposures to the government, permitting portfolio diversification and freeing resources for lending to the private sector. NPLs are also expected to remain at their lowest level in five years. Foreign-exchange liquidity risks are likely to be reduced, considering our baseline assumption that the government will continue to further loosen capital controls through 2025 and then eliminate them in 2026. However, Argentine banks’ profitability will fall to reflect lower yields on government securities combined with a full year of the central bank returning to a more orthodox monetary policy.

Another outlier, but on the negative side, will be Bolivia, where banks will likely continue to see their impairment levels above historical averages. Dollar liquidity for banks is likely to remain constrained, considering the combination of banks’ significant lending of dollars to the central bank through several government initiatives, poor foreign-exchange reserves and the country’s fixed exchange rate.