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Latin America Economics Weekly

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

Latin America Economics Weekly

Hikes, hikes, hikes

The hawkish tilt by Mexico’s central bank at its meeting yesterday, when it raised its raised its policy rate by 50bp (to 7.00%), suggests that Banxico may soon shift its tightening cycle into a higher gear. Elsewhere, Peru’s central bank also increased its policy rate by 50bp on Thursday, to 5.00%, and we expect a further 200bp of hikes in this cycle. Finally, the tightening cycle continued in Argentina yesterday with a 200bp rate hike and, with policymakers starting to take inflation targeting more seriously, we think that the central bank will gradually move real rates into positive territory in the coming quarters. EM Drop-In (17th May): Do current EM debt strains point to a repeat of the kinds of crises seen in the 1980s and 1990s? Join our special briefing on EM sovereign debt risk on Tuesday. Register now.

13 May 2022

Latin America Economics Weekly

Inflation alarm bells, Amlo seeks price freeze

The rise in inflation to multi-decade highs across much of the region in April is clearly worrying policymakers and, this week, Mexico’s government became the latest to announce measures to cushion the blow to consumers. Mexico’s plan should help to reduce inflation a little, but it will incur a fiscal cost and faces major implementation challenges. In the meantime, the latest inflation developments and comments from central banks support our view that interest rates across the region will be hiked further than most currently expect. China Drop-In (12th May, 09:00 BST/16:00 SGT): Join our China and Markets economists for a 20-minute discussion about near to long-term economic challenges, from zero-COVID disruptions to US-China decoupling. Register now.

6 May 2022
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Latin America Economics Weekly

Petro vs. Gutiérrez

This week Colombia's Liberal Party offered its backing to market-friendly Federico Gutiérrez – who currently trails left-wing Gustavo Petro in the polls – ahead of next month's presidential election. This decision may offer some solace to investors, although we think that Gutiérrez's plans for fiscal consolidation look ambitious and may be politically difficult to achieve. This suggests that, while public debt risks would be lower than under a Petro presidency, Gutiérrez may struggle to put Colombia's public finances on a sustainable path over the medium term.

Latin America Economics Weekly

Brazil’s election race heats up

Brazil’s presidential election race has started to take centre stage as incumbent Jair Bolsonaro has narrowed the gap in the polls with front-runner Lula. Investors’ concerns about a shift to looser fiscal policy have faded but, with neither candidate likely to pursue the reforms needed to restore long-term debt sustainability or boost growth, the risk premium on Brazilian financial assets is more likely to rise than fall further this year.

Latin America Economics Weekly

Boric on the backfoot, Argentine inflation concerns

The political fight over a fresh round of pension withdrawals in Chile underlines the Boric administration's struggle to wean the economy off accommodative policies. This will heap more pressure on the central bank to tighten policy aggressively to alleviate inflation and balance of payments risks. Otherwise, strong inflation data out of Argentina this week suggest that the government will fail to meet the IMF's target to reduce inflation this year. There's a risk this will be a prelude to broader slippage on the terms of its new deal with the Fund.
We are sending this Weekly one day earlier than usual because our offices are closed for Good Friday on Friday, 15th April.

Latin America Economics Weekly

Political risks: Peruvian protests & Chile’s constitution

The mass protests this week in Peru, triggered by rising inflation, are likely to lead to a further shift towards looser fiscal policy and a larger political risk premium on local financial assets. Elsewhere, there is a growing risk that Chile's Constitutional Convention will fail to create a legitimate new charter which reinforces our long-held view that lingering political concerns will weigh on the currency this year.

Latin America Economics Weekly

Central bank hikes and strikes

Central banks in Chile and Colombia didn’t hike interest rates as aggressively as had been widely expected this week, but we think that high inflation will, ultimately, lead to more tightening in this cycle than most are currently forecasting. Elsewhere, the start of a general strike by workers at Brazil’s central bank today to push for an inflation-busting pay rise may be symptomatic of a broader problem that high inflation in the country has tended to coincide with more disruptive labour action. Rising wage demands, coming against the backdrop of an improving labour market, could prolong the inflation problem too.

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