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Latin America Macroeconomic Outlook Summary

Core Content Overview

This document presents the macroeconomic outlook for Latin America in 2018, with a focus on Brazil, Mexico, Colombia, Argentina, and Chile. It includes insights on economic growth, inflation, monetary policy, elections, and sovereign ratings, highlighting the interplay between global factors and regional dynamics.

Global Context

• Global Expansion: The global economy is gradually moving away from accommodative monetary policies, with the US Fed Funds rate and 2-year Treasury bond yields expected to rise.
• USD Cycle: The US dollar is anticipated to have peaked, which could lead to a weaker USD and potentially boost international commodity prices.
• Commodity Prices and Ratings: A weaker USD tends to improve sovereign ratings in emerging markets (EM), as it reduces the burden of external debt.

Latin America: Commodity Exposure and Current Account Balances

• Commodity Dependency: Countries in Latin America have varying levels of dependency on commodity exports, with Brazil and Argentina being more reliant.
• Current Account Deficit: Brazil's current account deficit is manageable due to robust foreign direct investment (FDI). Mexico benefits from remittances and FDI, while Colombia has seen a diversification of FDI since the 2014 oil slump.
• FDI and Portfolio Investment: Colombia's FDI has diversified, but portfolio investment has slowed due to declining inflows to the oil and mining sectors.

2018 Latin America Elections Calendar

• Brazil:
  • 7 October 2018: Presidential election (2nd round)
• Colombia:
  • 11 March 2018: Legislative election
  • 27 May 2018: Presidential election (1st round)
  • 17 June 2018: Presidential election (2nd round)
• Mexico:
  • 1 July 2018: General election (President and Chamber of Deputies)

Brazil: Election Time

• Growth Recovery: Brazil's real GDP growth is expected to pick up in 2018, with the market consensus aligning with BNP Paribas' view.
• Confidence: Consumer and business confidence is improving, which is a positive indicator for economic recovery.
• Unemployment: The unemployment rate has peaked and is expected to improve gradually.
• Inflation: CPI inflation has fallen below the target range for the first time in years, with underlying services inflation also declining.
• Interest Rates: Inflation expectations are converging towards the target, and the market consensus forecast on interest rates is moving towards BNP Paribas' call.
• Non-Performing Loans: Non-performing loans are improving as the economy recovers.
• Debt Service: Debt service as a share of monthly disposable income is declining, indicating improved financial conditions.
• Pensions: High pension spending relative to demographics is a key challenge for fiscal sustainability.
• Tax Burden: Brazil's tax burden is high relative to its per capita income, and structural reforms are necessary to improve fiscal dynamics.

Mexico: Changing Gears

• Growth Moderation: Mexico's growth is expected to moderate in 2018 despite resilient performance so far.
• Monetary Policy Impact: Rate hikes are likely to slow the economy, with a lagged and cumulative effect.
• Inflation: Core inflation has peaked, with goods inflation still above services inflation.
• Exchange Rate: MXN has diverged from other EM currencies, which could influence policy rate decisions.
• Fiscal Balances: Fiscal balances are improving, with progress in both revenues and spending.
• FDI Resilience: FDI has remained relatively resilient, while other capital flows can be volatile.
• Sovereign Ratings: Mexico's sovereign ratings have been upgraded over time.
• Election Dynamics: The 2018 presidential election is expected to be competitive, with a wide political spectrum of potential candidates.
• Congressional Elections: The lower house election is also important, with leftist parties historically having a smaller share of seats.

Colombia: Growth Drivers a Precious Commodity

• Economic Activity: Colombia's economic activity has been adjusting to a new reality, with a deceleration in domestic demand linked to global oil prices.
• FDI Diversification: FDI has diversified since the 2014 oil slump, supporting total inflows despite a decline in the oil sector.
• Inflation: Core inflation is above target but is moderating. Non-tradable inflation is expected to remain elevated in a context of strong growth.
• Fiscal Policy: Complying with the fiscal rule will require reforms and budget cuts.
• Tax Revenues: Tax revenues have fallen to negative territory but are recovering.

Argentina: In Recovery Mode

• Growth Turnaround: Argentina's economy has turned a corner, with growth expected to continue for two consecutive years since 2011.
• Inflation: CPI inflation is expected to moderate, though the central bank may miss its target in 2018.
• Monetary Policy: The central bank is likely to cut rates later in the year.
• Current Account: The current account is expected to improve in 2018, with a focus on fiscal consolidation.
• Activity-Linked Taxes: Tax revenue performance suggests sustained growth in the first quarter of 2018.

Chile: Growth Acceleration in the Horizon

• GDP Growth: Chile's real GDP is expected to accelerate, with a forecast of 3.5% in 2018 and 4.0% in 2019.
• Confidence: Both consumer and business confidence have improved, showing optimism since 2014.
• Inflation: Inflation has moderated visibly, with the central bank likely to maintain a hold on interest rates before initiating a normalization cycle.
• CPI Breakdown: Tradable inflation is expected to remain higher than non-tradable inflation, even with strong growth.

Detailed Forecasts (2016–2019)

Key Takeaways

• Economic Recovery: Several countries in Latin America, including Brazil and Chile, are showing signs of economic recovery.
• Inflation Trends: Inflation is expected to decline across the region, with Argentina and Brazil experiencing significant moderation.
• Monetary Policy: Central banks in the region are adjusting rates in response to inflation and growth dynamics.
• Political Dynamics: Elections in 2018 will have a significant impact on economic policies and outcomes.
• FDI and Ratings: FDI remains a key driver for growth, and a weaker USD could improve sovereign ratings in EM.
• Structural Reforms: Necessary to address fiscal sustainability and improve economic performance.