• Russia’s invasion of Ukraine brings geopolitical risks to the fore. As would be expected, markets are in risk-off mode, with sharp declines in equity prices around the globe.
  • Looking ahead, “knock-on” effects on near-term economic prospects in the Latam region will depend on the extent to which shifts in investor risk appetite generate safe haven capital flows that trigger large currency gyrations and add to inflationary pressures via higher energy prices.
  • In the days and weeks ahead, close attention will be paid to high-frequency indicators for possible inflection points signalling a potential shift in the growth profile currently incorporated into the forecasts. For now, investors are likely joining policymakers in asking “what more could go wrong?”.


Pity the policymakers. In just over a decade, they have had to deal with a global financial crisis followed by a global pandemic. And in the past year inflation has once again reared its ugly head, rising to levels not seen since the Great Inflation of the 1970s. Against that background, they could be forgiven for asking “what more could go wrong?”.

There is no shortage of possible insomnia-inducing stressors. Banks with large bond portfolios face potential revaluation effects as interest rates rise. Or non-financial firms may be subject to possible financial distress as borrowing costs rise, currency mismatches bind, and pandemic support policies are scaled back and removed. Those risks are largely hypothetical. But this week, one stressor—geopolitical risk—moved from the hypothetical to the “all-too-clear-and-present” category.

As Mao purportedly opined (but evidently did not) with respect to the French Revolution, it is too early to say what the consequences of Russia’s invasion of Ukraine will be. Markets have responded as would be expected, in “risk-off” mode, with equity markets selling off sharply in trading on February 24. Looking ahead, the knock-on effects on economic prospects will depend on the extent to which shifts in investor risk appetite generate sustained safe haven capital flows, which could trigger large currency movements, along with higher energy prices with corresponding terms of trade effects. Sharp exchange depreciations and higher energy prices would exacerbate inflationary pressures already vexing central bankers in the Latam region and around the globe.

In short, confidence bounds around short-term economic projections have undoubtedly widened. For now, however, the forecasts of Scotiabank economists in the Latam region continue to show growth converging from the “dead-cat bounce” pace in 2021 to pre-pandemic levels over the medium-term (chart 1). And while it is premature to expect the latest geopolitical effects to be reflected in economic activity indices (chart 2), these indicators will be closely monitored in the weeks ahead for potential signs of inflection points.

The same close monitoring of monthly inflation data can, likewise, be expected. Inflation, which has been running above central banks’ targets across the Latam region, is nevertheless expected to gradually return to target over time, consistent with price stability commitments (chart 3). That said, additional supply-side shocks, whether emanating from geopolitical developments or unrelated bottlenecks in global supply chains, would further test the credibility of those commitments. 

Key policy interest rates have risen as Latam central banks have acted to prevent price pressures bleeding over into expectations (chart 4). While short-term expectations may be moving higher in line with headline inflation, to this point at least expectations over the medium-term seem to remain reasonably well anchored. Going forward, rates will likely have to move higher as the Fed and other advanced country central banks tighten policy, particularly if shifts in investor risk appetite lead to currency depreciation. For now, Latam central banks are clearly ahead of advanced country and other international peers in terms of real (after inflation) monetary policy rates (chart 5).

Less favourable external financial conditions would put a premium on strong institutions and sound policy frameworks. Fiscal probity is key. Fiscal balances deteriorated significantly in the pandemic as governments across the region responded quickly and appropriately to cushion the blow from economic and financial shocks (chart 6). However, good progress has been made in bringing deficits down and, looking ahead, governments have reiterated commitments to fiscal sustainability. Progress on this front will also contain debt burdens as measured by general government gross debt as a share of GDP (chart 7).

At the same time, global investors will be closely watching other indicators, including external debt (chart 8), current account balances (chart 9), and international reserves (chart 10). None point to impending concerns, though widening current account deficits in Chile and Colombia warrant monitoring.


Despite rising inflation and increased geopolitical tensions, Latam financial markets have performed surprisingly well since the start of the year. Higher policy rates have supported regional currencies (chart 3), which, apart from Argentina’s peso, have all appreciated, with Peru’s PEN leading the way. Equity markets in Peru have likewise led the region (chart 4), shaking off serial Cabinet shuffles to post impressive year-to-date gains. Mexico’s equity market is down modestly on the year, though recent increases have pared losses.

In a longer-term perspective, Mexico has demonstrated considerable financial resilience. The peso has been remarkably stable, depreciating against the US dollar in March 2020, consistent with the shock absorber role of flexible exchange rates, but gradually returning to pre-pandemic trading levels (chart 5). In contrast, other regional currencies depreciated significantly against the US dollar at the outset of the pandemic and, while they have appreciated recently, continue to trade at a discount to pre-2020 levels.

A similar pattern holds for 10-year Latam sovereign CDS spreads versus US Treasuries. Mexican spreads spiked in March 2020, but quickly narrowed over the balance of the year and remained flat at, or below, pre-pandemic levels throughout 2021. CDS spreads on other Latam 10-year sovereigns, meanwhile, which also declined in the second half of 2020, trended somewhat higher in 2021 (more so in the case of Colombia), possibly reflecting political uncertainties.


Rising geopolitical risks have also thus far not shown up in Latam sovereign yield curves (charts 1–20). Sovereign curves across the Latam region have been stable since the start of 2022. Yield curves shifted up from year-ago levels over the course of 2021, consistent with higher inflation and expectations of higher short-term rates. Argentina’s sovereign yield curve remains highly inverted; Chile’s curve less so. In Brazil, yield curves have flattened.


With geopolitical risks coming to the fore, attention will inevitably shift from COVID-19 risks. This shift coincides with a sharp decline in new cases both in the Latam region (chart 7) and more broadly (chart 8). Meanwhile, vaccine doses administered continues to rise, with Chile leading the Latam region (chart 10) and the world (chart 11).


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