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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.
William Jackson Chief Emerging Markets Economist
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More from Latin America

Latin America Data Response

Brazil IPCA-15 (May 2022)

The further rise in Brazilian inflation, to 12.2% y/y in the middle of May, supports our view that there will be another 75pb of hikes in the current tightening cycle (to 13.50%). Investors seem to have come round to this view recently. LatAm Drop-In (26th May, 10:00 ET/15:00 BST): Join our 20-minute briefing about Colombia’s election and other regional political and fiscal risks – including Lula vs Bolsonaro in October. Register here.

24 May 2022

Latin America Data Response

Mexico Bi-Weekly CPI (May)

While Mexico’s headline inflation edged down to 7.6% y/y in the first two weeks of May, this will provide little comfort to the central bank as price pressures remain stubbornly strong. The risks are still skewed towards Banxico becoming more aggressive and delivering a 75bp rate hike at its next meeting in June. LatAm Drop-In (26th May, 10:00 ET/15:00 BST): Join our 20-minute briefing about Colombia’s election and other regional political and fiscal risks – including Lula vs Bolsonaro in October. Register here.

24 May 2022

Latin America Economics Weekly

Chile’s new constitution, Brazil’s improving finances

Some of the doubts over Chile’s political system have eased after the Constitutional Convention completed a draft of the new charter, but political risks remain high for now, which may keep the peso on the backfoot in the coming months. Elsewhere, while the Brazilian government’s budget deficit has continued to narrow, we don’t think the country’s fiscal troubles are over for good. LatAm Drop-In (26th May, 10:00 ET/15:00 BST): Join our 20-minute briefing about Colombia’s election and other regional political and fiscal risks – including Lula vs Bolsonaro in October. Register here.

20 May 2022

More from William Jackson

Latin America Economics Weekly

Brazil’s tax reform, Chilean primary elections

Proposed changes to Brazil’s income tax setup, which aim to cut corporate tax but only partly offset that with an end to exemptions and the introduction of a levy on dividends, add to the view that fiscal risks will resurface. Elsewhere, on Sunday there will be primary elections in Chile to decide the presidential nominees for the left-wing Apruebo Dignidad and centre-right Chile Vamos coalitions. While there is still a lot of uncertainty at this stage, one common theme is that there seems to be broad political support for keeping fiscal policy loose.

16 July 2021

Emerging Markets Economics Chart Book

Shifting towards rate hikes

Falling virus cases, strong economic recoveries and/or inflation worries prompted several more EM central banks – those of Czechia, Chile, Hungary and Mexico – to tighten monetary policy in the past month, joining Russia and Brazil. And a few others, including Korea and Colombia, are likely to follow suit relatively soon. But it’s not a widespread tightening cycle. Low inflation means that many central banks in Asia in particular are still a long way from hiking. And perhaps most notably, the People’s Bank of China, having removed stimulus since late last year, has signalled with a cut to the reserve requirement ratio that it is now focused on lowering financing costs for indebted firms.

15 July 2021

Emerging Europe Economics Weekly

Hungary’s inflation surprise, Russia & OPEC+

The surprisingly large rise in Hungarian inflation in June to its highest rate in almost nine years suggests that the risks to our interest rate forecast are skewed to the upside. Elsewhere, the discord at the OPEC+ meeting this week has raised the risk that the current deal falls apart. For Russia, a surge in oil production would provide a mechanical boost to GDP growth, but the accompanying slump in oil prices would probably result in less supportive fiscal policy and a sharp drop in the ruble may trigger even more monetary tightening than we currently anticipate.

9 July 2021
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