Itaú BBA - When economies diverge

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When economies diverge

November 9, 2018

The idiosyncratic stories have been responsible for substantial swings in asset prices in in Latin America

Please open the attached pdf to read the full report and forecasts.

Global Economy
Global outlook remains uncertain, with a negative bias
While the Fed is set to continue increasing interest rates, a truce in trade war would be positive, but it is far from certain.

 

LatAm
Growth is still weak, with less room for monetary support
In a still turbulent environment for emerging market assets, the outlook for Brazil and Mexico could be diverging.

Brazil
A new administration, the same challenges
Public debt sustainability requires measures to cut mandatory expenditure, such as the social security reform.

Argentina
Stabilizing as adjustments advance
The brand new monetary aggregate targeting scheme led to higher interest rates and helped to strengthen the ARS.

Mexico
AMLO’s policymaking style
The airport cancellation rattled local markets, and overoptimistic savings assumptions in the budget increase the odds of deteriorating fiscal accounts.

Chile
The start of a gradual hiking cycle
We see the policy rate at 3.75% by the end of 2019, as economic slack and a still-risky external scenario call for a gradual hiking cycle.

Peru
Strengthened presidency
The main opposition party, “Fuerza Popular,” has been weakened after Keiko Fujimori was detained in an investigation.

Colombia
Tax reform: a tough sell
The government proposed a tax reform that seeks to cover the 2019 budget shortfall while removing VAT exemptions and lowering the tax rate at the same time.


 


Latam: when economies diverge

The global outlook remains uncertain, with a negative bias. The Fed is likely to continue increasing interest rates, despite financial market volatility. We see weaker growth in the euro area, while China’s growth is likely to stabilize as the government implements stimulus measures. A truce in trade war between U.S. and China would be positive, but it is far from certain.

In Latin America, the idiosyncratic stories have been responsible for substantial swings in asset prices. The BRL strengthened recently as markets price in higher chances of reform approval following October’s presidential elections. The performance of the Brazilian real helped the Argentine peso, which is also being supported by the tightening of monetary policy and the narrowing of the country’s twin deficits. Mexico’s airport cancelation rattled local markets. Aside from higher short term fiscal costs, the event raises concerns of how future economic policy decisions will be made and the possibly waning influence of the more market friendly forces within the government. In addition, overoptimistic savings assumptions through better management of the public sector increase the odds of deteriorating fiscal accounts.

In Brazil, we expect a stronger currency and a wide output gap to keep inflationary pressures at bay, and thus revised our call for monetary policy, now expecting the Selic rate to remain stable at 6.5% during 2019. Lower rates and more expansionary financial conditions as a whole point to stronger growth. We revised our GDP growth forecast to 2.5% from 2.0% in 2019. The top challenge of the new government will be the fiscal adjustment. Public debt sustainability requires the administration to rein in mandatory expenditure, which cannot happen without social security reform. 

 


Global Economy
Global outlook remains uncertain, with a negative bias

Fed to continue gradually increasing interest rates, despite financial market volatility.

Weaker growth in the euro area.

China’s growth to stabilize. 

A truce in trade war would be positive, but it is far from certain.

Adjustment in oil prices.
 


LatAm
Growth is still weak, with less room for monetary support

The environment for emerging market assets remains turbulent. Still, the BRL strengthened recently as markets price in a higher likelihood that reforms would be approved following October’s presidential elections in Brazil. The performance of the Brazilian real helped the Argentine peso. The Mexican peso, however, underperformed, due in part to more intense uncertainty over the direction of domestic policy under the incoming administration. 

Growth in the region remains weak. Argentina has seen the worst economic performance. The outlook for Brazil and Mexico could be diverging.

In the current context, there isn’t room for additional monetary easing, and some central banks seem to be actually set to raise interest rates further. The central bank of Chile has already started a tightening cycle, while we expect the central bank of Mexico to hike interest rates again this month. 
 

Please open the attached pdf to read the full report and forecasts.



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