Latam Charts: So Far, So Good 

• Financial markets around the globe continue to be buffeted by turbulence.
  

• Further commodity price shocks or additional supply-side disruptions, combined with US dollar appreciation could create strong headwinds going forward. But thus far, at least, there is little indication that high volatility is spilling over to growth prospects.

• In this respect, for Latam economies moving from recovery to expansion, the current conjuncture could be summed up as “so far, so good.”

Global financial markets continue to be subject to increased volatility as markets price-in higher inflation and the increase in advanced country interest rates that must ineluctably follow. To this point, however, there has been little sign of contagion from asset markets to the “real” economy (output and demand). That is probably as expected given the “orderly” adjustment process—or at least absence of a gut-wrenching dégringolade like March 2020 or October 2008—thus far. That said, the effects of US dollar appreciation on Latam economies, as investor risk appetite shifts, should be monitored closely. And further commodity price or supply chain shocks that propagate still higher inflation would clearly be worrisome. But, for now, the economic conjuncture can be summed up as “so far, so good.”

KEY ECONOMIC CHARTS

For now, Latam economies continue to recover from the pandemic-induced collapse in output, with the region’s economies on track to return to pre-COVID-19 growth paths (chart 1). In Chile, the transition to long-run growth may entail a technical recession, reflecting the remarkably vigorous bounce-back in 2021, but elsewhere in the region recession risks are low. Nevertheless, as noted above, it will be important to watch monthly activity indicators (chart 2) for signs of incipient weakness.

The biggest risk to the outlook is inflation, which has risen steadily across the region (chart 3). Latam central banks have tightened monetary conditions, raising key policy rates (chart 4) to keep inflation expectations firmly anchored to inflation-targeting ranges. In this respect, the region’s central banks have led most of their international peers in terms of generating positive real policy rates (chart 5); they have certainly been proactive as compared to advanced economy counterparts.

Economic recovery has led to improvement in fiscal balances (chart 6), as growth has raised GDP, while the extraordinary support provided throughout the pandemic has been scaled back. A return to fiscal targets consistent with long-term fiscal sustainability would help address investors’ concerns. Doing so would also bring down gross debt as a share of GDP (chart 7) as well as external debt as a share of GDP (chart 8). And fiscal probity would help contain burgeoning current account deficits (chart 9), though there is no automatic adjustment process between the two, and bolster external resilience. Going forward, while there is no immediate cause for concern, large current account deficits in Colombia, Chile, and Peru warrant monitoring, along with external reserves (chart 10), for signs of deterioration.

KEY MARKETS CHARTS

Financial markets in the Latam region have not been immune to the volatility affecting advanced economy markets. Despite the enormous uncertainty that clouds the near-term outlook, however, most markets have performed reasonably well. Currencies which had appreciated vis-à-vis the US dollar through the first couple of months have retreated somewhat in the wake of Russia’s invasion of Ukraine and heightened geopolitical risks (chart 3). The currencies of Brazil, Peru, and Mexico are all up on the dollar since the start of 2022; other regional currencies have depreciated. Similarly, the strong performance of regional equity markets earlier in the year is now more mixed. While most markets are still up on the year, Mexican and Peruvian markets have fallen back. In part, these markets may be affected by uncertainty with respect to investment climate; a factor that is also visible in a longer-term perspective on currency markets (chart 5) in the case of Peru. At the same time, increased economic risks associated with higher inflation may be contributing to a widening of CDS spreads on regional sovereign bonds (chart 6).

YIELD CURVE CHARTS

Yield curves across the Latam region are now largely inverted or flat. Colombia and Peru are exceptions here. Given that inverted yield curves can be a signal of a possible recession—though not a foolproof one—increased attention may be put on these indicators in the weeks and months ahead.

COVID-19 CHARTS

While much of the world seems to be operating “as if” the pandemic is past, the situation in China is a reminder that, while we may be through with COVID-19, it may not be finished with us. Rising caseloads in many countries highlight the possibility of another wave, with the potential economic implications that could entail. Key indicators are provided in charts 1–12.

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