Feeling the squeeze

2016 is shaping up to be a better year for investors in Latin America than 2015. With global commodity prices now at a bottom and set to edge up this year, we expect most equity markets in the region to perform well and most currencies to stabilise. However, the economic effects on the region of the previous sharp falls in commodity prices over the past two years have further to play out. Fiscal policy will tighten in most countries as governments adjust budgets in response to lower revenues. At the same time, the lagged effects of previous exchange rate weakness will push up inflation in most places, forcing central banks to raise interest rates. The result is that regional GDP will contract by another 0.5% this year, with a modest pick-up to 2.5% in 2017. At a country level, the crisis in Brazil will deepen, but Mexico, Chile and Peru will perform well by regional standards.