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Latin America will start 2022 in a very fragile position given
the economic fallout from the Coronavirus disease 2019 (COVID-19)
pandemic, a deteriorated fiscal position, weak FDI, and the erosion
of real wages due to high inflation.
The strong economic rebound in the second half of 2021 is
likely to slow in 2022, not least because of rising policy rates
(notably in Brazil).
Business uncertainty will be compounded by tightly contested
elections in major countries (Colombia and Brazil) where marked
policy shifts appear to have significant probability; the victory
of the left in Chile further compounds uncertainty.
Economic rebound will likely lose momentum due to
tighter monetary policy, declining real wages, and a deteriorating
political environment for businesses.
Following a partial regional rebound in 2021 from the
COVID-19-induced recession, external demand will be the main driver
of growth in 2022. IHS Markit forecasts 4.3% real GDP growth for
the world economy and 4.1% for the United States, the primary
trading partner of many Latin American countries, implying
increased exports along with higher remittances and expanded
foreign direct investment. Although the Omicron variant brings
renewed global economic uncertainty, strict lockdowns and mobility
restrictions are unlikely in Latin America.
However, high inflation will constrain private consumption
through tightened monetary policy and eroded household purchasing
power. Political and policy uncertainties will damage business
sentiment and near-term investment in Brazil, Colombia, Peru, and
Chile.
Left-wing parties are well-placed to gain office in
Brazil and Colombia, posing a major threat to the business
environment.
The leftward shift, already seen in Peru, Bolivia, and Chile in
2021, appears likely to continue this year. A victory for former
president Luiz Inácio Lula da Silva would pose significant
uncertainty for Brazilian fiscal policy, which remains the
country's main challenge given a large structural fiscal deficit
and a very high public debt. In Colombia, a victory for Gustavo
Petro of the radical left would lead to a hostile stance towards
the oil and mining industries, potential reviews of infrastructure
contracts, and an expansionary fiscal stance rejecting
austerity.
Latin American currencies face near-term downside risk
from political uncertainty but could well recover in late
2022.
Latin America's electoral calendar will strongly influence
exchange rates in early 2022, as foreshadowed by Peru's large-scale
capital flight and 14% currency depreciation following President
Pedro Castillo's unexpected victory in 2021. Threats to policy
continuity, weak public finances, and earlier US Federal Reserve
interest rate tightening are common stresses.
Nonetheless, there should be scope for recovery later in 2022.
Politics-driven depreciation may lead to overshoot, and new
administrations may moderate their rhetoric to stem currency
weakness. The external environment should also remain broadly
favorable.
Regional inflationary pressures will continue, prompting
further monetary policy tightening, but should ease later in 2022
as energy and food price inflation and supply-chain disruptions
abate.
Monetary authorities in Brazil, Peru, Colombia, Mexico, and
Chile have increased their policy rates in response to high
inflation, reflecting the autonomy they enjoy. In Brazil, inflation
reached double digits in September, bringing the most aggressive
response from any central bank.
Worryingly, inflation in services is also increasing, implying
there have been second-round effects or contagion from
commodity-driven inflation. IHS Markit expects oil prices to
decline in 2022, reducing external inflationary pressures, but
supply chain relief is unlikely before late in the year.
Semiconductor import shortages will hurt carmakers in Mexico,
Brazil, and Argentina, and Latin American exporters of perishable
agriculture goods face shortages and high prices of fertilizers
into early 2023. Strikes by truck drivers' associations in
Argentina, Brazil, Chile, and Peru are an additional risk.
High provisioning and capital ratios should mitigate
systemic asset quality risks in the banking sector.
Throughout the pandemic, both small and medium-sized enterprises
(SMEs) and nonmortgage consumer debt have been the weakest segments
in terms of impairment (as measured by recorded non-performing
loans) and for indicators of future deterioration. In Ecuador,
Honduras, Panama, and Peru, full impairment in the banking sector
is still to be realized, with many loans still benefiting from
forbearance. The banking sectors in Mexico, Brazil, and Chile
exhibit a healthier position but higher interest rates are likely
to lead to increased defaults involving heavily leveraged
debtors.
Sovereign credit risk is likely to deteriorate,
particularly in countriesrelying on International
Monetary Fund (IMF) support.
Argentina, which has delayed reaching an agreement with the IMF
on rescheduling its existing liabilities, will struggle to meet the
Fund's demands for fiscal and monetary restraint given government
reluctance to embrace austerity. Political opposition to fiscal
reform packages complicate IMF disbursements to Costa Rica and
Ecuador, and Fund talks with El Salvador have been jeopardized by
the introduction of Bitcoin as legal tender. Pressure on Brazilian
and Colombian public finances may worsen following the 2022
elections.
Oil-producing countries will accelerate the monetization
of hydrocarbons post-COP 26, but renewables offer increased
opportunities for foreign investors.
In the context of a growing global ESG focus, Brazilian
deforestation creates reputational risk and threatens further
delays to the EU-Mercosur trade agreement. In addition, proposed EU
carbon tariffs would disproportionately impact Latin America's key
sectors, including oil and gas, agribusiness, coal, and cement
production. Nonetheless, renewable energy has become the most
attractive sector for FDI in Latin America, according to the United
Nations Economic Commission for Latin America and the Caribbean,
with investment opportunities in Brazil, Chile, and Colombia
standing out.
Posted 05 January 2022 by Carlos Caicedo, Senior Principal Analyst, Latin America Country Risk, IHS Markit and
Jeremy Smith, Sr. Economist, Economics and Country Risk, S&P Global Market Intelligence and
Gloomier demand outlook and higher interest rates dampened commodity prices last week. Insights from our #MPI:… https://t.co/uUPkt1MWzP
May 13
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