Prospects for the economic growth in Mexico are deteriorating, owing to slower economic activity in the US, a tight fiscal stance and a persistent weakness in private investment. Real GDP growth for Q1 slowed to 1.2% y/y, from 1.7% y/y in Q4 2018. For the whole year, real GDP growth should reach 1.5% (from 2.0% in 2018) and risks are tilted to the downside. On the one hand, trade tensions with the US (following the US President’s announcement to impose tariffs on Mexican imports) will have a detrimental effect on business sentiment, even if the two countries have so far reached an agreement
Chart (a) shows short-term dynamics in non-resident net portfolio investments (equities and bonds) following the elections in Brazil, Chile, Colombia and Mexico (ie LAC-4). In Brazil, a rebound occurred after the election which followed a period of increased risk aversion as a result of the truckers’ strike (May 2018) and emerging market sell-off (August/September 2018). However, confidence remains very fragile as Brazil stands out as the country where, on a twelve months rolling sum, non-residents have remained net sellers (chart b). Net purchases have also turned positive post-elections in Colombia and Mexico however with a lag in the latter case owing possibly to concerns over NAFTA and commitment to fiscal responsibility under the new administration
The hopes of seeing economic activity pick up following the election of Jair Bolsonaro have fallen. Some indicators point to a possible contraction in economic activity in Q1 2019 at a time where confidence indicators were seemingly improving. Meanwhile, the reform of the pension system – a cornerstone of President Bolsonaro's economic program – was presented to Congress in February where it is currently under discussion. Negotiations will likely be more protracted and be more difficult than originally expected. Indeed, since taking office, the popularity of the Brazilian president has sharply declined and relations between the executive and the legislature have strained.
GDP growth rebounded in 2018, buoyed by higher copper prices and the renewed confidence of investors following the election of Sebastian Piñera. Over the course of his mandate, President Piñera’s ambition is to implement fiscal policies that will boost growth and stimulate investment while consolidating public finances, but this could prove to be harder to achieve than expected. The president’s party lacks a congressional majority, and is struggling to push through the fiscal and pension system reforms that have been presented so far. Even so, economic growth prospects will remain rather favourable over the next two years and fiscal consolidation should continue.
Colombia is coming off a four year macroeconomic adjustment, orchestrated by a large terms of trade shock following the end of the commodity super cycle in 2014. Colombia made a number of policy adjustments to deal with the shock and since 2017, the economy has largely corrected allowing the current account balance to narrow, the fiscal balance to improve and inflation to converge towards the target. However, the intensification of the Venezuelan migrant crisis is challenging fiscal accounts. President Duque’s pledge to make adjustments to the 2016 peace agreement represents a source of risk to the security environment. Meanwhile, the economic slowdown has bottomed out in 2018. Growth is set to accelerate in 2019 but will remain modest.
The election of Mexico’s new president, Andres Manuel Lopez Obrador, raises numerous questions. Although the new president and his team enjoy strong popular support, investors are worried about the policies he is proposing for the next six years. Some of the proposals do not seem to be compatible with his promise to maintain fiscal discipline, central bank independence and economic pragmatism in general. Several existing reforms are being called into question, notably in the energy sector. Given Mexico’s strong economic fundamentals, these contradictions are unlikely to have much of a short-term impact
The election of Jair Bolsonaro at the presidency of Brazil has marked a swing to the right, the weakening of traditional political parties and a return of the military to national politics. The new administration faces the challenges of rapidly engaging its fiscal reform, gaining the trust of foreign investors while reconciling ideological differences across its ranks. How society will adjust to a new era of liberal economic policy remains the greatest unknown. Meanwhile, the economy is still recovering at a slow pace. Supply-side indicators continue to show evidence of idle capacity while labour market conditions have yet to markedly improve. Sentiment indicators have shown large upswings in recent months which should help build some momentum in economic activity over Q1 2019.
Calm has returned to Argentina’s financial markets since the end of September 2018. The peso has levelled off after depreciating 50% against the dollar in the first 9 months of the year. The central bank finally managed to loosen its grip after raising its key policy rate by 70%. Restored calm can largely be attributed to IMF support, but it comes at a high cost: a strictly quantitative monetary policy and the balancing of the primary deficit as of 2019. The economy slid into recession in Q2 2018 and is likely to remain there through mid-2019. So far, the recession has not eroded the country’s fiscal performance, the trade balance has swung back into positive territory and inflation has peaked. Yet will that be enough to restore confidence before October’s elections?
