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Mexico : The economic outlook is weakening further

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. All in all, we expect real GDP to decline by more than 10% in 2020. Unlike other emerging countries, the ability of the Mexican economy to rebound appears limited. Growth forecasts for 2021 (less than 3.5%) and beyond are held back by the same factors that hampered recent economic performance before the crisis. The deterioration in the business climate, linked to the mixed messages sent by the government, will notably continue to weigh on investment.

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Brazil : Tough luck

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.

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Mexico : Mexico: sluggish growth in 2020

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. 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 proposed by the government will prove more difficult in the coming years.

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Brazil : Trying to build momentum

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.

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Mexico : Investment has stalled

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.

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Chile : Crisis times

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.

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Mexico : Mexico: the year after

The Mexican president is committed to keep public finances in control during the term of his mandate, but the budget’s assumptions seem too optimistic to be achievable. In the medium term, the risk of fiscal slippage persists.

Colombia : Colombia: who holds the public debt and in what proportion?

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.

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Brazil : In the spotlight

The world’s projectors have descended on Brazil following raging fires in the Amazon forest. President Jair Bolsonaro has come under pressure for his lack of engagement and commitment to protecting the environment. The pace of economic growth is still struggling to accelerate. Confidence indicators are ambivalent while investment remains weak. In the wake of a much less buoyant external environment and low inflation risk, the Central Bank has lowered its policy rate by a cumulative 100 basis points since August. The pension reform was approved in the Senate (first round) but was subject to revisions. Throughout the fall, a number of major reforms should be deployed and privatizations and concessions should accelerate.

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Argentina : Up against the wall

The Macri government faces an emergency situation in the run up to October’s general elections. Confronted with the erosion of foreign reserves and its failure to roll over short-term bonds, the government was forced to 1) delay payment of Treasury bonds held by local institutional investors, 2) announce debt “re-profiling” and 3) tighten capital controls. After this summer’s primary election, the opposition is largely expected to take power. The future government will have to manage numerous priorities and will probably roll back certain economic liberalisation measures. Yet, it has very little manoeuvring room since it cannot risk breaking off relations with the IMF, which is now its main creditor.

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