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Economic Outlook Latin America Q3 2021: Despite A Stronger 2021, Long-Term Growth Obstacles Abound

Latin America has been one of the hardest-hit regions by the pandemic in emerging markets, and we expect it to be among the slowest to recover. But recently, we've seen the services sectors performing better than expected. As a result, we have increased our average GDP growth projections for Latin America for 2021. However, we have lowered them for 2022, and kept our long-term assumptions broadly unchanged. We now project average growth in the six largest Latin American economies to be 5.9% this year, up from 4.9% as of our previous forecast, following a 6.9% contraction in 2020. However, we expect lower growth of 2.5% next year, compared with our 2.8% forecast in March, and just shy of 2.5% thereafter.

Table 1

Latin America: GDP Growth And S&P Global's Forecasts
(%) 2019 2020 2021F 2022F 2023F 2024F

Argentina

(2.1) (9.9) 6.9 2.1 2.2 2.0

Brazil

1.4 (4.4) 4.7 2.1 2.2 2.3

Chile

1.0 (6.0) 6.9 2.9 3.1 3.0

Colombia

3.3 (6.8) 7.0 3.0 3.3 3.2

Mexico

(0.0) (8.5) 5.8 2.9 2.2 2.1

Peru

2.2 (11.1) 11.0 3.5 4.1 3.9
LatAm 5 0.7 (6.6) 5.7 2.5 2.3 2.3
LatAm 6 0.8 (6.9) 5.9 2.5 2.4 2.4
Note: The LatAm GDP aggregate forecasts are based on PPP GDP weights. LatAm 5 excludes Peru. Source: Oxford Economics; F--S&P Global Ratings forecast.

Table 2

Change In Base GDP Forecasts From March 2021
(%) 2021 2022

Argentina

0.8 (0.5)

Brazil

1.3 (0.4)

Chile

1.0 (0.7)

Colombia

1.0 (0.5)

Mexico

1.0 0.2

Peru

0.8 (1.4)
LatAm 5 1.1 (0.2)
LatAm 6 1.1 (0.3)
Note: The LatAm GDP aggregate forecasts are based on PPP GDP weights. LatAm 5 excludes Peru. Source: Oxford Economics; F--S&P Global Ratings forecast.

On average, we expect GDP in the region to return to its pre-pandemic level in the middle of 2022 (see chart 1). However, downside risks to our long-term growth outlook have risen, as less predictable policy actions amid higher social instability could dampen investment and lower productivity.

Chart 1

image

Resilience In Services Has Pushed Our 2021 Growth Forecast Up

Stronger-than-expected economic activity in the first quarter was the main reason for our upward revision to 2021 GDP growth. On average, Latin American economies expanded 6% in quarterly annualized terms (see chart 2), higher than the 5% median expansion in major emerging markets. This was at odds with expectations that a rise in new daily COVID-19 cases to record highs at the time, combined with additional lockdown measures in some countries, would slow economic activity further. Strong demand for commodities continues to support growth in the region: export volumes increased in nearly every major Latin American economy in the first quarter compared with the fourth quarter. The main exception is Chile, where supply disruptions in several copper mines led to a decline in output, but that is likely to be reversed in the second quarter of this year.

Chart 2

image

Although commodity exports contributed to first-quarter growth, the main reason for the upside surprise was the resiliency of the services sector. The median quarterly annualized growth in services in first quarter was 9% (see chart 3), three percentage points above GDP growth during that period. Households and businesses in the region are adapting quickly to living in a pandemic, relying more on online shopping and bulk buying. In our view, the regions are becoming generally more comfortable in resuming pre-pandemic behaviors despite ongoing uncertainties.

Chart 3

image

However, the pandemic is far from over in most of the region. New daily cases are near record highs and are about four times higher than the median for emerging markets in per capita terms (see chart 4). COVID-19-related deaths also remain at alarmingly high levels, straining hospital capacity. This has led several economies to reimpose lockdowns, which is why we expect a decline in GDP in the second quarter in some cases. Even so, the stronger first quarter combined with a weaker second quarter still pushes up our overall 2021 GDP growth forecast.

Chart 4

image

Vaccinations will be key to reduce the need for lockdowns in the future and pave the way for a more sustained economic recovery. Latin American regions are making progress in vaccinating their populations (see chart 5), though vaccination is not happening fast enough to significantly lower the risk of more lockdowns this year.

Chart 5

image

Vaccination progress will also play a larger role in improving activity once stimulus measures are phased out in the upcoming quarters, as cash transfers and unemployment insurance have been supporting consumption. Labor markets need to improve to sustain the momentum in consumption, and that can only happen if more sectors open up and return to full capacity as a greater share of the population is vaccinated. Employment levels in the typical Latin American economy are still 5%-10% below pre-pandemic levels (see chart 6), underemployment rates are still high, and progress on both metrics has slowed in recent months. This means the recovery in employment has a long way to go before normal consumption levels return.

Chart 6

image

Monetary And Fiscal Tightening And Political Uncertainty Will Slow Growth In 2022

Latin American economies will face three unfavorable dynamics next year: monetary tightening, fiscal tightening, and less predictable policy. Inflation, both headline and core, has exceeded expectations in most cases, pushing inflation expectations above central bank targets. In both Brazil and Mexico, inflation expectations are above target for this year and next. Price pressures are coming from higher energy prices, supply-side disruptions, the pass-through from a weaker exchange rate, and to some extent, improving domestic demand.

Interest rate curves are already pricing in the expectation that every major central bank in the region will start lifting interest rates this year (see chart 7). We also expect that central banks will start tightening by the end of this year. In Brazil, rates have already gone up, and we expect them to continue increasing in 2022. If U.S. interest rates normalize earlier than currently expected, this would likely accelerate interest rate hikes in the region. In addition, fiscal policy will be tighter in 2022 than in 2021, as stimulus measures fade out, and in some cases, new taxes are introduced to pay for them.

Chart 7

image

Recent social and political instability will likely weigh on investment and reduce policy predictability, particularly the ongoing protests in Colombia over a proposed tax bill, the rise of anti-establishment political leaders in places like Peru, and an uncertain outlook for the drafting of Chile's new constitution. Middle- and lower-income households have been hardest hit by the pandemic, with important implications for policy, which at this point are highly uncertain. Lower levels of policy predictability could delay investment plans among some companies, at least until there is greater policy visibility.

Long-Term Outlook Unchanged

We continue to forecast long-term average growth in the region at roughly 2.5%. The region suffers from low productivity growth, which has averaged about 0.5% in the decade before the pandemic, a fraction of the nearly 5% average in emerging markets. The reason for low productivity is low and inefficient investment. Investment growth also averaged about 0.5% in the last decade (see chart 8), and on average, one unit of investment returns 50% less of GDP than in other emerging markets. The pandemic has not improved the investment picture in the region, which is why we do not see trend growth increasing post-pandemic. In fact, the risk of potential growth slowing has risen.

Chart 8

image

Low average economic growth means that progress in GDP per capita convergence is unlikely to materialize in the coming years. On average, GDP per capita in the region, as a share of U.S. GDP per capita, was about 30% ten years ago and remained at that level just before the pandemic. We believe it is likely to stay around this level by the end of our forecast period in 2024 (see chart 9). Lack of progress in income per capita convergence, in a context of high levels of inequality and higher levels of poverty due to the outsized impact of the pandemic on lower-income households, means that the risk of social instability will remain high. By consequence, this means that the potential for political volatility will also remain high, increasing the risk of lower investment in the region, which is the main reason growth in Latin America underperforms other emerging markets.

Chart 9

image

Our GDP Forecasts

Argentina:   We increased our 2021 GDP forecast to 6.9% from 6.1%, but we lowered our 2022 forecast to 2.1% from 2.5%. The economy continues to face severe constraints, including persistently high inflation, a heavy foreign-currency debt burden, and low foreign-exchange reserves, which means there is a scarcity of U.S. dollars in the economy. In light of these dynamics, economic growth will remain susceptible to large swings, keeping investment weak and the recovery slow. The pandemic is far from over, with new daily cases and related deaths among the highest in Latin America in per capita terms, which puts the economy at risk of further lockdowns this year.

Brazil:   We now project growth of 4.7% this year compared with 3.4% last quarter, but we expect growth to slow to 2.1% next year. Despite Brazil having some of the highest rates of new COVID-19 cases (and related deaths) in per capita terms, the economy has remained relatively open. This, combined with strong stimulus measures, has kept activity in services relatively resilient. However, the expiration of fiscal stimulus, aggressive monetary tightening, and uncertainty over next year's general election--in which former President Luiz Inácio Lula da Silva, known as Lula, is likely to run--will slow domestic demand. We see the risks to our 2022 growth outlook skewed to the downside.

Chile:   We increased our 2021 GDP growth forecast for Chile to 6.9% from 5.9%, as a third round of pension withdrawals has kept consumption levels higher than we anticipated so far this year. However, this also means consumption will slow sharply next year, and therefore we now foresee GDP growth at 2.9% in 2022, compared to our previous 3.6% projection. Uncertainty over the rewriting of Chile's constitution and the November general election, for which anti-establishment candidates are gaining popularity, will also likely delay investment plans.

Colombia:   We now forecast 7% GDP growth this year, up one percentage point from our previous projection. The performance of services has been stronger than we anticipated, and the country's key oil exports are recovering rapidly, in line with improving global demand. However, we lowered our 2022 growth projection to 3% from 3.5%. The ongoing protests over a proposed tax bill create a very challenging and unpredictable political outlook ahead of next year's general election, which we think will postpone investment decisions until there is more policy visibility. However, we expect oil exports to continue recovering this year and into 2022, as services sectors that rely heavily on energy--such as travel--normalize as the global vaccine rollout progresses.

Mexico:   We increased both our 2021 and 2022 GDP growth projections for Mexico, the only country for which this is the case in the region. We expect growth of 5.8% this year and 2.9% in 2022 (compared to 4.9% and 2.7%, respectively). Mexico is benefiting from--and will continue to benefit from--a strong U.S. recovery, via manufacturing exports and remittances. Exports are back to their pre-pandemic levels, and remittances are about 1% higher than normal of GDP. However, the investment picture, outside of manufacturing, remains relatively weak, partly because of government policies that have reduced investment incentives in key sectors, such as energy. Furthermore, because economic stimulus measures to offset the pandemic's impact have been lacking, at only about 1% of GDP in 2020, the damage to small and medium enterprises has been relatively large. This means recovery in many sectors dominated by small and medium enterprises could take longer than in peer countries.

Peru:   We forecast 11% GDP growth in 2021, up from 10.2% in our previous projection, due to a better-than-expected first-quarter result; we anticipated a contraction, but GDP was flat. However, most of the growth in 2021 is explained by a very high carry-over of over 14%, following the 11% GDP decline in 2020. We expect a contraction in the second quarter, driven by new lockdown measures and a deterioration in the pandemic's trajectory during that period. Political uncertainty has risen following Peru's highly polarized run-off election at the beginning of June, in which anti-establishment candidate Pedro Castillo became the new president. Investors will likely remain more cautious toward the country until there is higher visibility on the new administration's policies. This will contribute to slower GDP growth in 2022, which we project at 3.5%.

Appendix Tables

Table 3

Latin America: CPI Inflation And S&P Global's Forecasts (Year-End)
(%) 2019 2020 2021F 2022F 2023F 2024F

Argentina

53.8 36.1 49.0 40.0 32.0 30.0

Brazil

4.3 4.5 6.0 3.7 3.2 3.2

Chile

3.0 3.0 3.7 3.2 3.0 3.0

Colombia

3.8 1.6 4.0 3.2 3.0 3.0

Mexico

2.8 3.2 4.8 3.2 3.0 3.0

Peru

1.9 2.0 2.6 2.1 2.0 2.0
Source: Oxford Economics; F--S&P Global Ratings forecast.

Table 4

Latin America: CPI Inflation And S&P Global's Forecasts (Average)
(%) 2019 2020 2021F 2022F 2023F 2024F

Argentina

53.5 42.0 47.5 42.0 36.0 31.0

Brazil

3.7 3.2 7.0 4.4 3.5 3.2

Chile

2.3 3.0 3.6 3.4 3.1 3.0

Colombia

3.5 2.5 3.2 3.5 3.1 3.0

Mexico

3.6 3.4 5.0 3.5 3.1 3.0

Peru

2.1 1.8 2.4 2.3 2.0 2.0
Source: Oxford Economics; F--S&P Global Ratings forecast.

Table 5

Latin America: Central Bank Policy Interest Rates And S&P Global's Forecasts (Year-End)
(%) 2019 2020 2021F 2022F 2023F 2024F

Argentina

55.00 38.00 42.00 33.00 30.00 28.00

Brazil

4.50 2.00 6.50 7.00 7.00 7.00

Chile

1.75 0.50 1.00 2.25 2.50 3.00

Colombia

4.25 1.75 2.25 3.25 3.75 4.25

Mexico

7.25 4.25 4.50 5.25 5.50 5.50

Peru

2.25 0.25 0.75 1.75 2.50 3.00
Source: Oxford Economics; F--S&P Global Ratings forecast.

Table 6

Latin America: Year-End Exchange Rates And S&P Global's Forecasts (Versus U.S. Dollar)
2019 2020 2021F 2022F 2023F 2024F

Argentina

59.89 84.15 115.00 160.00 200.00 220.00

Brazil

4.03 5.20 5.30 5.40 5.45 5.50

Chile

745 729 735 740 745 745

Colombia

3,277 3,432 3,700 3,750 3,800 3,850

Mexico

18.93 19.88 20.50 21.00 21.50 22.00

Peru

3.31 3.65 3.90 3.95 4.00 4.00
Source: Oxford Economics; F--S&P Global Ratings forecast.

Table 7

Latin America: Average Exchange Rates And S&P Global's Forecasts (Versus U.S. Dollar)
2019 2020 2021F 2022F 2023F 2024F

Argentina

47.97 70.58 98.00 140.00 180.00 210.00

Brazil

3.94 5.16 5.30 5.35 5.43 5.48

Chile

703 792 725 738 743 745

Colombia

3,281 3,693 3,660 3,725 3,775 3,825

Mexico

19.25 21.49 20.15 20.75 21.25 21.75

Peru

3.34 3.50 3.80 3.93 3.97 4.00
Source: Oxford Economics; F--S&P Global Ratings forecast.

Table 8

Latin America: Average Unemployment Rate And S&P Global's Forecasts
(%) 2019 2020 2021F 2022F 2023F 2024F

Argentina

9.8 11.6 11.0 10.0 9.7 9.3

Brazil

11.9 13.5 13.9 12.7 12.1 11.6

Chile

7.2 10.8 10.0 8.7 8.1 7.5

Colombia

10.5 16.1 13.9 12.8 11.9 11.0

Mexico

3.5 4.6 4.3 4.2 4.0 4.0

Peru

6.6 13.9 12.7 9.8 8.5 7.3
Source: Oxford Economics; F--S&P Global Ratings forecast.

The views expressed here are the independent opinions of S&P Global's economics group, which is separate from, but provides forecasts and other input to, S&P Global Ratings' analysts. The economic views herein may be incorporated into S&P Global Ratings' credit ratings; however, credit ratings are determined and assigned by ratings committees, exercising analytical judgment in accordance with S&P Global Ratings' publicly available methodologies.

This report does not constitute a rating action.

Latin America Senior Economist:Elijah Oliveros-Rosen, New York + 1 (212) 438 2228;
elijah.oliveros@spglobal.com

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