Economic growth across the region is projected to have moderated, influenced by varying exposure to global trade, reliance on remittances, commodity prices and international capital flows. While many economies slowed, rebounds in countries recovering from recent shocks likely supported overall growth in 2025. The International Monetary Fund (IMF) estimates gross domestic product (GDP) growth at 2.4% in 2025, supported by lower tariffs in most countries and stronger-than-expected incoming data. Growth is expected to ease to 2.2% in 2026, reflecting weakening performance in major trading partners the US and China. Most of the projected moderation stems from deceleration in most LA7 countries—the largest and most financially integrated countries in Latin America— and Argentina. This is partly offset by recoveries in Mexico, the Dominican Republic, Ecuador and several Caribbean countries. The LA7 group includes Brazil, Chile, Colombia, Mexico, Paraguay, Peru and Uruguay. Inflation has largely eased, supporting monetary easing in most countries. Consumer prices rose 7.6% in 2025, down from 16.6% and are expected to fall further to 5.0% in 2026. Many central banks in the region, such as those in Mexico, Colombia and Chile, have eased monetary policy as inflation cooled, while Brazil’s central bank has held its rate steady at a high level. The IMF notes that disinflation may take longer to achieve targets, necessitating credible policy frameworks and central bank independence. Fiscal pressures remain high, with the average public debt-to-GDP ratio in the region projected at around 70%. Pandemic-era spending and weak post-pandemic growth have left many countries with limited fiscal space, rising interest payments and a high vulnerability to external shocks. IMF stresses the importance of fiscal consolidation to ensure macroeconomic stability and anchor inflation expectations. This environment of limited growth and fiscal space brings challenges for the region’s banking sector, particularly in credit risk and funding. Slower economic activity can reduce business profits and household income, potentially raising non-performing loans (NPLs). Persistent tight global financial conditions, marked by high interest rates, could raise debt-servicing costs for both governments and corporations, adding pressure on bank funding and liquidity. Smaller, less diverse economies reliant on tourism and commodities are also vulnerable to external shocks which can quickly ripple through their banking systems. Despite these pressures, banks remain supported by adequate capitalisation, sound asset quality and ample liquidity. The sector is also investing heavily in digital transformation and artificial intelligence (AI) to drive efficiency and financial inclusion. Asset quality to hold up amid sluggish growth Even with a moderate outlook, risks remain titled to the downside. Slower-than-expected growth in major economies, heightened global policy uncertainty, tighter financial conditions, as well as higher trade barriers and shipping costs could weigh on the region. On the domestic front, tighter macroeconomic policies and more frequent or intense natural disasters pose additional threats. Shifts in the US tariff regime could amplify macroeconomic risks, particularly in Mexico which is reliant on exports. Even so, Moody’s notes that banks enter the year with broadly stable operating conditions as growth is steady, albeit tempered, and easing inflation support monetary easing. Brazil, Mexico and Colombia are exceptions, where elevated interest rates may limit relief for borrowers and constraint credit demand. Problem loans will continue to rise in Brazil and Mexico, particularly in consumer and SME portfolios, but deterioration in asset quality will likely be contained, supported by resilient labour markets and substantial loss buffers. Banks are expected to keep generating plenty of capital from their own operations as balance sheets expand slowly. In Brazil, lenders are gradually boosting capital buffers to meet phased-in rules on operational risk and International Financial Reporting Standards (IFRS) through 2028. Despite slower business growth, banks are likely to maintain high profit margins thanks to continued inflows of low-cost deposits and efficiency gains from digitisation, offsetting weaker loan growth and lower business volumes. Strong liquidity helps banks weather fiscal strains Many banks in the region hold significant domestic sovereign debt due to underdeveloped domestic capital markets, so elevated sovereign risk directly affects the value of their holdings and their overall stability. Higher sovereign risk also drives up borrowing costs for the banks themselves. Limited public financing can also crowd out of private sector investment as banks may prioritise government debt, leaving the banking system more vulnerable to external shocks and changes in investor sentiment as stability is linked more closely to fiscal standing. But amid a challenging fiscal environment, banks are still set to maintain strong liquidity and have ready access to funding, Moody’s notes. Deposit inflows are expected to outpace loan growth across the region, while new instant payment systems, such as those in Colombia and Peru could drive a surge in retail deposits. Strong domestic liquidity, particularly in Brazil and Chile will enable banks to meet upcoming obligations and stabilise their finances in 2026. External risks marked by trade vulnerability, financial and debt exposure The region occupies a middle-ground economic position, where moderate stability is threatened by structural fragilities and high sensitivity to global policy shifts. The region’s external exposure stems primarily from deep integration with the US via trade, remittances and tourism, as well as vulnerability to commodity price fluctuations in China, and high sensitivity to US monetary policy changes. Growth is largely tied to US monetary policy and the trajectory of the dollar because of deep financial links. Higher rates attract investment to the US, causing capital to flow out of Latin America, weakening local currencies and increasing borrowing costs. Caribbean economies are also significantly exposed to US labour market trends, which influence remittances and tourism demand. External financing remains a critical vulnerability due to high debt levels and global interest rate risks. High public debt and debt-servicing costs limit governments’ ability to cushion shocks, increasing sovereign risk premiums, and potentially affecting banks holding significant amounts of government debt. Banks also face rising physical risks from climate change, with natural disasters capable of raising NPLs by up to 1.4 percentage points in affected areas, according to the World Bank. Despite fiscal strains, governments are prepared to support systemically important banks, especially those with large deposit bases or majority government ownership. Moody’s notes, however, that in fiscally constrained countries such as Brazil, Argentina and Colombia, sovereign support may be tempered by limited financial flexibility. Rapid digitisation widens financial inclusion Banks are being reshaped by the rapid adoption of AI and digital technology. In a region with a large unbanked population but widespread mobile phone use, digital banking has become a powerful tool to expand financial access, improve efficiency and enhance customer experience. AI supports alternative credit scoring for individuals and small businesses with limited credit histories, enables real-time fraud detection and allows personalised products and advice tailored to local inflation trends, economic volatility and consumer spending habits. Digital payments are accelerating, aided by government-backed platforms such as Brazil’s PIX and Mexico’s SPEI. These systems simplify transactions, foster open-finance ecosystems and fuel fintech growth across the region. Challenges remain. Fragmented regulation, a shortage of AI talent and uneven digital infrastructure continue to slow progress in some markets. A large informal economy complicates data collection but also presents opportunities for formalisation. Building trust in new technologies also remains essential, requiring transparency and continued human support alongside automation. Digital-first players are leading the change. Nubank has emerged as a regional and global standout, serving millions of customers in Brazil, Mexico and Colombia. Platforms such as Mercado Pago and several Caribbean banks—often supported by accelerator programmes involving the International Finance Corporation—are deploying AI to speed up account opening and modernise everyday banking. These efforts underscore the region’s steady shift towards a more inclusive, digitally driven financial system. Resilience amid uncertainty While slower growth, high public debt and external conditions pose credit and funding pressures, most institutions remain well-capitalised, with government backstops reinforcing stability. Digitalisation and AI are helping banks navigate these challenges. By expanding financial access, improving risk assessment, and enhancing customer experience, technology offsets fiscal constraints and slower growth. Fintech partnerships and government-backed payment platforms are accelerating innovation, signalling a banking sector that is adapting and evolving toward a more inclusive, agile, and future-ready model. Read the full publication.
