Brexit roils Lat Am markets but economic fallout limited

The UK’s vote to leave the European Union has triggered sharp falls in financial markets in Latin America but the economic fallout for the region should be limited. The UK is a relatively small export market for Latin America and financial ties are limited. While UK banks have a footprint in some countries (notably Mexico), units are locally capitalised. The bigger risk for the region is that the Brexit vote triggers a prolonged dislocation in global financial markets, which in turn weighs on capital flows to EMs. Were this to happen, economies with large current account deficits (notably Colombia) could come under pressure. But there are already some encouraging signs that, after the initial sharp falls in markets, conditions in EM markets are starting to stabilise. And there is no evidence that the Brexit vote has led to a tightening of financial conditions in economies in Latin America. Accordingly, our sense is that the fallout from the UK’s vote for Brexit should be limited. The external forces that will play a greater role in shaping the outlook for Latin America over the next year lie elsewhere, and include the pace and timing of Fed tightening and the prospects for China’s economy.