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LATAM CHARTBOOK Summary

Core Content

This document provides an economic outlook for Latin America (LATAM) in February 2016, focusing on macroeconomic trends and challenges across major economies. It includes analysis of GDP growth, inflation, fiscal policy, current account deficits, exchange rates, and policy rate adjustments. The report also examines the global context, particularly the impact of US monetary policy, China's economic slowdown, and commodity price trends on LATAM.

Key Regions and Their Outlooks

Brazil: Triple Whammy

• GDP Growth: Brazil's economy is in recession, with a slow recovery expected. The 2016 real GDP growth is projected to be below consensus.
• Inflation: Brazil's inflation is above the target and expected to remain high, with the central bank struggling to re-anchor inflation expectations.
• Fiscal Challenges: The primary fiscal surplus is insufficient, and the burden of interest payments is significant. Spending on pensions is high, and fiscal deficits are above structural targets.
• Monetary Policy: The central bank is expected to hike rates, but the impact on the economy is limited due to weak confidence and high unemployment.
• Exchange Rates: The BRL is weak, but the real effective exchange rate (REER) is not as weak as it appears due to FX basket and inflation considerations.
• Credit and NPLs: Credit growth is strong, but non-performing loans are rising, indicating financial stress.

Mexico: Stuck in First Gear

• GDP Growth: Mexico's growth is expected to remain near the 20-year average, with a negative output gap.
• Oil Dependency: The oil sector remains a major contributor to government revenue, but its role is declining.
• Fiscal Revenues: Fiscal dependence on oil is significant, and the trade balance is improving while the services deficit shrinks.
• Monetary Policy: The central bank's policy rate is closely tied to the Fed's rate, with a likely neutral rate of 4.25%–4.50%.
• FDI and Debt: FDI is growing, but portfolio inflows are volatile. Foreign ownership of local debt is stable, though the composition is changing.
• Inflation: Inflation is at record lows but is expected to rise due to food prices and a weaker COP.

Colombia: Rough Weather

• Investment: Investment has slowed, with FDI contributing more than oil and mining in recent years.
• Fiscal Deficit: The fiscal deficit is above the structural target, and the debt-to-GDP ratio is expected to rise.
• Inflation: High inflation is driven by rising food prices and a weaker COP.
• External Context: The current account deficit is expected to worsen due to low copper prices, and foreign investment in local debt is stable but changing in composition.

Chile: More Tightening on the Cards

• Growth: Chile's growth is expected to remain below potential, with weak external conditions and low consumer confidence.
• Inflation: Inflation is above the tolerance range, and the central bank is expected to continue hiking rates.
• Current Account: The current account is expected to adjust, but the adjustment may take longer than anticipated.
• Monetary Policy: The central bank is expected to hike rates twice in 2016 and continue tightening in 2017.

Argentina: A Jam-Packed Policy Agenda

• Growth: Argentina's growth is expected to worsen before improving in the second half of 2016.
• External Performance: The trade balance is expected to improve, with FX market liberalization playing a key role.
• Commodity Prices: Commodity prices are declining, and they are unlikely to lift national income in 2016.
• Exchange Rates: The peso is expected to remain under depreciation pressure, and the real effective exchange rate (RER) is overvalued.
• Inflation: Inflation is expected to reaccelerate in Q1 2016 despite stabilization efforts.
• International Reserves: FX market liberalization is expected to help international reserves, but the impact is not yet visible.

Main Points and Insights

• Global Context: The US is shifting to tighter monetary policy, and China's growth is expected to slow, affecting LATAM.
• Commodity Prices: The commodity price boom is over, and LATAM economies are increasingly exposed to this trend.
• Inflation Trends: Inflation remains high in Brazil and Colombia, with expectations of further increases in Argentina.
• Fiscal Challenges: All LATAM countries face significant fiscal challenges, including high deficits and debt-to-GDP ratios.
• Monetary Policy: Central banks across LATAM are expected to hike policy rates, with varying degrees of urgency and impact.
• Exchange Rates: The USD is strong, leading to weaker LATAM currencies. However, the REER is not as weak as it seems in Brazil and Chile.
• FDI and Debt: FDI is growing in some countries, but portfolio inflows are volatile. Foreign investment in local debt is stable but changing in composition.
• Structural Issues: All countries face structural challenges, including high tax burdens, poor infrastructure, and low productivity growth.

Key Figures and Projections

• Brazil:
  • Policy rate: 14.25% (current), expected to rise to 15.75% by year-end 2016.
  • Inflation: Expected to remain above 4.5% target.
  • Debt-to-GDP ratio: Expected to rise.
• Mexico:
  • Policy rate: Expected to be around 4.25%–4.50% by year-end 2016.
  • Inflation: Expected to rise to 3% target.
  • Oil revenue: Down from 31% of government revenue in 2014 to 20% in 2016.
• Colombia:
  • Fiscal deficit: Above structural target.
  • Oil income: Down to 4.4% of GDP in Q3 2015.
  • Inflation: High due to food prices and a weaker COP.
• Chile:
  • Policy rate: Expected to rise twice in 2016, with further tightening in 2017.
  • Inflation: Expected to remain above tolerance range.
• Argentina:
  • Policy rate: Expected to be adjusted, with inflation likely to reaccelerate in Q1 2016.
  • RER: Overvalued, with depreciation pressure.
  • Trade balance: Expected to improve due to FX liberalization.

Conclusion

The LATAM region faces a complex economic environment marked by slowing growth, high inflation, and fiscal challenges. The impact of global trends, particularly the US dollar cycle and China's economic slowdown, is significant. While some countries like Chile and Mexico are expected to gradually tighten monetary policy, others such as Brazil and Argentina face more severe challenges. The report highlights the need for structural reforms and improved economic fundamentals to support sustainable growth.