Latin America

Uruguay

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.

19 August 2021

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
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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.

Economic ‘immunity’ improving

Latin America is once again the global epicentre of COVID-19 but, from an economic perspective, the region has built up significant immunity to the virus. Indeed, despite the surge in new virus cases at the start of Q2, the latest activity data show that the region’s economies held up well, especially those of Brazil and Colombia. It appears that businesses and consumers have adapted to various restrictions, which bodes well for economies during the latest wave of infections. Better still, outbreaks appear to be easing and lockdown measures are being lifted in Argentina, Chile and Peru, which should support their recoveries heading into Q3. Overall, we’re more optimistic than most about the near-term economic outlook for Latin America, even though the region’s prospects are still dimmer than elsewhere in the emerging world.

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.

Brazil’s political crisis puts back pension reform

The past month has brought some signs that the continuing political crisis in Brazil is starting to weigh on the more ambitious elements of the government’s reform programme. While President Temer’s administration has already passed labour reforms and this month announced plans to privatise large swathes of the economy, these measures only require a simple majority in Congress. In contrast, pension reforms – which are crucial to stabilising the public finances and form the centre-piece of the reform programme – require constitutional amendments that must clear a much higher bar in Congress. In recent days, the government’s Chief Whip has suggested that these “are no longer on the immediate agenda”. Our sense is that the likelihood of meaningful pension reforms (that deliver savings in excess of 1% of GDP per year) are now no better than 50:50. The one crumb of comfort is that, as things stand, there are still few signs that the political crisis is weighing on Brazil’s economic recovery.

Regional inflation hits seven-year low

Inflation has continued to fall across Latin America – our measure of regional inflation (excluding Argentina and Venezuela) dropped below 4% y/y for the first time since 2010 last month. This is due largely to the collapse in Brazilian inflation, which reached a near twenty-year low of 2.8% y/y in the first half of July. But price pressures have also eased further in Colombia, Chile and Peru. This should give most central banks cover to continue easing monetary policy over the coming months. Indeed, in Colombia, Chile and Peru we expect more easing than the consensus and financial markets currently expect. Mexico is the regional outlier, with headline inflation there running at an eight-year high. But the latest data suggest that it is close to peaking and this should be enough to dissuade its central bank from tightening monetary policy further.

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