Latin America

Argentina

Argentina’s PASO surprise, Pemex debt

The loss for Argentina’s ruling Peronists in the open primary (PASO) for mid-term legislative elections in November suggest that the political tides might be shifting and boosted local financial markets. But the country’s public debt problems are likely to re-surface before too long. Meanwhile, the news that Mexico’s government has purchased $7bn of foreign exchange from the central bank appears to be another step towards the state taking greater responsibility for Pemex’s debt problems.

17 September 2021

EM financial conditions still loose barring LatAm

Our financial conditions indices show that conditions remain loose by historic standards in most EMs. The key exception is Latin America, where conditions have tightened sharply this year due to rising interest rates and fiscal risks. This could pose a headwind to economic recoveries in the region.

13 September 2021

Brazil’s political crisis, Mexico’s austere budget

It’s been a rollercoaster week in Brazilian politics and financial markets and, while investors have breathed a small sigh of relief in the past day or so, we think that they will be put under further pressure as the 2022 election nears. Elsewhere, Mexico's austere 2022 budget unveiled this week suggests that fiscal policy will continue to do very little to support the economy, which reinforces our view that Mexico's recovery will underperform most of its regional peers.
CE Spotlight 2021: The Rebirth Of Inflation? We’re holding a week of online events from 27th September to accompany our special research series. Event details and registration here.

10 September 2021
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The pandemic and EM scarring risks

The pandemic is likely to inflict lasting damage on potential growth in economies in much of Latin America, Africa and South and Southeast Asia, adding to the structural headwinds that they already faced. However, the risk of permanent scarring in many other emerging markets – including much of East Asia and Emerging Europe – is overstated.

Evergrande & frontier sovereign debt risks build

The combination of large foreign-currency debt burdens, low FX reserves and weakening currencies means that the risk of sovereign defaults in Sri Lanka and Tunisia is growing. Elsewhere, China’s largest property developer, Evergrande, appears to be close to collapse, which would cause large losses for banks and bondholders. Were this to cause stress in the banking sector, the government would ultimately step in to restore stability. Elsewhere, banking sectors in Turkey, India and the UAE are points of concern.

Brazil at breaking point, Argentina’s SDRs, Chile pensions

Brazil’s institutional crisis took a turn for the worse this week, and points to an environment in which fiscal risks will grow and the economic reform agenda will be put on the backburner. Elsewhere, a proposed fourth pension withdrawal bill in Chile would turbocharge the economic recovery, but adds to reasons to expect aggressive monetary tightening and presents longer-term public debt risks. Finally, while the IMF’s SDR allocation has given policymakers in Argentina some breathing space, they appear no closer to securing a new deal with the Fund.

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.

What our commodity forecasts mean for Latin America

We expect that most commodity prices will come off the boil, which will weigh on recoveries across Latin America, particularly in Peru and Chile. While the brightening domestic picture will boost overall GDP growth in the very near term, this emerging headwind to activity adds to the reasons why we expect that the regional recovery will lag much of the rest of the world over the coming quarters.

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