Latin America

Colombia

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.

19 October 2021

The fiscal risk of rising rates, Mercosur tariff cuts

Central banks were once again in the spotlight this week after the supersized 125bp rate hike in Chile, but one issue that is often overlooked is the damaging impact of rising interest rates on public finances across the region. Brazil is particularly vulnerable on this front, and may resort to financial repression over the medium term to alleviate debt risks. Otherwise, an agreement to cut Mercosur's common external tariff is a positive step towards liberalisation but, as always, domestic politics could be a hurdle for further progress.

15 October 2021

We expect the rally in commodity currencies to be short-lived

Although we wouldn’t be surprised if energy prices remained elevated for a while, we still think they will fall back over the next year, weighing on the currencies of net energy exporters.

14 October 2021
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Mexico & Colombia hike but tightening cycles to differ

Central banks in Mexico and Colombia raised their policy rates by 25bp yesterday and more rate hikes are in the pipeline in both economies. The pace of tightening will remain gradual in Mexico but, similar to elsewhere in the region, the tightening cycle in Colombia will probably shift into a higher gear soon.

External headwinds growing

Falling new virus cases and the lifting of restrictions have boosted economies across the region in Q3, but the deteriorating external backdrop will put a lid on growth from here. Even with an orderly resolution to the Evergrande saga, a slowdown in China’s property sector will weigh on Latin American commodity producers, particularly Chile and Peru, over the coming quarters. Meanwhile, weakening US growth is a headwind to exporters, particularly in Mexico. As a result, regardless of developments on the virus and vaccine front, we expect that the regional recovery will slow over the coming quarters.

Have emerging markets vanquished inflation?

Low inflation is here to stay in much of the emerging world. However, there is a significant risk that inflation rises, albeit moderately, over the medium term in several countries. This risk isn’t limited to the usual suspects like Turkey and Argentina. But it also includes other major emerging economies such as Brazil, South Africa, Indonesia, the Philippines, Colombia and, to a lesser extent, Mexico and India.

Is high inflation here to stay in Latin America?

Following a surge in inflation across the region this year, we think that headline rates are at, or close to, a peak in major Latin American economies. But strong underlying price pressures will prevent inflation from falling below central banks’ targets over the next year or so. Monetary tightening cycles therefore have a lot further to run across the region, especially compared to elsewhere in the emerging world.

Putting risky asset valuations into context

This Update compares the valuations of the twelve different “risky” asset classes that we cover on our Asset Allocation service, both relative to one another and to the yields of “safe” assets, as well as explaining how those valuations inform our long-term returns forecasts.

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