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Uruguay

High inflation fuels strikes and protests

High inflation seems to be causing growing unrest in the region, which threatens to be economically disruptive and raise fiscal concerns. Recent protests in Ecuador have hit its oil sector hard, while truck drivers in Peru are about to embark on a strike. Elsewhere, Brazil’s government is seeking to stave off possible unrest among truck drivers with higher benefits, while Mexico’s last month sought to freeze the prices of some basic goods. It remains to be seen what impact all this will have. But the regions’ recent experience suggests that strikes and protests can hit output significantly. And higher public spending to cushion the blow to consumers and businesses will cause weigh on budget positions. EM Drop-In (Thurs, 7th July): Join our economists for their regular monthly briefing on the hot stories in EMs – and those that aren’t getting the attention they deserve. In this 20-minute session, topics will include the outlook for EM FX markets after the recent sell-offs. Register now.

28 June 2022

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.

30 May 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
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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.

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.

Some good news on the political front

Political risk will be a major theme once again in Latin America this year, although recent developments have given cause for cautious optimism. Chilean President-elect Boric’s appointment of Mario Marcel, the current Central Bank Governor, as the next Finance Minister signals that his government may pursue prudent fiscal policies. And in Brazil, former left-wing president Lula (the front-runner in the presidential race) may be moderating his stance, having mooted to have asked Geraldo Alckmin, previously Lula’s centre-right rival, to be his running mate. However, there are still lingering risks in the region. Argentina’s government continues to play hardball with the IMF as the clock ticks down to reach a new deal. The make-up of Chile’s new constitution remains uncertain. And fiscal discipline could still waver around elections in Brazil and Colombia. These risks, and the implications for public debt trajectories, will probably put renewed pressure on currencies across Latin America.

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.

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.

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