IMF cuts Latin America growth forecast to 2.3% for 2026

Economist outlines three scenarios for Latin America’s growth path

The IMF in its October outlook projected growth of about 2.3% for Latin America and the Caribbean this year, down from 2.5% in 2025, with only a modest pickup to 2.5% expected in 2027. The World Bank’s estimate for this year is lower, at 2.2%.

Those figures describe what the essay series calls the low-growth trap, in which economies “expand enough to keep moving but too little to substantially improve living standards or close the gap with advanced economies.” The IMF links the latest downgrade to the energy shock from the war in the Middle East, adding that most of the region is getting little lift from the artificial intelligence boom that has cushioned other economies.

In an opinion essay published Oct. 29, Soljancic notes that the regional average hides wide differences. Brazil is expected to grow 2.2% this year and 1.9% in 2027 as high interest rates and fading fiscal stimulus weigh on activity. Argentina is forecast to slow to 2.1% after expanding 4.5% in 2025. The IMF expects the Mexican economy to grow just 1.5% this year.

Mexico attracted a record $40.9 billion in foreign direct investment in 2025, according to the essay, but about two-thirds of it was reinvested earnings and only 18% was new investment. More than half was recorded in Mexico City, where many companies are headquartered, so the figures do not fully reflect where new productive facilities are being established.

Across much of the region, Soljancic writes, nearshoring “remains more visible in announcements than in new factories,” and its prospects now also depend on Washington, which in July declined to renew the United States-Mexico-Canada Agreement in its current form. The pact stays in force until 2036 but faces annual reviews, and many companies are likely to delay major decisions until its future is clear.

The Inter-American Development Bank estimated in 2022 that nearshoring could add up to $78 billion a year to regional exports, a potential the essay says depends on predictable institutions and a workforce suited to more sophisticated supply chains.

Soljancic lays out three scenarios for how policy choices and external conditions could interact over the rest of the decade. In the optimistic scenario, credible reforms coincide with a sustained rise in productive investment; regional growth rises above 3% and stays there, public debt stabilizes or falls relative to gross domestic product, and stronger productivity translates expansion into higher household incomes.

The baseline scenario extends current conditions: growth stays between 2% and 2.3%, governments continue operating with little fiscal room, nearshoring benefits selected industrial centers while uncertainty over North American trade delays larger commitments, private investment rises too slowly to overcome weak productivity, and per capita income edges up without altering the region’s prospects.

The pessimistic scenario pairs a deeper external shock — such as a prolonged energy crisis or a sharp slowdown in the United States or China — with governments abandoning fiscal discipline. Inflation and interest rates climb as currencies weaken, and debt-service costs crowd out spending on infrastructure and education. As private capital moves to more predictable destinations, growth could fall below 1% or turn negative in several countries.

On current evidence, the essay concludes, the baseline is the most likely outcome for the region as a whole. Its strongest performers, however, demonstrate that better policy choices can open a path toward faster, more sustainable growth. The World Bank’s October report finds several countries with coherent, long-term policies sustaining growth above 3% or 4%; among the stronger performers are Paraguay and the Dominican Republic, both projected to grow 4.7% this year, followed by El Salvador at 4.5% and Panama at 4.2%.

Soljancic argues that four choices matter most. Credible fiscal rules must set sustainable limits on deficits and public debt, with escape clauses reserved for genuine emergencies, and should shield productive public investment from short-term political calculation; he cites Chile’s structural balance rule, adopted in 2001, which helped the country save during the commodity boom while many neighbors spent.

Human capital investment, he argues, must be judged by its effect on productivity, because educational quality and technical training geared to modern industries will decide whether nearshoring creates broad domestic employment or isolated industrial enclaves. Institutional predictability must become a competitive advantage, with courts settling commercial disputes promptly and regulations surviving changes of government; Mexico shows what is at stake, he writes, its 2024 decision to elect all judges by popular vote — first applied in June 2025 — having drawn warnings from the major rating agencies that investor uncertainty had increased.

Productive diversification, he writes, must reduce dependence on individual commodities and export markets, and nearshoring can help only if countries develop competitive domestic suppliers and the logistics to connect them to international value chains. The essay says the direction should be clear within three or four years: real per capita income growth above 2% a year alongside stabilizing public debt would put the region on the optimistic path; growth near 2% with nearshoring announcements still outnumbering completed projects would keep the baseline; and resurgent inflation with repeated suspensions of fiscal rules would signal a drift toward the pessimistic outcome.

The series argues that the commodity boom of the 2000s fell short because temporary revenues were too rarely converted into permanent productive capacity, and that the reorganization of global supply chains and rising demand for energy and food now offer another opening. “The lesson of this series is that Latin America’s economic future remains open,” Soljancic writes. Whether the next decade brings sustained prosperity or another cycle of missed opportunities, he adds, will depend less on external circumstances than on the choices its governments make and their capacity to carry them out. The essay identifies Soljancic as an economist specializing in public finance with decades of experience advising governments and institutions across Latin America and the Caribbean; over his career, according to the essay, he has led 69 capital-market issuances across 13 countries totaling nearly $49 billion. Its closing note states that “the views expressed are solely those of the author.”