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Summary of the 2018 Latin America Economic Outlook and Elections

Core Content

The document provides an overview of the economic and political landscape in Latin America, focusing on Brazil, Mexico, Colombia, and Argentina in 2018. It highlights the interplay between economic indicators, monetary policy, and political events, particularly elections.

Main Views

Global Context

• Monetary Policy: Gradual removal of accommodative policies is expected globally.
• USD Trends: The US dollar has peaked and is expected to weaken, which could positively impact international commodity prices and emerging market sovereign ratings.

Brazil

• Economic Recovery: Growth is on the rise, with inflation expected to fall below the target range for the first time in many years.
• Elections: A heavy election calendar in 2018, with key dates for the presidential and legislative elections.
• Political Spectrum: The main candidates span from left-wing (e.g., Lula, Marina Silva) to right-wing (e.g., Bolsonaro, Alckmin).
• Economic Indicators:
  • Inflation: CPI inflation is expected to fall to the target, with expectations converging towards the market consensus.
  • Unemployment: The unemployment rate has peaked, and improvement is expected to be gradual.
  • Interest Rates: Market consensus forecasts for policy rates are falling, with the central bank likely to cut rates.
  • Debt Dynamics: Debt servicing is becoming a smaller portion of households' disposable income.
  • FDI: FDI remains resilient, while portfolio investment is more volatile.
  • Sovereign Ratings: Brazil’s sovereign ratings are expected to improve with a weaker USD and better fiscal balances.
  • Structural Issues: High taxes, complex tax system, poor infrastructure, and labor laws are significant challenges for doing business.

Mexico

• Economic Outlook: Growth is expected to moderate in 2018, with a lagged impact of monetary tightening.
• Elections: A competitive presidential election is anticipated, with key dates in July and October.
• Economic Indicators:
  • Inflation: Core inflation has peaked and is expected to moderate, though goods inflation remains above services.
  • FDI and Capital Flows: FDI is resilient, but portfolio investment is volatile.
  • Trade Balance: The oil trade balance has turned negative, while the non-oil balance has improved.
  • Fiscal Balances: Fiscal balances are improving, with progress in both revenues and spending.
  • Monetary Policy: The central bank is expected to continue easing policy, with a potential rate cut in 2018.
  • Sovereign Ratings: Mexico’s sovereign ratings have been upgraded over time.
• Structural Issues: Corruption, bureaucracy, crime, and high taxes are the most problematic factors for doing business.

Colombia

• Economic Outlook: Growth is expected to accelerate, with a focus on structural reforms and fiscal discipline.
• Elections: A legislative and presidential election is scheduled for March and May–June 2018.
• Economic Indicators:
  • Inflation: Inflation has fallen but remains sticky, with core inflation above target.
  • FDI: FDI has diversified since the 2014 oil slump, with a decline in the oil and mining sectors.
  • Monetary Policy: The central bank is expected to cut rates as inflation slows and growth concerns arise.
  • Fiscal Policy: Compliance with the fiscal rule will require reforms and budget cuts.
  • Political Spectrum: A wide range of candidates, with a historical preference for center-right.

Argentina

• Economic Recovery: The economy is in recovery mode, with growth turning a corner after a prolonged downturn.
• Elections: The presidential election is expected to be competitive, with the first two consecutive years of growth since 2011.
• Economic Indicators:
  • Growth: Expected to remain strong in 2018.
  • Inflation: CPI inflation is expected to fall, though the central bank may miss its target.
  • Investment: Investment is likely to remain a key driver of growth.
  • Fiscal Deficit: The nominal fiscal deficit is expected to improve in 2018.
• Structural Issues: Activity-linked taxes and high inflation are key challenges for doing business.

Key Information

Economic Forecasts for Latin America (2016–2019)

Inflation Forecasts for Latin America (2016–2019)

Key Factors Affecting Latam Economies

• Commodity Prices: A weaker USD tends to boost international commodity prices, which is beneficial for countries with high commodity exposure.
• Monetary Policy Impact: Rate hikes can slow economic growth, while easing can stimulate it.
• Fiscal Policy: Fiscal discipline and structural reforms are crucial for improving economic outlooks.
• Political Dynamics: Elections are a significant factor in shaping economic policy and outcomes.
• Sovereign Ratings: A weaker USD is associated with improved sovereign ratings in emerging markets.

Conclusion

The 2018 economic outlook for Latin America is cautiously optimistic, with growth expected to pick up in several countries, particularly Brazil and Chile. However, challenges such as high inflation, structural issues, and political uncertainty remain. The interplay between monetary and fiscal policies, along with the impact of global trends like the USD cycle and commodity prices, will be crucial in determining the region's economic trajectory. The election calendars in Brazil, Mexico, and Colombia are expected to influence policy directions and economic performance.