The improvement in global growth prospects and the success of the vaccination campaign have helped sustain the recovery in Chile’s growth seen since Q3 2020, despite the reintroduction of relatively strict health protection measures in the early part of 2021. Household consumption grew strongly and is likely to continue to drive growth, boosted by stimulus measures and the opportunity given to a large number of employees to draw on their pension savings. In all, GDP is likely to grow by 6% in 2021, after a 5.8% drop in 2020. This said, the risks are on the downside. External risks relate mainly to trends in the pandemic and progress in vaccination on a global level
The health crisis continues to worsen – undermining the economy to a point of entertaining a recessionary risk in the first half of 2021. In this context, confidence has plummeted and financial markets have retreated. The vaccination campaign – after facing significant logistical challenges – has finally begun to accelerate since mid-March and with the concomitant introduction of new restrictive measures, the hope is that the epidemic curve will reach an inflection point over the next two months. Faced with rising inflation and inflation expectations, the Central Bank launched its monetary tightening cycle, which – against a backdrop of slowing economic activity and a high sovereign interest burden – has exacerbated budgetary pressures and risks
Thanks to a strong Q4 rebound, the contraction in real GDP was limited to 8.2% in 2020, the public deficit did not swell as much as expected, and 2021 growth prospects were given a boost. Yet the recovery is still fragile: private consumption and investment have both taken a lasting hit from the 2020 crisis, and the export sector will not benefit fully from the expected rebound in US growth. The crisis also exacerbated concerns about the vulnerability of public finances and the decline in investment, which will undermine medium to long-term growth prospects.
In 2020, the Brazilian main equity index – the B3 Ibovespa – recovered swiftly from the commotion caused by the pandemic. After hitting record highs in January, the index lost 50% of its value in March before ending the year on a 3% gain. The year also ended with a record number of initial public offerings (26 IPOs and nearly USD 8 bn in funds raised – the highest level since 2007). The proceeds of these offerings were used to acquire assets or equity interests, cover working capital needs, pay down debt and invest in infrastructure – in that order. Global factors have facilitated this rapid bounce back. Liquidity injections and record low interest rates across the globe in addition to vaccines development helped spur an increase in risk appetite
An active economic policy has helped attenuate the magnitude of the recessionary shock in 2020. The recovery in Q3 was vigorous and was prolonged into Q4. However, the economy showed signs of slowing down towards year-end. Brazil’s external vulnerability did not deteriorate despite high volatility of both portfolio and direct investments as well as a sharp depreciation of the real in 2020. In 2021, the economy will benefit from the recovery in commodity prices and the maintenance of accommodative measures on the monetary side
Peru is one of the Latin American countries to have suffered most from the Covid-19 crisis. After a sharp contraction in Q2 2020, the recovery that began in Q3 has continued. This said, economic activity is unlikely to regain its pre-crisis level before the end of 2022. The economic contraction and the massive stimulus programme introduced by the government have hit public finances, but the deterioration is likely to remain manageable, for the short term at least. However, the deterioration of the political climate seen over the past few years is affecting the medium-term outlook.
Amidst low investment and stagnant productivity, Brazil has primarily relied on favorable demographics (labor accumulation) to grow. In the face of rapid population ageing and a decline in fertility rates however, Brazil’s demographic dividend has been gradually fading. Brazil will have to alter its pattern of growth and find avenues to stimulate capital investments and improve total factor productivity if its economy is to achieve higher medium-term growth prospects (i.e. lift potential growth). The administration has embraced this challenge through an ambitious structural reform agenda anchored on two complimentary pillars: enhancing the business environment and transforming the role of the state in the economy
The epidemic remains in full swing, but has shown some signs of deceleration. The recovery in Q3 has been stronger than expected. However, the picture varies considerably from one sector to the next. The central bank has paused its monetary easing cycle for the first time since mid-2019. At the same time, it has adopted a more active communication stance through the embracement of forward guidance. The emergency aid programme – which will push the budget deficit to a record high – has meanwhile helped President Bolsonaro witness a resurgence in popularity. Negotiations over the 2021 budget are likely to crystallise tensions across the executive and Congress
The health crisis has slammed an economy that was already suffering from more than two years of recession. GDP will probably contract by more than 10% in 2020. With the technical rebound that began in late Q2 and the signing of a public debt restructuring agreement, the country should manage to pull out of recession in the second half. Yet financial instability persists with the erosion of foreign reserves, the stark disconnection between official and parallel exchange rates and expectations of surging inflation. The authorities have tightened forex controls again. IMF support is essential for financial stability but might not suffice for a sustainable recovery.
The Brazilian economy is gradually migrating towards a new macroeconomic equilibrium whereby the private sector is gaining a larger role in the allocation of resources. This transition is the result of a changing conception of the role of the state but also stems out of a necessity to consolidate fiscal accounts. The nature of the fiscal adjustment however has had knock-on effects on both public and private investment, with adverse consequences on the recovery and medium-term growth prospects. The recent disruption to the economy resulting from the Covid-19 pandemic has also reset the deck with regards to the outlook for corporate investment and potential output
While the Covid-19 epidemic continues to spread, restrictions have started to ease in parts of the country. A severe contraction of economic activity is anticipated in Q2 with the latest data indicating that a low point was reached in April. A rapid recovery of economic activity will be constrained by the economy’s weak growth engines, especially investment. Fiscal and monetary policy measures have continued to be deployed or extended to help cushion the impact of the crisis. While the currency continues to exhibit weakness and fiscal balances keep deteriorating, continued monetary easing has helped boost the stock market.
Growth prospects are deteriorating constantly in Mexico. In the short term, several factors are weakening the economy, including the impact of lockdown restrictions on domestic demand, the decline in oil prices, the disruption of supply chains and sluggish external demand. Without a fiscal stimulus package, the support measures announced by the central bank will not suffice to offset the enormous shock. In the medium term, the economy’s capacity to rebound is limited. The downturn in the business climate and other pre-crisis factors that contributed to the slowdown, coupled with the government’s contradictory signals, will continue to weigh on investment.
In early June, the World Health Organization declared Latin America as the new epicentre of the Covid-19 pandemic. Only Chile has managed so far to “bend” the curve of new cases. Peru also seemed on track but its decline was interrupted and its curve has since flattened. Both countries have faced however high death tolls relative to the size of their population. Colombia and Argentina – two countries that put in place tight lockdowns early on and have witnessed comparatively lower deaths relative to the size of their population – are facing rising numbers of new cases and deaths. In recent weeks, Brazil has gotten closer to stabilizing the pandemic’s progression albeit at an elevated level (~ 35000 cases per day, second only to the United States worldwide)
Mexican real GDP fell by 19.9% year- on- year in April. At the same time, industrial production plunged by 30% (the manufacturing component fell by more than 35%). In addition to the domestic impact of lockdown measures, economic activity has been hit by the fall in the oil price, disruption in supply chains, and the sharp decline in external demand (especially from the US) affecting both the export and tourism sectors. The Central Bank has lowered its policy rate (by 225 basis points since January, to 5%) and announced several series of measures aimed at supporting the economy, but this will not be sufficient to cushion the shock. Indeed, the government, preferring to stick to its fiscal austerity policy, has not announced a major fiscal plan to support the economy
The massive economic shock resulting from the coronavirus sanitary crisis will delay Brazil’s economic recovery, suspend the process of fiscal consolidation and stall progress on reforms. While the extent of the recessionary shock remains highly uncertain, measures – both fiscal and monetary – have been taken to mitigate the impact of confinement measures on economic activity, prevent a sharp upturn in unemployment and ensure that tensions over liquidity do not materialize into solvency problems. Intervention capacities on the monetary side are ample and contrast with those on the fiscal side, which are more limited due to the fragilities of public accounts. Brazil’s financial markets, which came under significant stress in Q1, will continue to be challenged.
According to the first estimates, economic activity contracted for the third quarter in a row in Q4 (-0.3% y/y). Manufacturing industry was the most affected and contracted by 2%. In 2019, real GDP contracted by 0.1%, after recording a 2% growth in 2018. Real GDP growth should pick up in 2020 (+0.6%), but remains under its potential (estimated at 2.5% by the IMF). Indeed, one year after Andres Manuel Lopez Obrador came to power, his economic policy is still hard to read and weighs on investment. The future of the energy sector also raises doubts, affecting investor sentiment, both domestic and foreign
Despite a more challenging global environment and a deterioration in the country’s external accounts, Brazil’s economic recovery is gaining some traction on the back of a strengthening domestic demand. In 2020, GDP growth is forecast to improve but questions remain nonetheless regarding the economy’s ability to build up and keep up momentum. The easing of monetary and financial conditions should help support the credit market but should continue to have a weakening impact on the currency. During his first year in office, President Jair Bolsonaro’s losses in terms of approval ratings contrast with his government’s notable gains on the public finance front.
Having more or less stagnated in 2019, economic growth is likely to bounce back a little in 2020, boosted by private consumption and net exports. Despite an infrastructure programme that is largely open to the private sector, the outlook for investment is struggling to improve. One year after Andres Manuel Lopez Obrador, generally known as AMLO, came to power, his economic policy is still hard to decipher. The lack of clarity on energy sector reform is also affecting investor sentiment. At the same time, the risk of a loss of control of the public finances is growing: against a background of low growth, maintaining the austerity programme favoured by the government will prove more difficult from 2021.
With violent protests rocking Chile since October, the government announced a series of measures to combat inequality and proposed a new version of its pension system reform. Above all, the government signed an agreement with the main opposition parties to draw up a new constitution. Yet persistently fierce political and social tensions are bound to curtail growth. Forecasts for the next two years have been revised largely downwards. The public debt and deficit are also expected to swell over the next five years.
When looking at Colombia’s creditors by residence and type of institution over the past 10 years, we observe three main dynamics at play: first, non-residents have increased their exposure to the sovereign in both relative terms but also in absolute terms as the general government’s debt burden has increased by 20 percentage points of GDP in the intervening time. Second, most of that increase has been driven by larger holdings from foreign non-banks (i.e. investment management industry) which in fact have captured the shortfall in sovereign financing left behind by domestic banks. Finally, non-residents have altered the currency composition of their holdings as evidenced by their comparatively much larger exposure to local currency public debt instruments over the period.
