Latin America

Peru

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.

10 January 2022

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.

22 December 2021

2021 in review

For the last Weekly of the year we look back at some our key 2021 forecasts. Our biggest wins were predicting that Brazil’s government would effectively cast aside its spending cap and that Colombia would lose its investment-grade rating. However, we underestimated this year’s surge in inflation and the aggressive monetary policy response across the region. Otherwise, all eyes are on Chile’s presidential election on Sunday between José Antonio Kast and Gabriel Boric, which looks too close to call. Both candidates have moderated their stance in recent weeks suggesting that a radical shift in policymaking seems unlikely, but fiscal risks will linger regardless of who wins.
– This will be the last Economics Weekly for 2021. The next Weekly will be sent on Friday 7th Jan. 2022 –

17 December 2021
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Lat Am’s recovery falling behind other EMs

The recent batch of GDP figures showed that growth in Latin America as a whole picked up in Q3, but the region’s recovery so far has been one of the weakest in the emerging world. And growth prospects are only deteriorating, suggesting Latin America will fall even further behind in the coming quarters. Note: Central Bank Drop-In – The Fed, ECB and BoE are just some of the key central bank decisions expected in this packed week of meetings. Neil Shearing and a special panel of our chief economists will sift through the outcomes on Thursday, 16th December at 11:00 ET/16:00 GMT and discuss the monetary policy outlook for 2022.

Political storm clouds lifting for investors…for now

Political developments in Latin America have generally turned in investors’ favour this month. Right-wing José Antonio Kast beat his left-wing rival, Gabriel Boric, in the first round of Chile’s presidential election which buoyed local markets. Elsewhere, the Peronists’ heavy defeat in Argentina’s legislative elections points to more market-friendly policymaking there. However, political risks still linger across the region. The fractured nature of Chilean politics and uncertainty over the new constitution may weigh on investor sentiment, while the Argentine government has a long way to go to win over markets. Meanwhile, fears over populist shifts will persist in Brazil and Colombia ahead of elections next year. Taken together with our view that growth will slow and commodity prices will fall (further), we remain downbeat on the outlook for Latin American financial markets.

Fiscal risks in the spotlight

The growing likelihood that Brazil’s government will circumvent its spending cap adds to broader signs that austerity is becoming politically difficult to implement across the region. For instance, Ecuadorian President Lasso recently U-turned on a plan to reduce fuel subsidies after facing the threat of protests. That echoes the decision by Colombia’s government to dilute tax hikes after mass demonstrations there earlier this year. With a busy electoral calendar approaching (e.g. in Chile, Colombia and Brazil), it seems unlikely that policymakers will push through the (harsh) austerity needed to reduce public debt risks. This feeds into our view that financial markets will come under further pressure across much of Latin America.

EM recovery faces mounting headwinds

After what appears to have been a strong Q3, we expect recoveries in many EMs to enter a slower phase as re-opening boosts fade and goods shortages bite.

Best of the recovery now over

Easing virus outbreaks and the lifting of restrictions boosted recoveries across Latin America in Q3, but growth looks set to slow sharply over the coming quarters. The re-opening boost will soon fade. Fiscal support is, or will be, unwound while sustained above-target inflation will prompt more monetary tightening than most analysts expect. Meanwhile, supply constraints and falling commodity prices are becoming headwinds to the regional recovery too. So, having beaten expectations in recent months, the pace of the regional recovery is now likely to disappoint. The spectre of more populist policymaking will keep public debt concerns high, particularly in Brazil, putting local financial markets under pressure.

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