Latin America

Latin America Economics Weekly

Latin America Economics Weekly

New face at Banxico, Chile election wrap-up

The unexpected change in the nomination for Banxico’s next governor, to Victoria Rodríguez from Arturo Herrera, hit investor confidence but we don't think this switch alters the outlook for Banxico’s gradual tightening cycle. Meanwhile, investors initially cheered the result of Chile’s first-round presidential election but with political risks unlikely to fade soon, and copper prices set to fall further, we see little upside in Chilean local markets from here. Drop-In: Why is Asia sitting out the global inflation surge? 09:00 GMT/17:00 HKT, Thursday 2nd December

26 November 2021

Latin America Economics Weekly

Chilean external imbalances, Peronists humbled

While much of the focus in Chile has centred on Sunday's general election, one story which may have flown under the radar is that external vulnerabilities are building. Data this week showed that the current account deficit blew out in Q3 on the back of surging imports, adding to the evidence that the economy is overheating. This leaves the Chilean peso vulnerable to a tightening of external financial conditions. Elsewhere, following a poor performance in the midterm elections, Argentina's government appears to be turning towards more orthodox economic policies.

19 November 2021

Latin America Economics Weekly

Core inflation concerns, elections in focus

The October CPI figures out of the region this week, which showed a marked strengthening of core inflation, are likely to ring alarm bells for central banks in the region and may trigger larger rate hikes in Brazil and Chile next month. Politics is likely to be centre of attention next week, with Chile’s presidential election entering the final straight, while the results of Argentina’s mid-term elections on Sunday are likely to determine the chances of a new IMF deal.

12 November 2021
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Latin America Economics Weekly

Chile feeling the heat, Brazil bending the (fiscal) rules

Strong September activity data out of Chile this week adds to signs that that the economy is starting to overheat, which will put even more pressure on the central bank to take some steam out of the recovery. We expect another 125bp rate hike at its next meeting in December, to 4.00%, taking the policy rate above the central bank’s estimate of neutral (3.25-3.75%). Elsewhere, the initial approval of a constitutional amendment in Brazil which would free up space for higher public spending adds to the evidence that the government's fiscal discipline is waning.

Latin America Economics Weekly

BCB in a tight spot, bailout for Pemex?

Brazil’s central bank is in a quandary. The market fallout after this week’s 150bp rate hike suggests investors didn’t think it went far enough to quash concerns about fiscal risks and rising inflation, but tighter policy also risks derailing the economic recovery and making the public finances even more fragile. Elsewhere, Pemex’s poor Q3 results implies that Mexico’s state-owned oil giant will need more government support, which will probably be forthcoming but would come at the cost of a greater misallocation of resources and lower potential growth.

Latin America Economics Weekly

Chile’s constitution, Brazil fiscal worries mounting

This week marked the two-year anniversary of the mass protests in Chile which caused a political risk premium to emerge in local financial markets and the currency, and we think that lingering political risks will keep them under pressure for some time. Similarly, we think that hard-hit Brazilian assets will continue to fair poorly from here, with suggestions this week that the government will break the spending cap adding to the evidence that the country's public finances will deteriorate in the coming years.

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.

Latin America Economics Weekly

Castillo moderates, Amlo’s intervention & ailing autos

President Castillo’s cabinet reshuffle in Peru this week points towards more pragmatic policymaking which, while a possible headwind to near-term growth, should boost Peru’s medium- to long-term economic prospects. On the flipside, Mexico's President López Obrador (Amlo) is once again trying to increase his grip on the energy sector which may deter private investment and weigh on the economy there. Finally, the latest data suggest that global shortages are continuing to hit auto production while also adding to price pressures across the region, and this trend may have further to run.

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