COVID-19: Latam Below G-10 New Case #s
THE LATAM HOTSPOT HAS COOLED
Latam Real GDP Growth Solid into 2022
AR, BR, CL, CO, & PE ALREADY BACK TO PRE-PANDEMIC LEVELS
Inflation: Has Risen More than Expected
BIGGEST UPSIDE SURPRISES IN BR, CL, & PE
Policy Rates: Topping Out by End-2022
STILL SET TO BE BROADLY ACCOMMODATIVE
Economists have consistently been too optimistic on Mexican growth in 2021: without greater investment, won’t sustainably see it above 2%.
Banxico expects output gap to be nearly shut by end-2022; uneven performance by regions & sectors and spending changes explain some price pressures.
Broad-based inflation shock putting pressure on Banxico; goods driving the shock. Services inflation kicking in as 2021 winds down.
MXN has been propped up by trade & remittances… tourism recovery is key for support going forward.
Capital flows have been a one-way street. Positioning much cleaner, but risks remain.
Loss of IG looks difficult in next 12 months; long-term fiscal sustainability affected by growth outlook.
Peru’s state of affairs going into 2022
- Macro balances are strong
- Surprisingly robust growth
- Resilience in the face of uncertainty
- COVID-19 cases are near their lows
- FX and capital outflows reflect uncertainty
- Government instability
- Policy confusion
- Social conflicts
- Inflation
- 2022 will continue to be politically noisy and challenging
- Terms of risk have shifted from radicalism to underperformance, poor State management and an erratic decision-making process
Investment will be key in 2022
- Peru GDP is at pre-COVID-19 levels
- Recent indicators do not show evidence of politics affecting growth
- Economic management is more institutionalized and mainstream
Macro balances are robust
- Peru’s credit agencies: political concerns versus improving macro balances
Inflation is a growing concern
- Our inflation forecasts:
- 2021: 6.5%
- 2022: 4.5%
- We expect the BCRP to raise to 2.50% by year end, and to 4.0% in 2022
- Inflation is affecting purchasing power and risks weakening the government further
Social conflicts are having a real impact on mining
- Property and predictability of contract and legal matters are a risk
- Government stance favours social conflicts
- Cabinet conflicted over mine closures (Francke vs Vásquez)
- Protests in recent months at mines that represent 38% of Peru’s copper exports
- Also:
- Zinc (Cerro Lindo; 12% of zn output)
- Gold/silver mines (Apumayo, et. al; +7% of au/ag output)
In Q3-2021, Colombia surpassed its pre-pandemic production levels; growth should approach 10% y/y for all of 2021. BanRep expects output gap to close by mid-2022.
Despite supply shocks being temporary, indexation should extend CPI inflation. Reversion should start in H2-2022, but risks remain that headline closes 2022 above 3% y/y.
BanRep set to continue more aggressive-than-normal hiking cycle; neutral rate should be reached by mid-2022. IBR market pricing an even higher terminal rate.
Elections in 2022 are a source of uncertainty. Congressional elections are the first milestone. Strong institutions will prevail.
FX market could remain under pressure owing to higher external deficit and political uncertainty; positive macroeconomic news may be discounted.
Imacec expanded 15% y/y in October (0.8% m/m) driven by service sectors. GDP growth should reach 11.6% y/y in 2021 and 4.5% y/y in 2022. We estimate that Imacec expanded 12% y/y in November.
Private consumption remains high after three pension fund withdrawals (USD 50 bn) and a strong fiscal impulse. Liquidity is normalizing, but there is still an extra USD 20 bn in chequing and debit accounts that (we project) will last until mid-2022 (at least).
As of September 2021, investment projects in the pipeline for the period 2021–25 reached USD 69.8 bn (54% in construction stage). Investment dynamics depend on the materialization of large projects in mining (public and private) and public works.
The employment gap vs pre-pandemic levels has shrunk to -607k. By economic sector, job creation has been led by commerce, which has added +28k jobs. The construction sector has also recovered its pre-COVID-19 levels of employment.
Economic Outlook
Recovery is getting back to pre-pandemic levels, but some sectors have not recovered pre-Dilma benchmarks
Key to economic weakness = investment.
Can elections restore it?
Fiscal deterioration returned with COVID-19 pandemic. Brazil’s high revenue base both a strength and weakness.
Debt composition key element of Brazil’s fiscal vulnerability, makes country sensitive to rising rates
Is aggressive BCB tightening driving an inflection point?
Goods inflation dominates the BCB’s headaches…
Inflation: Deep in the Core
PRICE GAINS CONTINUE TO HAVE HIGH BREADTH
Inflation: Little Change, as Expected
MONTHLY INFLATION STILL AT 2.5% M/M
Monetary Policy: A Long Way to Hawkish
REAL RATES SET TO CRAWL OUT OF NEGATIVE TERRITORY
FX: ARS Awaits the IMF
UNIFICATION OF CURRENCIES WILL BE PAINFUL
Keep in Touch
www.scotiabank.com/economics
scotia.economics@scotiabank.com
@ScotiaEconomics
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