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Latin America


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

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
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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.

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.

US-Venezuela ties, Brazil fuel price hike

A meeting this week between officials from the US and Venezuelan governments could be the first step on a long road towards sanctions being lifted on the country. That would be necessary for Venezuela to rebuild its shattered economy over the medium to long term. Otherwise, the sharp hike to fuel prices in Brazil will push inflation above 11% and will weigh on real incomes and consumer spending. So while the mining sector will benefit from higher commodity prices, the economy as a whole will remain sluggish.

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.

Signs of life in Venezuela’s oil sector

Oil production in Venezuela has been showing signs of life, and there is probably scope for further gains in the near term. But it would require a lifting of sanctions and significant investment over many years to bring production back to levels seen a decade ago, which seems unlikely under the current Maduro government. And even if there is an eventual turnaround in oil production, this may only come after global demand peaks for Venezuela’s highly-polluting oil as the world transitions towards cleaner energy. In light of the wider interest, this Latin America Economics Update is being made available to clients of our Energy Service.

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