Latin America

Latin America Economics Weekly

The fiscal risk of rising rates, Mercosur tariff cuts

Central banks were once again in the spotlight this week after the supersized 125bp rate hike in Chile, but one issue that is often overlooked is the damaging impact of rising interest rates on public finances across the region. Brazil is particularly vulnerable on this front, and may resort to financial repression over the medium term to alleviate debt risks. Otherwise, an agreement to cut Mercosur's common external tariff is a positive step towards liberalisation but, as always, domestic politics could be a hurdle for further progress.

15 October 2021

Latin America Economics Update

Brazil: signs of stagflation

The multitude of supply shocks hitting Brazil’s economy are likely to keep inflation at 7-10% well into next year and cause the pace of recovery to slow to a crawl in the next few quarters. Overall, we now expect GDP growth of just 1.3% next year, which sits below the consensus.

14 October 2021

Latin America Economics Update

Chile: front-loaded tightening cycle has further to run

The surprisingly large 125bp rate hike delivered by Chile’s central bank yesterday, to 2.75%, suggests that it will continue to front-load its tightening cycle to clamp down on high inflation. We now expect a further 225bp of hikes in this cycle, to 5.00%, by the end of Q1 2022 (previously 4.00%).

14 October 2021

Key Forecasts

Table 3: GDP & Consumer Prices (% y/y)

Share of

World1

GDP

Consumer Prices

2010-19 Ave.

2020

2021f

2022f

2023f

2020

2021f

2022f

2023f

Brazil

2.4

1.4

-4.1

4.8

1.3

1.8

3.2

7.8

5.5

3.0

Mexico

1.9

2.7

-8.3

6.0

2.8

1.5

3.4

5.3

4.0

4.0

Argentina

0.7

1.3

-9.9

8.0

2.5

2.0

42.0

48.0

42.5

38.0

Colombia

0.6

3.7

-6.8

7.5

4.0

3.0

2.5

3.3

4.0

3.3

Chile

0.3

3.3

-5.8

10.0

4.5

2.5

3.0

4.0

4.3

3.5

Peru

0.3

4.5

-11.0

13.0

4.0

3.5

1.8

3.5

3.8

3.0

Ecuador

0.1

2.8

-7.8

3.0

4.0

2.0

-0.3

0.0

0.5

0.3

Venezuela

-

-9.7

-30.0

5.0

2.5

0.0

2,355

2,000

1,500

1,000

Uruguay

0.1

2.9

-5.9

3.0

4.5

2.5

9.8

7.5

6.8

6.5

Costa Rica

0.1

3.7

-4.1

3.5

3.0

2.5

0.7

1.5

2.0

2.0

Bolivia

0.1

4.6

-8.5

6.5

4.0

3.0

0.9

1.5

2.5

2.3

Latin America2

6.5

2.3

-6.8

6.4

2.5

2.0

3.0

5.7

4.5

3.3

Sources: Refinitiv, Capital Economics. 1) % of GDP, 2020, PPP terms. 2) GDP Excl. Venezuela; Consumer Prices Excl. Argentina & Venezuela.


The fiscal risk of rising rates, Mercosur tariff cuts

Latin America Economics Weekly

17 October 2021

Our view

Easing virus outbreaks and the lifting of restrictions have boosted economies recoveries across Latin America in Q3 but growth looks set to slow sharply over the coming quarters. Sustained above-target inflation will prompt more monetary tightening than most analysts expect, while fiscal policy will also become less accommodative. Weakening external conditions present another key headwind to the regional recovery. Meanwhile, lingering political risks will keep public debt concerns high, particularly in Brazil, which will probably put local financial assets and currencies under further pressure.

Latest Outlook

Latin America Economic Outlook

Not all doom and gloom

Virus outbreaks are easing in much of Latin America which should support activity in the near term. And while vaccination coverage is still weak in most of the region, suggesting there is still a clear risk of further virus waves, economies are becoming increasingly resilient on this front. We think that the pace of the regional recovery will beat most analysts’ expectations in the coming years. Further monetary tightening lies in store but, with headline inflation rates set to drop back in 2022, interest rates probably won’t rise as far as investors are currently pricing into financial markets. Meanwhile, political risks are likely to grow over the coming year, raising debt concerns and putting local financial assets under pressure.

19 July 2021