More fiscal worries in Brazil, the regional re-opening

More fiscal worries in Brazil, the regional re-opening

Worries about a worsening of Brazil’s fiscal position in the run-up to next year’s general elections have continued to build, and we think there may now be a fiscal risk premium of about 50bp embedded in sovereign dollar bond yields. Meanwhile, governments in the region took several important steps towards re-opening this week, and near-term economic prospects continue to brighten. But the growing prevalence of the Delta variant poses a worrying threat.
William Jackson Chief Emerging Markets Economist
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More from Latin America

Latin America Data Response

Chile Consumer Prices (Nov.)

The further rise in Chile’s inflation to 6.7% y/y – the highest rate since late 2008 – will keep pressure on the central bank to deliver further aggressive monetary tightening. We expect another 125bp policy rate hike, to 4.00%, at its meeting next week.

7 December 2021

Latin America Economics Weekly

Central banks and Omicron, Colombia CA risks

The emergence of the Omicron variant presents a key risk to economic recoveries in the region, although the experience from the latest virus wave in the region provides a reason to think it will not result in a permanent hit to output. In the meantime, central banks across the region will remain focussed on tackling high inflation with further rate hikes. Otherwise, data this week showed that Colombia's current account deficit widened even further in Q3 and the recent drop in oil prices will add to the growing external vulnerabilities there.

3 December 2021

Latin America Data Response

Brazil Industrial Production (Oct.)

The surprise 0.6% m/m fall in Brazilian industrial production in October and weakness in the surveys for last month provide early evidence that the contraction in the economy last quarter may be followed by another q/q drop in GDP in Q4.

3 December 2021

More from William Jackson

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.

19 August 2021

Emerging Markets Economics Chart Book

Asia bucks the monetary policy trend

Several EM central banks have continued to tighten monetary policy over the past month or so in response to strong reopening rebounds (Chile, Czech Republic, Hungary) and/or rising inflation concerns (Brazil, Mexico, Peru, Russia). A few others, including Colombia, are likely to follow suit relatively soon. But one EM region that is bucking the monetary policy trend is Asia. Admittedly, the Bank of Korea may be gearing up to tighten policy soon too in response to building financial risks. But the surge in virus cases and low (or easing) inflation means that most central banks in the region are in no rush to tighten. In fact, we now expect further rate cuts in both Thailand and the Philippines over the coming months, while the Reserve Bank of India is unlikely to start normalising policy until well into next year.

18 August 2021

Emerging Europe Data Response

Russia Consumer Prices (Jul.)

Although Russian headline inflation came in at a slightly-weaker-than expected 6.5% y/y, that masked a worryingly strong rise in core inflation that’s likely to trigger further monetary tightening. We still expect another 75bp of hikes in the policy rate (to 7.25%) over the coming months.

6 August 2021
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