Latin America

Peru

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

Castillo moderates, Amlo’s intervention & ailing autos

President Castillo’s cabinet reshuffle in Peru this week points towards more pragmatic policymaking which, while a possible headwind to near-term growth, should boost Peru’s medium- to long-term economic prospects. On the flipside, Mexico's President López Obrador (Amlo) is once again trying to increase his grip on the energy sector which may deter private investment and weigh on the economy there. Finally, the latest data suggest that global shortages are continuing to hit auto production while also adding to price pressures across the region, and this trend may have further to run.

8 October 2021

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.

28 September 2021
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Evergrande fallout on Lat Am, Peronist infighting

Fears over Chinese property giant Evergrande rocked global markets earlier this week and Latin American economies, particularly Chile and Peru, are among the most exposed in the world to problems in China’s construction sector. This underlies our view that external conditions are becoming a growing headwind to recoveries across the region. Otherwise, while there are growing fears in Argentina that firebrand Vice President Cristina Kirchner is taking over the reins, it seems that these concerns are overdone, at least for as long as the relatively moderate Economy Minister, Martín Guzmán, remains in office.

Lat Am leads the EM tightening cycle

Several EM central banks have raised interest rates in the past couple of months on the back of growing inflation concerns (including many in Latin America) and/or strong economic recoveries (parts of Central Europe, Korea). Hiking cycles look set to continue for a while longer, with Latin America likely to tighten most aggressively. Bucking the trend is much of Asia, where – with the exception of Korea – policy tightening still looks some way off.

We think China’s equities will continue to struggle

Even if the current concerns around Evergrande abate, we think China’s stock market will continue to underperform many of those elsewhere over the next couple of years.

Drop-In: Evergrande – What are the risks to China and the world? Chief Asia Economist Mark Williams and Senior China Economist Julian Evans-Pritchard will be joined by Senior Markets Economist Oliver Jones to take your questions about the Evergrande situation. They’ll be covering the implications of collapse for China’s financial system and growth outlook, and assessing the global markets fallout. Register here for the 0900 BST/1600 HKT session on Thursday, 23rd September.

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.

Peru: BCRP stepping up pace of tightening

Yesterday’s larger 50bp rate hike, to 1.00%, delivered by Peru’s central bank (BCRP) suggests it is becoming increasingly concerned about the inflation outlook. With inflation set to stay above the 1-3% target range over the coming quarters, and GDP growth likely to beat expectations, we now think that the policy rate will rise to 2.00% by end-2021 and 3.50% by end-2022 (previously 1.25% and 2.75%).

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