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Latin America

Ecuador

Food inflation a growing concern

Inflation continues to march higher in Latin America, most recently driven by surging food prices owing to poor domestic weather conditions and rising global agricultural prices. This has led to unrest in Peru, and there is growing political pressure to safeguard consumers through lower taxes, higher subsidies and/or price controls on foodstuffs elsewhere in the region (e.g. Mexico and Chile). Even so, we expect that food (and headline) inflation will remain elevated in the coming months. This feeds into our view that Latin American central banks will raise policy rates further than most analysts expect in this cycle.

27 April 2022

High commodity prices won’t lift all boats

The surge in commodity prices will drive stronger regional growth than the consensus expects this year, but not all economies in Latin America will benefit. While Brazil and Colombia will see a terms of trade windfall – we expect GDP growth in both countries to beat consensus expectations in 2022 – major oil importers such as Chile and Peru will lose out. Meanwhile, inflation will be higher across the region and monetary policy tighter than most analysts anticipate over the next 6-12 months.

21 April 2022

Commodities boost Lat Am markets, economies less so

High commodity prices caused by the war in Ukraine have driven a rally in Latin American currencies and equities this month, and are causing exports to surge. Weekly trade figures from Brazil and Chile show that exports were up by 25-40% y/y in early March (in dollar terms). But domestic conditions remain challenging. Timely surveys from Brazil show that confidence fell this month, which seems linked to high and rising inflation. Meanwhile, financial conditions have tightened a little further across most of the region which is likely to weigh on credit growth. In short, the region still faces a slow and bumpy recovery.

31 March 2022
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Fresh headwinds appear

The easing of Omicron waves, and loosening of restrictions, across Latin America will have given a lift to recoveries in recent weeks, but the fallout from the Russia-Ukraine crisis presents a fresh headwind to the region. While the recent surge in global commodity prices will benefit some Latin American countries, not all will see an improvement in their terms of trade. And higher prices will add to strong inflationary pressures, squeezing real incomes and consumer spending. Central banks will maintain their hawkish stance, and additional rate hikes will be a further drag on activity. The upshot is that the regional recovery will remain sluggish in the coming months.

High oil prices more harm than good for Lat Am

Persistently high oil prices would bode ill for current account positions in much of Latin America, adding to the existing vulnerabilities in Chile. It would also keep inflation elevated, leading to more aggressive monetary tightening than we currently expect. Political pressures might prompt governments to try to protect consumers from rising energy costs, but at the expense of greater fiscal concerns.

Falling to the back of the pack

The regional recovery will lag further behind others in the emerging world in the coming years. The Omicron-led surge in virus cases presents a risk to growth in the near term, but we suspect that the economic hit will be small. Larger drags will come from the unwinding of fiscal support and further monetary tightening in response to high inflation. Our rate forecasts are generally more hawkish than the consensus. Falling commodity prices will also weigh on growth in the region, and will cause current account balances to deteriorate, with external positions in Chile and Colombia looking increasing shaky. Lingering fiscal and political risks will keep local financial markets under pressure in much of Latin America, particularly ahead of elections in Brazil and Colombia this year.

Latin America: five key calls for 2022

We think that Latin American GDP growth will slow by more than most expect in 2022, while inflation will also drop more a bit more quickly than the consensus anticipates. This feeds into our relatively dovish monetary policy views across the region. Meanwhile, heightened political and/or fiscal risks, alongside falling commodity prices, will cause the region’s currencies to weaken further against the US dollar.

Omicron may hinder already weakening recoveries

Recoveries across Latin America have lost momentum in Q4 even though, unlike in other regions such as Europe, new COVID-19 cases generally remain low and containment measures are still light-touch at this stage. The situation could get worse if the Omicron variant takes hold. One reassuring sign is that vaccine coverage continues to improve across much of the region, particularly in Chile and Uruguay which have world-leading booster programmes. But the rollout of third doses has barely got off the ground in the likes of Mexico, Colombia and Peru, suggesting these economies are most vulnerable to a renewed flare-up in virus cases and fresh lockdowns.

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