During the most recent edition of the Latibex Forum, held at the Palacio de la Bolsa in Madrid on 21-22 November, industry leaders from some of the largest companies and financial institutions in LATAM, Spain and the rest of the world gathered to discuss the main challenges and opportunities facing LATAM markets today.
Insights into the Macroeconomic Environment across Latin America
Notwithstanding the supply chain shocks caused by Covid and the war in Ukraine, LATAM economies (barring Argentina and Venezuela) have managed to keep inflation rates comparatively low, especially when benchmarked against the US and Europe. The International Monetary Fund (IMF), for example, noted that headline inflation in the region peaked at 7.8% in 2022, and is expected to decline to 5% this year, before falling again to 3.6% in 2023.[1]
“LATAM markets exceeded their growth expectations thanks to effective macro-economic management and the fast response of the region’s Central Banks to curb inflation. In general, LATAM economies have been successful in combating inflation,” said Mariana Longobardo, Market Specialist, BME Market Research.
Juan Cerruti, Chief Economist, Santander said the region’s economies are not suffering as badly today as they did previously, when similar anti-inflationary measures were introduced. “In the past, LATAM markets have struggled to deal with rising interest rates, but today the region is arguably handling inflation better than anywhere else in the world. So why is it different this time? LATAM’s Central Banks were earlier, in comparison to the Federal Reserve and European Central Bank (ECB), to spot the inflationary risk, meaning they were quick to increase interest rates. The region also has strong macro-economic foundations, especially if you look at the proportion of Central Bank reserves relative to Gross Domestic Product, which are much higher today than what they were in previous monetary tightening periods. The monetary policy tightening has also coincided with a period of high commodity prices, and this has not always been the case in the past when rates were increased,” noted Cerruti.
Relative to other global markets, LATAM economies are proving resilient, despite the challenging macro and geopolitical headwinds. According to IMF data, the region’s economies are projected to grow on average by 1.6% this year, and 2% in 2024. [2] Victor Matarranz, Global Head of Wealth Management and Insurance at Santander, said he is particularly bullish on Brazil and Mexico’s prospects.
Mexico, for instance, has become a major beneficiary of the recent nearshoring trend, as the US looks to bring manufacturing closer to home, amid worsening trade and geopolitical tensions with China. Morgan Stanley anticipates nearshoring could result in Mexican exports to the US increasing from $455 billion to $609 billion over the next five years. [3] In the case of Brazil, Matarranz said the country is rapidly turning itself into an export powerhouse, and is diversifying its exports beyond just soya beans and meat.
Still, Vulnerabilities Persist
There are a number of potential challenges, however, which could derail LATAM’s economic recovery.
“The world economy is likely to decelerate in 2024 due to the adverse effects of the high interest rates on global growth. Different LATAM markets will respond differently to the shocks, depending on their economies. Some markets - like Mexico - are reliant on the US, whereas others are more dependent on China. We anticipate the US will grow next year so countries reliant on the US should be fairly insulated. However, China’s economy is decelerating rapidly, and a China hard landing will have huge ramifications for certain LATAM markets,” explained Alejandro Padilla, Chief Economist , GF Banorte.
Although the US economy is unlikely to contract next year, the country’s turbulent domestic politics - most notably the looming Presidential election – will probably cause headaches for a number of LATAM markets. Right now, President Donald Trump is leading in the polls, with a number of pundits predicting he will make a return to the White House in 2025. Padilla warned that Mexico’s economy would be especially vulnerable if President Donald Trump were to win the Presidency again.
Events in Argentina have also stirred debate following recent proposals from the newly elected President Javier Milei to dollarize the economy. Such a move will effectively render Argentina’s Central Bank obsolete , as the country’s monetary policy would be determined by the Federal Reserve.
Although Ecuador tried something similar, Cerruti said there are no examples of any country of a comparable size to that of Argentina attempting to dollarize their economy . While dollarization would cause Argentina to lose control of its monetary policy and make it highly susceptible to any shocks which hit the US Dollar, the move could help the country tackle its inflation. There are barriers to these plans though. Most significantly, Argentina requires $35 billion to $50 billion in Dollar reserves to replace the Pesos, something it currently does not have and may not be able to borrow that easily.
[1] IMF – October 2023 – Western hemisphere regional economic outlook; Securing low inflation and nurturing potential growth
[2] IMF – October 2023 – Securing low inflation and nurturing potential growth
[3] Morgan Stanley – June 21, 2023 – Mexico is poised to ride the nearshoring wave