Latin America

Latin America Chart Book

Latin America Chart Book

Political storm clouds lifting for investors…for now

Political developments in Latin America have generally turned in investors’ favour this month. Right-wing José Antonio Kast beat his left-wing rival, Gabriel Boric, in the first round of Chile’s presidential election which buoyed local markets. Elsewhere, the Peronists’ heavy defeat in Argentina’s legislative elections points to more market-friendly policymaking there. However, political risks still linger across the region. The fractured nature of Chilean politics and uncertainty over the new constitution may weigh on investor sentiment, while the Argentine government has a long way to go to win over markets. Meanwhile, fears over populist shifts will persist in Brazil and Colombia ahead of elections next year. Taken together with our view that growth will slow and commodity prices will fall (further), we remain downbeat on the outlook for Latin American financial markets.

24 November 2021

Latin America Chart Book

Fiscal risks in the spotlight

The growing likelihood that Brazil’s government will circumvent its spending cap adds to broader signs that austerity is becoming politically difficult to implement across the region. For instance, Ecuadorian President Lasso recently U-turned on a plan to reduce fuel subsidies after facing the threat of protests. That echoes the decision by Colombia’s government to dilute tax hikes after mass demonstrations there earlier this year. With a busy electoral calendar approaching (e.g. in Chile, Colombia and Brazil), it seems unlikely that policymakers will push through the (harsh) austerity needed to reduce public debt risks. This feeds into our view that financial markets will come under further pressure across much of Latin America.

26 October 2021

Latin America Chart Book

External headwinds growing

Falling new virus cases and the lifting of restrictions have boosted economies across the region in Q3, but the deteriorating external backdrop will put a lid on growth from here. Even with an orderly resolution to the Evergrande saga, a slowdown in China’s property sector will weigh on Latin American commodity producers, particularly Chile and Peru, over the coming quarters. Meanwhile, weakening US growth is a headwind to exporters, particularly in Mexico. As a result, regardless of developments on the virus and vaccine front, we expect that the regional recovery will slow over the coming quarters.

28 September 2021
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Latin America Chart Book

Inflation risks growing

Inflation is at, or close to, multi-year highs across Latin America which has prompted a slew of interest rate hikes across the region. We think that central banks in Brazil, Mexico, Chile and Peru will continue their tightening cycles over the coming months, and that Colombia’s will soon join the club. However, in general, we expect that inflation across Latin America will fall in 2022 as temporary factors (base effects linked to fuel prices, re-opening effects, supply shortages) unwind, bringing tightening cycles to an end within a year or so. A key risk is if the current high rates of inflation cause expectations to drift higher, which may prompt central banks to press on the brakes more aggressively than we currently anticipate.

Latin America Chart Book

Q3 looking brighter

While the regional economic recovery stuttered in Q2, it appears to be gathering pace in Q3. New COVID-19 cases have dropped back, particularly in Chile and Uruguay suggesting that their rapid vaccination programmes are proving effective. Restrictions have been eased across Latin America which is reflected in the improvement in the latest high-frequency data. Mexico is the key exception to this trend. It is currently in the midst of a Delta-induced third wave, which provides a warning sign to other countries with similarly low vaccination coverage. But, for now, the positive developments in much of Latin America reinforce our view that the near-term economic outlook for the region is not as bad as many think.

Latin America Chart Book

Economic ‘immunity’ improving

Latin America is once again the global epicentre of COVID-19 but, from an economic perspective, the region has built up significant immunity to the virus. Indeed, despite the surge in new virus cases at the start of Q2, the latest activity data show that the region’s economies held up well, especially those of Brazil and Colombia. It appears that businesses and consumers have adapted to various restrictions, which bodes well for economies during the latest wave of infections. Better still, outbreaks appear to be easing and lockdown measures are being lifted in Argentina, Chile and Peru, which should support their recoveries heading into Q3. Overall, we’re more optimistic than most about the near-term economic outlook for Latin America, even though the region’s prospects are still dimmer than elsewhere in the emerging world.

Latin America Chart Book

Political risks coming to the fore

Political risks have intensified in the Andes this month, which could be part of a broader trend throughout the region. In Colombia, the protests against tax reforms have pushed policymakers away from the fiscal austerity measures required to repair the public finances. Meanwhile, the result of Chile’s Constitutional Convention election has opened the door to more radical proposals entering the new charter. Elsewhere, elections in Mexico and Peru next month may result in a shift towards more interventionist policymaking, while populist measures could emerge in Brazil ahead of next year’s general election. These political concerns are likely to put Latin American financial markets on the backfoot over the coming months.

Latin America Chart Book

Diverging policy responses to rising inflation

Inflation is above target in Brazil and Mexico, with Chile set to follow in the coming months, but only in the former is the central bank likely to respond with (further) interest rate hikes. Brazil’s case reflects a combination of high inflation, a rising country risk premium and a starting point of low real rates. Central banks elsewhere, though, are likely to look through the rise in inflation, which largely reflects a transitory spike in energy inflation. We think that headline inflation will fall back towards central banks’ targets as unfavourable base effects unwind over the rest of the year, which feeds into our view that policy rates will follow a lower path than is currently priced into financial markets.

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