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LATAM CHARTBOOK: BACK ON TRACK – JUNE 2016

Core Content Overview

This document provides an economic outlook for Latin America, focusing on macroeconomic trends, growth prospects, and policy developments across key countries: Brazil, Mexico, Colombia, Chile, Argentina, and Venezuela. It highlights the impact of global factors, including monetary policy shifts, commodity price changes, and trade dynamics, on regional economies. Additionally, it examines fiscal policies, inflation trends, exchange rates, and structural challenges such as debt, unemployment, and investment performance.

Key Macro Trends in Latin America

Global Context

• Monetary Policy Divergence: The US is tightening monetary policy, while the Eurozone and Japan are easing.
• Commodity Price Decline: The commodity price boom is over, leading to lower growth in Latin America.
• China's Role: China's slower growth will have a long-term impact on Latin American exports.
• Exchange Rates: A stronger USD weakens Latin American currencies, increasing import costs.
• Current Account Deficits: Many countries face significant current account deficits, with trade balances improving but services deficits shrinking.
• Doing Business Rankings: Countries like Chile, Mexico, and Peru perform well, while Brazil and Argentina lag due to poor infrastructure and complex tax systems.

Country-Specific Analysis

Brazil: Under New Management

• Growth Recovery: Despite a recession, the document is optimistic about Brazil's growth recovery in 2017.
• Fiscal Challenges: The primary balance needs improvement, and interest payments are a heavy burden.
• Inflation Outlook: Inflation is expected to decline towards the target of 4.5%.
• Interest Rates: The BCB is expected to cut rates more than the market anticipates.
• Unemployment: The unemployment rate is rising rapidly from record lows.
• Credit Growth: Credit from public sector banks has grown quickly, but non-performing loans are increasing.
• Fiscal Outlook: The fiscal deficit is a concern, and pension spending is high relative to demographics.

Mexico: Plotting a Steady Course

• Oil Dependency: Mexico's economy is heavily reliant on oil revenue, which has declined.
• Growth Prospects: Growth is expected to remain close to the 20-year average, with a small output gap.
• Inflation: Inflation is expected to gradually converge to 3%.
• Interest Rates: Banxico is likely to maintain its policy rate at 3.75% in 2016.
• Investment: Investment has slowed, and FDI to oil and mining sectors has declined.
• Foreign Debt Ownership: Foreign ownership of local debt has recovered slightly, with a significant drop in Cetes holdings.

Colombia: In Need of Fiscal Clarity

• Investment Sources: Investment has decelerated sharply, with FDI from oil and mining declining.
• Fiscal Deficit: The fiscal deficit exceeds the structural target, making fiscal rule a challenge.
• Inflation: High inflation is driven by rising food prices and a weaker COP.
• Interest Rates: The central bank is expected to hike rates gradually, but confidence remains low.

Chile: No Meaningful Growth Improvement in Sight

• Growth Outlook: Growth is expected to remain below potential in the short term.
• Inflation: Inflation is moderating, but still above the central bank's tolerance range.
• Current Account: The current account adjustment is reversing, but low copper prices pose a risk.
• Interest Rates: The BCCh is expected to hike rates gradually, with two 25bp increases anticipated in H2 2016.

Argentina: The Best Is Yet to Come

• Growth Outlook: Growth is expected to worsen before improving in H2 2016.
• Trade Balance: The trade balance remains in deficit in 2016, with revisions showing a deficit in 2015.
• Commodity Prices: Commodity prices are lower, and they are unlikely to boost national income in 2016.
• Inflation: Inflation spiked in Q1 2016 due to FX pass-through and tariff hikes, but moderation is expected in H2.
• Interest Rates: The BCRA has started to cut rates, with a path to lower CPI in the second half of 2016.
• Political Context: The government needs to form alliances with the opposition to implement reforms.

Main Points and Key Information

• Global Monetary Policy Shifts: The US is tightening policy, while the Eurozone and Japan are easing, affecting Latin American economies.
• Commodity Prices: The commodity price boom is over, and Latin America's growth is expected to slow.
• Fiscal Challenges: Most countries face fiscal deficits, with Brazil and Argentina showing particular concerns.
• Inflation and Interest Rates: Inflation is expected to decline in most countries, but interest rate cuts may be more significant than anticipated.
• Exchange Rates: A stronger USD weakens regional currencies, increasing import costs.
• Investment and Growth: Investment remains a key driver of growth, but it has slowed in several countries.
• Political Dynamics: Political changes in Brazil and Argentina are expected to influence economic performance in the coming years.
• Structural Reforms: Improvements in education, infrastructure, and fiscal management are essential for long-term growth in Latin America.

Conclusion

The Latin American region is facing a mix of challenges and opportunities in 2016. While some countries like Chile and Mexico are on a more stable path, others such as Brazil and Argentina need significant fiscal and structural reforms. The global context, including monetary policy divergence and slower commodity growth, plays a critical role in shaping regional economic outcomes. The outlook for 2017 is cautiously optimistic, with expectations of growth recovery and inflation moderation, provided that governments can implement effective policies and manage external shocks.