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.
Argentina’s economy is in turmoil. Since Q4 2022, it has been mired in a recession that is bound to extend at least through H1 2023. The farm sector has been plagued by misfortune: for the third consecutive year it has been hit by drought – whose intensity has been compounded by climate change – and an outbreak of avian influenza. Inflation has soared, forcing the central bank to tighten monetary policy. Despite fiscal efforts, the balance of payments and foreign reserves are coming under increasingly fierce pressures, even with IMF support. The government has rolled out a series of measures to avoid wasting foreign reserves and defaulting on its external debt with official creditors. It has also had to offer a proposal to reschedule domestic debt in the local currency.
Trade integration with China (including Hong Kong and Macau) has changed tremendously over the past 20 years. In 2022, bilateral trade amounted to some USD 150 bn – a 37-fold increase relative to trade in 2001. Since 2009, China has been Brazil’s main trading partner absorbing today close to 27% of its exports (vs 11% for the US).
The political crisis worsened in Peru over the last two months. In the very short term, political instability should continue, and weigh on the economic outlook.
Luiz Inacio Lula da Silva started his third term as President of Brazil amidst a tense socio-political climate and more benign economic environment. Despite the many obstacles lying ahead of him, Lula bolsters ambitious social and environmental objectives. Their realisation will rely, amongst other, on an increase in public spending and a more interventionist credit policy. In the absence of a credible redefinition of the fiscal framework, market participants and the Central Bank fear that the use of these policies will come at the expense of greater macroeconomic imbalances.
Chile is unlikely to escape a recession in 2023. The slowdown in global demand will weigh on exports, while domestic demand continues to be eroded by high inflation and interest rates due to restrictive monetary policy. The investment outlook remains closely linked to the political climate in the country, and in particular to the implementation of the two principal reforms announced by the government: the new constitutional process (which is expected to continue throughout 2023), and the implementation of pensions reform.
Gabriel Boric, the candidate of the very broad left-wing coalition, won the second round of the presidential election last December. He took office in mid-March, and is already facing numerous challenges. His general policy speech at the beginning of June, and then the tax reforms he brought forward at the end of June, have confirmed his intention to implement economic and social policies which differ from those of previous governments. His ambitious objective for his term of office is to begin a rapid "green transition", but also to find the "right balance" between the need for reforms in favour of greater social justice and the need to remain "fiscally responsible"
Accelerating growth, slowing inflation, falling unemployment and the interruption of monetary tightening differentiate Brazil from most of the world’s major economies. These developments, which are largely attributable to fiscal stimuli (higher social transfers, reduction in taxes and fuel prices), are complicating the task of monetary authorities by partially diluting the restrictive effects of their policy. In the second half of the year, the maintenance of fiscal stimulus should again help limit the slowdown in activity. Brazil’s solid economic performance has allowed financial assets to hold up well despite the general elections and a deteriorating global environment.
The economic dynamism seen in the first half of 2022 is waning. The rebound in private consumption is being held back by rising inflationary pressures, while exports are weakening due to slowing growth in the United States and global demand. Structural weaknesses in the economy (low investment, lack of infrastructure) are also limiting the growth recovery. Moreover, a deterioration in public finances is increasingly likely in the medium term. The very limited rise in fiscal income will not be enough to compensate for the necessary increase in government spending that is expected in the coming years. In addition, sovereign wealth funds have been used over the past two years and the government no longer has any reserves.
Inflation in Latin America is growing at its fastest pace in over 20 years. Already in 2021, inflation had doubled to reach 6.6% – a level comparable to the financial crisis of 2008. In 2022, inflation projections are even higher and should come in at some 8 to 10%. So which countries have witnessed the largest price increases? What are some of their drivers? And what are monetary authorities doing to contain them?
In Chile, a large majority of voters (nearly 62%, with an exceptional voter turnout) rejected the draft new constitution in the referendum held on 4 September. The draft, which contains almost 400 articles, did not propose a profound reform of the Chilean economic model; the Central Bank had to remain independent, while property and labour rights were not called into question. But it guaranteed better access for the population to a set of social rights (housing, education and access to healthcare), whereas the State currently only pays for those needs not covered by the private sector. This meant a substantial and long-term increase in public spending
