Latin America

Costa Rica

The economic fallout from political risks in Lat Am

The pandemic appears to be accelerating a political trend towards populism in Latin America. While there is a lot of uncertainty about how this might play out, it generally points towards loose fiscal policy and greater state intervention across the region. The key economic risks are that this could lead to weaker public finances, lower potential growth and possibly higher inflation over the medium term. The more immediate impact will probably be to keep Latin American financial markets under pressure.

5 August 2021

Q3 looking brighter

While the regional economic recovery stuttered in Q2, it appears to be gathering pace in Q3. New COVID-19 cases have dropped back, particularly in Chile and Uruguay suggesting that their rapid vaccination programmes are proving effective. Restrictions have been eased across Latin America which is reflected in the improvement in the latest high-frequency data. Mexico is the key exception to this trend. It is currently in the midst of a Delta-induced third wave, which provides a warning sign to other countries with similarly low vaccination coverage. But, for now, the positive developments in much of Latin America reinforce our view that the near-term economic outlook for the region is not as bad as many think.

27 July 2021

Not all doom and gloom

Virus outbreaks are easing in much of Latin America which should support activity in the near term. And while vaccination coverage is still weak in most of the region, suggesting there is still a clear risk of further virus waves, economies are becoming increasingly resilient on this front. We think that the pace of the regional recovery will beat most analysts’ expectations in the coming years. Further monetary tightening lies in store but, with headline inflation rates set to drop back in 2022, interest rates probably won’t rise as far as investors are currently pricing into financial markets. Meanwhile, political risks are likely to grow over the coming year, raising debt concerns and putting local financial assets under pressure.

19 July 2021
More Publications

Assessing Lat Am’s vulnerability to US protectionism

Mexico, as well as several smaller countries in Central America (including Nicaragua, Honduras and Costa Rica), are most vulnerable to a general escalation in US protectionism. But individual sectors in some countries – including aeronautics in Brazil – would also be vulnerable in the event of targeted action on specific products. In this Focus, we answer four key questions about the region’s vulnerability to the threat of US further trade protection.

Recovery in Latin America steps up a gear

The past month has brought further evidence that the recovery in Latin America is picking up pace. Our GDP Tracker suggests that regional growth is now running at a three-year high of 3% y/y. The rebound has been widespread. In Brazil, a combination of lower inflation and looser monetary policy has given a boost to consumer spending. The same is true in Colombia. Meanwhile, a fiscal loosening ahead of October’s legislative elections has caused growth in Argentina to rebound, while the temporary factors that weighed on growth in Chile (a mine strike) and Peru (floods earlier this year) have begun to fade. The exception to all of this is Mexico, where there are early signs that the rise in inflation earlier this year, and the associated tightening of monetary policy, is beginning to weigh on growth. The disruption caused by this month’s large earthquake just south of Mexico City will add to the headwinds for the economy over the coming months.

On the road to recovery

The outlook for Latin America is improving and we expect economic growth to accelerate over the next year. The latest political crisis to engulf Brazil has cast fresh doubts over the outlook there but the early signs suggest that this is unlikely to prevent the economy from recovering. Likewise, Mexico’s economy is holding up reasonably well despite continued uncertainty over relations with the US and we think growth will beat consensus expectations this year. Finally, while the Andean economies of Chile, Peru and Colombia have weakened since the start of this year, a combination of looser monetary policy and, in some cases, fiscal support, should help to revive growth over the second half of 2017. All told, we expect regional GDP to grow by 1.5% this year and 2.5% in 2018.

Brazil breathes sigh of relief as meat scandal subsides

The scandal over Brazil’s meat sector, which at one point appeared to threaten the country’s economic recovery, seems to have faded just as quickly as it escalated. The crisis exploded following the revelation earlier this month that the authorities had begun an investigation into allegations that up to 40 food processing companies had bribed government officials to approve the sale and export of soiled meat. In response, countries from China to Chile imposed bans on imports of Brazilian meat with the result that shipments fell by about a fifth last week. At one point, meat exports worth about $8bn annually (0.5% of GDP) were subject to various bans and restrictions. The good news is that most of these bans have now been lifted, helped in part by an intense lobbying effort by the government. The bad news is that the fact that a single scandal posed such a threat to the economy underlines just how fragile Brazil’s economic recovery will be. Meanwhile, with the meat scandal subsiding, investors have quickly turned their focus to the progress of pension reforms through Congress. Signs that the bill is struggling to get out of committee have taken some steam out of the rally in the real over the past week.

Growth to return in 2017

After two years of falling output, Latin America’s economy finally looks set to return to growth next year. Brazil and Argentina should exit recessions, while the downturns in Colombia and Chile are likely to bottom out. Investment should start to recover in most countries as business confidence returns. At the same time, weaker currencies will support non-commodity exports. However, the region’s recovery will be slow going. On the external front, economic growth in China – the largest export market for most countries – looks set to slow. Global commodity prices should grind higher but they will remain at low levels. On the domestic front, fiscal policy will tighten further in most places as governments continue the process of balance sheet repair. The good news is that falling inflation will give most central banks room to cut interest rates. The main exception is Mexico. While we don’t expect the election of Donald Trump to trigger a recession in Mexico, the drop in the peso will push up inflation and trigger further monetary tightening. All told, having contracted by 1.0% this year, we expect regional GDP to grow by 1.3% next year and 2.3% in 2018.

1 to 0 of 0 publications