Brazil's macro-financial portrait is one of striking contrasts: on the one hand, unemployment is at an all-time low, external accounts exhibit a notable resilience, and economic growth continues to outperform expectations as it draws on multiple levers ; On the other hand, the currency has continued to weaken, residents have increased their holdings abroad, and risk premiums have widened – as defiant markets call for additional measures to curb public spending. The Central Bank – bucking the global trend – has initiated a phase of monetary tightening in response to rising inflation. The latter has witnessed upward pressures on both the supply and demand side in recent months
In Chile, the recovery in economic activity seen in 2024 is expected to continue in 2025. Commodity exports will remain strong, while private consumption will benefit from slowing inflation and a gradually improving labour market. Against a political backdrop marked by ongoing tensions, and an opposition coalition strengthened by the results of recent local elections, the government is trying to press ahead with its flagship reforms, relating to the energy sector in particular, before the end of its term, which will be in late 2025. Against this backdrop, public finances are still being gradually consolidated, at a slower pace than initially anticipated.
The election of Donald Trump as President of the United States has raised fears that protectionist measures will be stepped up. Customs duties would be applied to all products from all of the United States' trading partners. In addition to China, the main country targeted, concerns about the macroeconomic and financial consequences of such a policy have risen sharply in Mexico.
Growth in emerging markets held up fairly well until the spring of 2024, partly thanks to the easing of monetary policies since mid-2023. The imminent one in the United States should make it possible to extend or even strengthen it. In the most likely scenario of a soft landing of the US economy, the main risk for emerging economies is a sharper-than-expected slowdown in the Chinese economy. The slump in the real estate sector is spreading through the fall in commodity prices. On the one hand, most emerging countries will gain in disinflation. But, on the other hand, commodity-exporting countries of which China is the main customer will suffer. Above all, the risk of contagion lies in the implications of the Chinese authorities' strategy of supporting growth through foreign trade
The messages sent out by the Brazilian financial markets and those of the real economy have become increasingly incongruent. Robust economic growth, low unemployment and relatively subdued inflation have become steadily overshadowed by rising political and fiscal risks, which have weighed more heavily on the currency, equity prices and the yield curve. Lula's parliamentary setbacks, his frictions with the Central Bank and increased interventionism have rattled investors already shaken by major revisions to global and local interest rate projections. The challenge for the second half of the year will be to bolster economic agents’ confidence in an effort to stabilise expectations.
Claudia Sheinbaum was elected President of Mexico on 2 June. The political and economic challenges she will face during her mandate are numerous, and mainly concern the sustainability of public finances, the reform of the energy sector (a particularly sensitive point in Mexico, especially in the context of nearshoring and renewed appeal to foreign investors) and the renegotiation of the trade treaty with Canada and the United States (UMSCA) in 2026. In the short term, as a member of the Morena party of the former outgoing President, the new President needs to find the appropriate distance from Andres Manuel Lopes Obrador and his supporters. Discussions relate in particular to the reform of the justice system that AMLO himself had proposed.
The Ley Bases (a set of measures designed to liberalise the economy and, more generally, society) presented by Javier Milei after his inauguration last December was finally adopted at the end of June. As the President's party has no majority in either the Chamber of Deputies or the Senate, the final version was watered down. However, it is a victory for Milei, who is racing against time between an economy sinking into deep recession and the first signs of disinflation. For the government, the fight against inflation justifies the drastic cuts in public spending and the maintenance of a strategy of real exchange rate appreciation
Energy and mineral commodities are central to the low carbon transition process. Latin America, which boasts abundant amounts of minerals and key metals for the transition, and GCC[1] countries, which are dependent on revenue from hydrocarbons, are seemingly, on the face of it, taking contrasting paths on the transition journey. However, the macroeconomic consequences cannot easily be determined currently. Gulf countries have some advantages in the oil market, but the pace of the transition could affect revenues more quickly than expected. In Latin America, while the size of critical minerals reserves is brightening the outlook, various national strategies and numerous constraints could curb the scale
After stagnating in the second half of 2023, economic activity has strengthened in recent months, supported by a surprisingly resilient labor market, amongst other. This good start to the year was however not overtly obvious given the divergence of many indicators. The pace of rate cuts is expected to slow down in the second half of 2024. Monetary easing is indeed coming up against slower-than-expected disinflation and upside risks to inflation expectations. The latter have been dented by the revision of the budgetary targets for 2025-28 and a more pronounced interventionism by the State, anxious to revive investment
Chile’s economic growth stabilised during the second half of 2023, inflation eased and the current account deficit fell. The expected upturn in activity in 2024 should ensure that growth comes close to its potential, driven by household consumption, private investment and mining exports. Political pressures have eased after the decision to suspend the process of adopting a new Constitution (which is expected to be left alone for a number of years). Nevertheless, Gabriel Boric’s government and the opposition parties are still clashing on a number of areas, most notably, fiscal reform, pension system reform and the energy sector framework law.
The debate on monetary sovereignty in emerging countries is resurfacing with, on the one hand, the plan of Argentinian President Javier Milei to dollarise his economy, and on the other, the temptation of several West African country leaders to abandon the CFA franc. The abandonment of the CFA franc with the aim of recovering the flexibility of an unpegged exchange rate regime and greater autonomy of monetary policy, is an argument that is either weak in theory or unconvincing in practice.
Oxford Insights’ AI 2023 preparedness index offers a great starting point to harness the digital divide across the region with Brazil and its vibrant Fintech sector on one end of the spectrum and Haiti on the other, lacking basic infrastructure. To that point-in-time snapshot, however, we can add a backward-looking component (investment rate over the past decade) and a forward-looking one (projected fiscal space) to get a more complete picture of some of the challenges lying ahead as the region furthers its digital transformation.
For his return at the helm of Brazil, Lula can look at his first year back in office with some contentment: macro-financial indicators boasted solid prints, social programs were given a new impetus, an ambitious change in direction was initiated on the environment and the government’s capacity to reform ended up being much stronger than anticipated by most observers. This picture, nonetheless, conceals some imbalances most apparent in Brazil’s growth profile, the dynamics of unemployment and the structure of its trade balance. The markets’ renewed skepticism relative to the government's ability to balance its books (despite the new fiscal framework) constitutes another grey area. In 2024, economic growth, inflation and interest rates will be lower than in 2023
Following his clear victory in the presidential election, the new president, Javier Milei, intends to push ahead with the liberalisation and deregulation of the economy. A decree and an omnibus bill containing just over 1,000 measures, including some very radical ones, are already being scrutinised in the National Congress of Argentina. These measures have been received rather favourably by the markets and the IMF. However, against a very tense political and social backdrop, the economy is plunging into stagflation and thecountry’s financial situation is still very precarious. The government has already discussed a reprofiling of domestic public debt repayments with the banks. A default on external debt could still be avoided with support from the IMF
Rising long-term yields in the US are causing waves in the region : they have reverted FX gains seen earlier in the year, redirected portfolio flows and are complicating plans to issue debt to fund the energy transition.
Brazil’s cyclical performance continues to boast positive surprises. Growth and employment have held up well, core inflation is retreating, trade surpluses are beating all-time records and the real is holding its ground despite a rising dollar. Against this backdrop, the Central Bank eased its monetary policy in August for the first time in a year. These developments coupled with the revival of social policies, have helped spur a rise in Lula's approval ratings. In search of new growth drivers to reduce inequality and accelerate the energy transition, the President unveiled the third act of his Growth Acceleration Pact (Novo PAC). Financing the investment programme, however, poses questions in the face of the recently enacted fiscal framework
Mexico’s economic activity is expected to slow in the next few quarters under the combined effect of the slowdown in the US economy and the continuation of high interest rates. Beyond 2024, growth could be supported by a new driver, nearshoring, the effects of which are starting to be seen in export and investment data. The next administration, to be elected in June 2024, will therefore face the challenge of implementing the structural reforms necessary to take full advantage of this new relocation strategy and maintain financial support for Pemex, while limiting the slippage in public finance.
Climate-related migration (internal displacements and cross-border flows) have increased significantly in recent years across Central America. Natural disasters and environmental changes (increasing temperatures, changing precipitation patterns, increasing intensity of storms) affect human mobility through their impact on agriculture (soil degradation, crop failure, declining agricultural yields), access to water resources, destruction of infrastructure and land losses (coastal erosion / flooding, landslides).
The Caribbean has contributed little to global CO2 emission at less than 1%. Yet the region is amongst the most vulnerable to the impact of climate change. Currently, many economies’ adaptations plans suffer from financing shortfalls amidst high debt ratios, weak growth profiles and insufficient support from official creditors. New forms of financing are however offering promising solutions to help bolster the region’s climate and financial resilience.
Gabriel Boric intends to exceed the goals set up to that point, on a country level, by achieving carbon neutrality before 2050, and on an international level, by developing lithium and green hydrogen production and export capacities.
A wind of optimism is currently blowing over Brazil. Brazilian assets recovered strongly in Q2 2023 on the back of reform progress and positive surprises from growth, inflation, the labour market and external accounts. The short-term outlook has also improved. New fiscal measures combined with a softening of energy prices and the prospects of monetary easing in H2 has helped mitigate the expected economic slowdown this year. However, flashing green lights conceal the underlying weaknesses of internal demand as well as differentiated performances across sectors. In the absence of higher revenues, the primary result targets defined by the new fiscal framework is expected to be difficult to achieve.
Chile seems to have made more progress with the energy transition than most Latin American countries. The combination of a favourable geography, significant resources, the aspirations of public opinion and political will has favoured implementation of a number of measures for almost 25 years. Since he came to power in 2022, Gabriel Boric has undertaken to exceed the goals set up to that point, on a country level, by achieving carbon neutrality before 2050, and on an international level, by developing lithium and green hydrogen production and export capacities.
On 22 June, the Mexican Central Bank maintained its main policy rate at 11.25% for the second time in a row. The Governing Board’s decision was unanimous and largely anticipated. In its press release, the Board stated that the pause should continue over the coming months: the downward trend in inflation seems to be confirmed, but the outlook remains «complex and uncertain».
The Executive's calls for monetary authorities to lower rates are fuelling debates on the appropriate inflation target, the permanence of the Central Bank’s independence and the right calibration for the policy mix. The opposition between both parties is weighing on inflation expectations due to uncertainty over the path of economic policy. To help create favourable conditions for monetary easing, the government has accelerated the presentation of its new fiscal framework. Following the downturn in activity in Q4 2022, the economy should temporarily return to growth in Q1 2023, driven by the strong performance of the agricultural sector. The deceleration - which began in the second half of 2022 - is however expected to resume its course for the remainder of the year
Economic growth should slow significantly in 2023. The relative resilience of private consumption will not be enough to offset the slowdown in external demand, particularly from the US. In addition, the investment outlook remains limited. In the medium term, the Mexican economy could benefit from the relocation of American companies, a trend recently accelerated by the disruption of value chains linked to the pandemic and trade tensions between China and the United States. To take full advantage of this, Mexico will need to restore investor confidence and meet its energy policy commitments.
