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Latin America


The Codelco strike threat, Chile and the copper price

A threatened strike at Chile’s copper giant, Codelco, could knock as much as 0.3%-pts off quarterly GDP growth for every week that workers are on strike and worsen the country’s balance of payments strains. What’s more, it may not even be enough to give a lift to the copper price given subdued global demand. In view of the wider interest, we are also sending this Latin America Update to clients of our Metals Service.

21 June 2022

Emerging Markets Capital Flows Monitor

Capital outflows from EMs appear to have eased over the past month, but rapidly tightening external financing conditions mean that this won’t last for long. Large outflows already seem to have pushed Turkey to the brink of a(nother) currency crisis, and we’re also concerned about those EMs whose current account deficits have widened sharply, including Chile and parts of Central and Eastern Europe.

14 June 2022

Chile’s current account deficit flashing red

Chile is likely to run a current account deficit of 7% of GDP this year, the widest since 1985. Worryingly, this deficit is being increasingly funded by volatile portfolio inflows, making the economy (and currency) particularly vulnerable to swings in investor risk appetite. One key implication is that the central bank will raise interest rates further than most expect in order to alleviate these growing vulnerabilities.

13 June 2022
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Chile: tightening cycle will go further than most expect

The guidance in the Monetary Policy Report released by Chile’s central bank today, following on from its 75bp rate hike to 9.00% yesterday, suggests that the tightening cycle has a little further to run. We think that double digit inflation alongside Chile’s growing external vulnerabilities will prompt an additional 100bp of rate hikes in this cycle, to 10.00%. Our view is more hawkish than the path currently priced in to financial markets and the latest analyst consensus.

Colombia: no more business as usual

The first round of Colombia’s presidential election has set up a close race between left-wing Gustavo Petro and populist Rodolfo Hernández in the second round vote on 19th June. The vote was a major repudiation of the pro-business governments that have governed Colombia for the past two decades. Investors seem to have welcomed the result. Hernández is seen as having the best chance of defeating Petro and avoiding a shift to the left. But we think that any optimism is likely to be short lived. Neither Hernández nor Petro are likely to tighten fiscal policy to reduce public debt risks, while both advocate higher trade barriers which bodes poorly for Colombia’s growth prospects. If anything, we suspect that Hernández presents a greater risk on these fronts than Petro.

EM growth hit by China lockdown and war in Ukraine

Recently-released Q1 GDP figures showed that most EMs performed well at the start of this year, but headwinds are growing. Lockdowns are dealing a heavy blow to China’s economy and spillovers from the war in Ukraine will weigh on Emerging Europe in particular. In general, our 2022 GDP growth forecasts are below the consensus.

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.

Chile GDP (Q1)

The 0.8% q/q contraction in Chile’s GDP in Q1 suggests the economy is coming back down to earth after a stellar 2021, and there is a growing chance of a recession this year. Meanwhile, the current account deficit widened to a worryingly large 7.3% of GDP, making the economy especially vulnerable to a further tightening of external financial conditions.

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