In order to fund their ambitious sustainable development agendas, Latin American and Caribbean countries need to expand their financing sources. This 17th edition of the Latin American Economic Outlook proposes a series of policy options to mobilise the necessary resources, based on co-ordinated actions between policy makers, the private sector and their international partners. It argues that public resources should be invested more efficiently, tax better collected and debt better managed. Even with those improvements, private resources will be equally crucial, as public revenues will not be enough to fund the deep transformations the region needs. The depth, access, inclusiveness and efficiency of financial systems must improve further, especially for the benefit of citizens and smaller firms. Businesses need stronger capital markets to finance their long-term investment projects. The report’s recommendations include the use of innovative financial instruments; renewing the role of development finance institutions; reinvigorated international partnerships to mobilise external resources; and the adoption of a shared regional agenda to address the challenging international financing context.
Latin American Economic Outlook 2024
Abstract
Executive Summary
Latin American and Caribbean (LAC) countries need vast financial resources to achieve sustainable development. For instance, the spending gap for the Sustainable Development Goals currently is estimated to average USD 99 billion per year. Mobilising these resources requires a co-ordinated strategy by public and private sectors at national, regional and international levels.
The socio-economic context hinders efforts to mobilise more domestic revenue. Economic growth has been modest due in part to long-term structural challenges such as low productivity. In 2023, average labour productivity in LAC amounted to 33% of that of the OECD, down from 40% in 1990. Poverty remains high in LAC, representing 26.8% of the region's total population in 2024, while extreme poverty continues to affect one in ten people in the region. High inflation has exacerbated the poverty situation, as for people in extreme poverty, the price of the basket of goods consumed was 20% higher in 2023 than in 2021, a difference much greater than the 13.1% increase recorded in the general price levels of the region. More than half of employees in LAC remain in informal jobs, with low pay, limited social insurance and heightened vulnerabilities for women and youth.
There is little space for demand-side policies to support aggregate demand. Many countries are maintaining a tight monetary framework to keep inflation expectations anchored and undergoing a fiscal consolidation phase, after fiscal space decreased significantly following the pandemic.
LAC tax revenues averaged 21.5% of GDP in 2022, below the OECD’s 34.0%, constraining governments’ ability to finance development agendas. The region’s tax structures are characterised by high reliance on indirect taxes (48% of total taxes, mostly VAT), which tend to be more regressive than direct taxes. Policies should focus on increasing revenues from personal income tax, rationalising tax expenditures, exploring additional revenue sources such as recurrent taxes on immovable property, health and environmentally related taxes, fostering a tax-paying culture, and improving tax administration. The effectiveness of spending should also be improved: expenditure tends to be short-term and pro-cyclical, decreasing during downturns (especially capital investments) and increasing during upswings (especially current spending).
Improving debt management can help free up revenue for development. Public debt levels in the region remained high in 2023, though heterogenous – ranging from less than 40% of GDP to more than 100% – with a high cost of debt servicing. While OECD countries reduced their debt service from 6.4% of tax revenue in 2012 to 4.8% in 2022, in LAC it increased from 9.8% to 12.2%. Over the past decade, interest payments have surpassed core government expenditures. In some countries, debt service has exceeded the spending on education and been up to two times that on healthcare and on capital investment.
A well-developed financial system, providing fundamental services such as loans, savings products and insurance, can help individuals and businesses smooth consumption, invest in physical and human capital, and promote entrepreneurship. Here, policies should focus on improving three dimensions: i) financial systems lack depth, with domestic credit to the private sector reaching 50% of GDP in 2022, below the 80% in other regions; ii) access is constrained, particularly for the most vulnerable, with account ownership standing at 57% in 2021, below the OECD average of 94%. There are significant disparities in access to credit between formal and informal households. For example, in some cases, access to housing loans for informal households can be up to six times lower compared to formal households; iii) efficiency is low, with banks exhibiting high net interest margins of 5% in 2021, exceeding the OECD average of 1.7%.
Capital markets – equity and debt – in LAC remain small, heterogeneous and concentrated. Policies should aim to diversify funding sources, enhance financial stability and support long-term investments. In 2022, equity market capitalisation reached 35.9% of GDP, below OECD levels (64.7%). Most LAC markets are more concentrated than that of Korea, except for Brazil and Chile, which are among the least concentrated in the region; however, all of them still have higher concentration levels than the New York Stock Exchange. Meanwhile, in 2023, the outstanding amount of corporate bonds in LAC represented around 2% of the global total. Regional debt markets are focused on the public sector, accounting for 81% of local issuances over 2015-2023. In the same period, firms in LAC issued bonds mainly in foreign currency (58% of corporate issues), which exposes them to exchange rate risk, but with longer maturities than those in emerging markets (9.3 years vs. 5.2 years on average). Policies should aim to boost the participation of institutional investors, modernise regulations, enhance financial literacy, and deepen regional financial integration.
Development Finance Institutions (DFIs) can channel more resources towards development goals, addressing financial market depth issues, redistributing risks, and fostering inclusive markets. Their deep local market knowledge and strong connections with private and public sectors are key to developing projects and facilitating capital flows. 34% of DFIs have a specific mandate to support the financial inclusion of micro-, small and medium-sized enterprises through instruments like guarantee schemes and loans, but only 19% of the financial instruments they propose address the green transition, gender equality and digital transformation or innovation.
The Fourth International Conference on Financing for Development in 2025 is an opportunity for the region to adopt a strategic approach. The conference will enable the design of reforms to promote development financing in key areas, such as improving liquidity, measuring risk, mobilising private finance, and enhancing co‑ordination among development providers. A unified regional agenda can not only bring forward LAC's perspective on international financing challenges, but also trigger discussions on innovative risk-sharing tools, blended finance, and improved regulations to strengthen LAC's financial landscape.
International co-operation will be key to scaling up additional resources, such as the funds pledged by the Global Gateway Initiative or debt instruments. Financing instruments such as green, social, sustainability, and sustainability-linked (GSSS) bonds, catastrophe bonds, debt-for-nature swaps, and natural disaster clauses can mobilise public and private investment where needs are greatest. Enhanced regulation and supervision through consolidated sustainable finance frameworks will be essential to ensure the effectiveness of these instruments and mitigate risks.
