Alphacast Highlight - Latin America slowing down.
Global growth is slowing, USA demand has been dwindling for two quarters in a row, Europe is in the middle of a historical energy crisis, and China faces threats that leave "Chinese growth" years far in the past. Most analysts foresee further deceleration for 2023. What to expect for Latin America in this context?
In terms of middle/long-term growth, Latin America can be split into three groups: The smaller-pacific-growing-countries: Colombia (3.0% 10 years average), Peru (2.8%), and Chile 2.1%, and the bigger-slow-or-no-growth Mexico (1.2%), Brazil (0.2%) and Argentina (0.2%). Uruguay (1.5%) stands in the middle.
Colombia is the fastest-growing economy in the region. It is expected to grow 6.0% in 2022 and accumulates a strong 9.0% growth vs. the pre-pandemic levels. Colombia's growth this year has been fueled by the growth of exports, remittances, and a positive fiscal shock pushed by the electoral cycle.
However, the Colombian economy is still adapting to the political swing of the Petro Administration, the first left-wing president ever! The macro flashes multiple warnings, and consensus for 2023 points to deceleration to 2.3%. 75% of Colombia's global demand is explained by private consumption, the highest figure in the region, and consumption is posed to decelerate in the context of high inflation (11% Yoy Headline but 25% food) and real wage contraction. The country faces a large and risky twin deficit of the current (-5.4%) and Fiscal (-5.9%) accounts and the Gov. Interest payments account for as much as 3.9% of GDP. On the onset of a major political swing, the balance of risk for Colombia is looking negative.
Peru was among the countries most hit by the CODIV (-11% 2020), but it has recovered quickly and is now 4.0 above pre-pandemic. The Peruvian economy is being affected by political turmoil and uncertainty and the investment climate has been eroded.
The economy is now growing a soft 2.0%, and some further deceleration is expected of next year. Like other countries in the region, Peru will be affected by lower growth of partners and commodity prices, the delayed effect of monetary and fiscal tightening, and the lower consumption driven by lower disposable income, while plummeting business expectations may affect investment dynamics. Supply-side growth may come from the copper production increase in a number of big ongoing projects. On a positive note, Peruvian fiscal and external balances are good compared with other peers, and sovereign ranking is still good (BBB) and the debt level (34% of GDP) and interest burden (1.4%) are quite low.
Chile was among the fast-growing economies before it was hit by political turmoil in 2019. Ten years' growth is 2.1%. It grew fast after the pandemic and is now 7% above, fueled by consumption financed by three partial withdrawals of pension savings. In 2022 It's the only economy in the region that is contracting and is expected to contract in 2023 and in terms of FX and inflation it was the worst performer of the year. The rejection of the constitutional amendment may lead to a more market-friendly proposition. However social unrest, violence in the south, volatile copper prices, and the government’s weak parliamentary position imply a highly uncertain scenario.
Brazil has been Stagnant for a decade (0.2%), 2022, however, was the best year after the crisis of 2014, mostly driven by investment. Unemployment hit 7 year low, Consumption growth accelerated in Q2 - although real wages fell -8% - and exports grew driven by rising Terms of Trade. Brazil saw a strong fiscal consolidation in 2022, despite the electoral cycle and its monetary policy tightening began before every other country and was stronger. inflation is already going down on tax cuts. Top performer FX in 2022.
Brazilian Real proved surprisingly resilient to the growing uncertainty around the election. The political cycle has not affected the perception of Brazil in 2022, and Lula's return is not being read as a dramatic policy swing like what has happened in other countries (Petro, Castillo, Boric, Fernandez, or AMLO in 2018. Also, the first-round results will imply a much more balanced congress than previously expected. Biggest risk source in Brazil?: Debt levels are very very high, and the interest burden is almost 5% of GDP and is a high source of risk in a rising rates environment. Country highly dependent on foreign capital
Mexico is a Slow Growth economy, particularly since 2018. The Mexican economy has grown 1.2% on average in the last decade, but 0% in the last 5 years, and It has not yet recovered to pre-pandemic levels. Mexican economy is tightly tied to US and, and to that extent, it is very different from every other major Latin American country. The country is more open (40% exports / GDP vs 20% in brazil) and 80% of its exports go to the USA. It will be hard for the Mexican economy to avoid deceleration with US facing recession and rising rates
Argentina deserves an insight on its own. having been stagnant for a decade, its macroeconomy needs a different framework of analysis than other countries of the region. Financial isolation, FX Controls, Monetary Financing, financial repression. The economy's high inflation environment moves at the rhythm of the treasury financial program, and its ability to finance a chronic deficit state.