The World’s Leading Macroeconomic Survey Firm Economic Consensus Inc presents their economic and financial report for Latin America. These forecasters analyse a range of variable data including future growth, inflation, foreign trade, interest rates and exchange rates.Below you will see some of the highlights of the report for this quarter.
Persistent inflationary pressures have sparked a further acceleration in monetary tightening across Latin America. In Chile, the central bank lifted the monetary policy rate by 150basis points to 5.5% last month alone, the largest hike in 20 years. Brazil has continued to tighten aggressively, with a third straight 150 basis-point increase in the SELIC rate to 10.75% this month as inflation strengthened to 10.4% in January. Colombia stepped up the pace of adjustment by raising interest rates by a full percentage point to 4.0% in January. Although Mexico and Peru have not been as aggressive in terms of size of rate hikes, both countries have continued to withdraw monetary stimulus. Banco de México hiked its benchmark rate by another 50 basis points to 6% on February 10. The higher (and increasingly entrenched) inflation risks are fuelling central banks’ hawkish stance as they try to re-anchor longer term inflation expectations. Monetary tightening cycles will weigh on regional growth, along with stubbornly high inflation. This has contributed to 2022 GDP growth downgrades for Brazil, Mexico and Peru.
As in the rest of the world, Latin America is facing acute rising inflation risks following a prolonged period of fiscal and monetary stimulus. Upward price pressures are also being fuelled by exchange rate weakness, pent-up demand and global supply bottlenecks. The region has a turbulent history of high inflation, and two of its larger economies . Argentina and Venezuela still struggle with significant inflation or acute hyperinflation, due mainly to a lack of credible monetary policies and, indeed, a lack of central bank independence.
Venezuela
Dollarisation, along with the bolivar’s recent re-denomination, is so far supporting Caracas based headline inflation. The CPI eased to 455% (y-o-y) in January, from 672% in December 2021 – down from nearly 3,000% in December 2020. On a m- o-m basis, inflation moderated from 7.7% in December to 6% in January. Hyperinflation continues to have a chokehold on daily life, particularly as most Venezuelans earn only the minimum wage. However, the economy is showing signs of exiting one of the world’s worst economic collapses lasting almost a decade. The government, which was in power throughout that time, and whose takeover and mismanagement of the economy is largely blamed for the collapse has finally relaxed disastrous policies like currency & price controls, and import restrictions. It is encouraging informal dollarisation in order to lift pressure off the battered bolivar, its value having eroded to near-worthlessness over the past 10 years. Hyperinflation could continue to ebb this year if the bolivar remains stable. President Maduro claims the economy grew by +7.6% (q-o-q) in Q3 2021 and more than 4% (y-o-y) in 2021 as a whole, amid improved tax revenues and oil output. Robust oil prices should support the recovery in the near term, though chronic underinvestment and corruption point to a long road before real recovery.
Peru
Policy Uncertainty Plays on Growth and Investment. The central bank of Peru hiked rates again by 50bps to 3.5% on February 10, for the sixth consecutive meeting due to persistently strong inflationary pressures. While high interest rates present a source of headwind to growth this year, other positive developments in the economy bode well for activity. For instance, progress in the vaccination program and an easing of the third COVID wave have increased consumer confidence, while the reopening of the economy and falling unemployment (7.8% in Q4) have bolstered consumer spending. On top of this, record-high copper prices, along with new copper mines coming into operation, provide further support to the growth outlook. The consensus is predicting real GDP growth of 2.9% for this year, down from the stellar 13.0% expansion predicted for 2021. Aside from high base effects contributing to the softer outlook, continued government policy uncertainty is expected to impact on the recovery. President Castillo recently appointed a new cabinet following the resignation of his third prime minister in six months. Fears over the impact of constitutional changes and policies on the economy are likely to play on business sentiment and in turn investment.
Chile
According to Banco Central de Chile’s IMACEC economic activity index, a close proxy for real GDP, the economy grew by 10.1% (y-o-y) in December but contracted by -0.4% in m- o-m terms. A breakdown showed that all the major components of the index registered an increase, with services contributing the most to the expansion with growth of 12.1% (y-o-y), followed by commerce (14.8%). The strong finish to the year follows on from the solid pace of expansion exhibited since last April. Excluding mining, the IMACEC indicator rose by 11.5% (y-o-y) and 0.3% (m-o-m) in December. Following 2020’s pandemic-induced slump, the Chilean economy recovered rapidly last year, with the revival in activity buoyed by a successful vaccination program, fiscal support measures and pension fund withdrawals. While these support measures helped to propel activity on the back of a consumer boom as Chile reopened, at the same time the combined effects overheated the economy in the latter part of 2021. For the whole of 2022, the IMACEC indicator puts growth at a blistering 12.0%. The rapid economic recovery has stoked inflation, however, with the CPI trending upwards since last April to finish 2021 at 7.2%.
Argentina
Government Reaches Understanding with IMF The government finally reached a ‘technical understanding’ with the IMF, to restructure US$44.5bn of a massive standby loan that the Fund made to the previous Argentine government in 2018. This is the country’s 22nd agreement with the IMF – the prior ones mostly failed. Observers are still waiting on the precise details, but what has emerged is an agree- ment allowing a four-and-a-half year grace period, during which the government will gradually reduce the fiscal deficit from -3% of GDP in 2021 (most of our panel predicts that the 2021 outturn was -4.3%) to -0.9% in 2024. Our panel’s 2022 and 2023 forecasts for the public sector budget deficit (excluding provinces) currently stand at -4.1% of GDP and -3.5%, respectively. The government appears to have extended a promise to curb money-printing which thus far has financed its spending commitments. The money printing has pushed headline inflation to over 50%, hitting 50.7% (y- o-y) in January. In m-o-m terms, the CPI accelerated by 3.9% last month, and despite promises to gradually limit central bank financing, our panel expects monthly inflation to advance above 55% in the latter part of this year, ending 2022 at 53.6% (y-o-y). Despite subsidies for public utility tariffs and price controls, inflation is being driven higher by the parallel exchange rate which, at Ps215 per US$ , is more than twice the official rate of Ps 106.38. Markets will be waiting to see if the FX gap can be narrowed and inflation gradually tamed; thus far, the consensus does not believe that inflation will moderate below 45% (y-o-y) by end-2023. Meanwhile, the government must look elsewhere for badly- needed investment, and has agreed to join China’s Belt and Road Initiative.
Brazil
Brazil Struggling With High Interest Rates and Inflation Since Banco Central do Brasil (BCB) kick-started its monetary tightening cycle last March, after the benchmark SELIC rate troughed to an all-time low of 2.0%. Borrowing costs have now risen by a total of 875 basis points following another hefty rate hike (1.5%) this month. The SELIC rate currently stands at 10.75%, entering double-digits for the first since June 2017. Like many of its neighbours, Brazil faced a spike in inflationary pressures last year and BCB was one of the first central banks to hike rates to quell accelerating prices. In fact, Brazil has been one of the most aggressive in tightening monetary policy amongst its Latin American peers, with the authorities’ hawkish stance being reinforced by Brazil’s weak fiscal outlook. Despite tighter monetary conditions, the CPI still ended last year in double- digit territory (10.1% (y-o-y) and January’s reading saw prices creep back up to 10.4%. Recovering domestic demand, high commodity prices, supply-side issues and a severe drought are all contributing to upside pressure on prices, as is concern about runaway public spending before and after October’s presidential election. President Bolsonaro pushed for changes in the spending cap last year in order to increase cash transfers to the poor, and additional fiscal pressures are likely to come from this year’s plans to increase civil servants’ pay and reduce taxes on fuel and electricity. These proposals will inevitably impact the fiscal accounts and in turn boost inflation expectations further. The absence of a credible fiscal path is adding to the uncertainty over the inflation outlook. At the February COPOM meeting, BCB remained hawkish, but signalled a slowdown in the pace of adjustments going forward.
Colombia
GDP Growth Soars by 10.6% in 2021.The Colombian economy grew at its fastest pace in more than a century after output rebounded by a massive 10.6% in 2021. Last year’s solid outturn was also accompanied by a downgrade to the 2020 figure to -7.0% and 2019 to 3.2%. A low base in 2020, combined with a recovery in consumer demand amid an easing of pandemic curbs and strong commodity prices contributed to last year’s strong outturn. In the final quarter, the economy expanded by a robust 10.8% (y-o-y) and 4.3% (q-o-q), with output led by firm gains in entertainment & recreation, retail sales, communications and manufacturing. Growth is set to ease to 4.3% this year. Meanwhile, the central bank accelerated its pace of monetary tightening last month with a 100 basis point hike in the policy rate to 4.0%. The more hawkish stance reflected the general tightening in global monetary conditions, rising inflation expectations as well as a widening current account deficit. Even after January’s large rate hike, further tightening is likely, with last month’s inflation spike (1.7% m-o-m and 6.9% y-o-y) adding to the case for more rate increases. The strong reading was driven by higher food and energy prices, which are expected to stay elevated in the near term.
Mexico
Banxico Hikes Rates at a Sixth Straight Meeting. Banco de México raised its benchmark interest rate by 50 basis points to 6% on February 10, a sixth consecutive increase, with the board voting 4-1 in favour of the rise. The meeting marked the first under new governor Victoria Rodríguez Ceja, and the statement which followed confirmed the bank’s increasingly hawkish view. Banxico now expects the headline CPI to end the year at 4% (y-o-y) and at 3.1% by end-2023, with inflation staying high in Q1 and Q2 2022 before trending downward in the latter part of the year. Meanwhile, our panel has upgraded its CPI forecast for December 2022 to 4.3% (from 4.0% last month) and 3.7% for December 2023, underscoring the view that inflation shows few signs of abating. Indeed, Banxico’s steady tightening of monetary policy since June 2021 suggests that the central bank’s medium- and long-term expectations are being pushed up by the persistence of current inflation, which is more than double its 3% inflation target (+/-1% range around that central target). Mexico’s headline CPI advanced 7.1% (y-o-y) in January, compared with 7.4% in November and December 2021, driven by high food and energy prices, although excluding those, the core rate was still high at 6.2%. Production bottlenecks and shortages of key components have also boosted inflation, although December’s production equipment (specifically autos) improved considerably. However, lingering supply chain issues could be a reason behind our panel’s downgrade to 3.3% for manufacturing in 2022.
