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Economic Outlook Latin America Q4 2021: Settling Into The New Post-Pandemic Normal Of Slow Growth

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Economic Outlook Latin America Q4 2021: Settling Into The New Post-Pandemic Normal Of Slow Growth

Latin American economies performed better than expected during the second quarter. The services sectors in the region were more resilient to the COVID-19 delta variant than we envisioned. Exports also performed well, especially commodities. Although we projected a mild contraction, average GDP grew 0.1% quarter on quarter in the largest six Latin American countries (the LatAm 6, which comprises Argentina, Brazil, Chile, Colombia, Mexico, and Peru). The biggest upside surprise was Chile, which expanded 1.0% quarter on quarter despite reimposing lockdowns, due primarily to very strong growth in durable goods consumption (12.6% quarter on quarter), boosted by allowances to withdraw funds from individual pension accounts. This pushed up our 2021 GDP growth projection for the LatAm 6 by half a percentage point to 6.5%, after contracting 6.8% in 2020. Our forecasts for 2022 and beyond remain broadly unchanged, as we see the region converging toward its long-term average of around 2.5% growth. The region will continue to face the same structural economic challenges it did before the pandemic: slow productivity growth, driven by low and inefficient investment.

Table 1

Latin America: GDP Growth And S&P Global's Forecasts
(%) 2019 2020 2021F 2022F 2023F 2024F
Argentina (2.0) (9.9) 7.2 2.1 2.2 2.0
Brazil 1.4 (4.4) 5.1 1.8 2.2 2.3
Chile 0.9 (6.0) 9.0 2.5 3.0 3.0
Colombia 3.3 (6.8) 8.0 3.0 3.3 3.2
Mexico (0.2) (8.5) 6.2 2.9 2.2 2.1
Peru 2.2 (11.0) 12.0 3.0 4.0 3.5
LatAm 5 0.7 (6.6) 6.2 2.4 2.3 2.3
LatAm 6 0.8 (6.8) 6.5 2.4 2.5 2.4
Note: The LatAm GDP aggregate forecasts are based on PPP GDP weights. LatAm 5 excludes Peru. PPP--Purchasing power parity. Source: Oxford Economics; F--S&P Global Ratings forecast.

Table 2

Change In Base GDP Forecasts From September 2021
(%) 2021 2022
Argentina 0.3 0.0
Brazil 0.4 (0.3)
Chile 2.1 (0.4)
Colombia 1.0 (0.0)
Mexico 0.4 0.0
Peru 1.0 (0.5)
LatAm 5 0.5 (0.1)
LatAm 6 0.5 (0.1)
Note: The LatAm GDP aggregate forecasts are based on PPP GDP weights. LatAm 5 excludes Peru. PPP--Purchasing power parity. Source: Oxford Economics; F--S&P Global Ratings forecast.

The region will return to its pre-COVID-19 GDP level in the first quarter of 2022 on average, meaning a generally slower recovery than most of the major economies in the globe (see chart 1). According to our projections, Brazil, Chile, and Colombia return to their pre-pandemic GDP levels in the second half of this year, Mexico and Peru at the beginning of 2022, and Argentina toward the end of 2022. However, by the end of 2022 the region on average will still be about 4% below its pre-pandemic GDP trend--the difference between actual GDP and where it would have been if it would have continued growing at the same average pace before the pandemic. Most of this 4% is output that will not be recovered and is mostly concentrated in the services sectors.

Chart 1

image

The Pandemic Will Have Less Of An Impact On GDP

While COVID-19 is not going away anytime soon, and lockdowns to prevent the spread of future COVID-19 variants are still on the cards, its impact on GDP is falling. Lockdowns will become less of a drag on GDP growth, as they have become narrower in scope, targeting a smaller number of sectors. Businesses and households have also become more comfortable with living in a pandemic, which will help activity continue to normalize. However, the same logic applies to ending lockdowns, which is likely to boost GDP less than in recent quarters, as Latin American economies are already operating close to normal in most sectors, especially those that have a higher share of GDP. In other words, the link between pandemic-specific developments and GDP growth is diminishing and will likely continue to do so in the coming quarters.

Table 3

image

We can examine this in greater detail by looking at the sectors for which output is the farthest away from their pre-pandemic GDP level. These are the sectors that could benefit more from reopening as vaccination progresses. As table 3 shows, it is no surprise that most of the sectors that are laggards in the recovery are in the services segments that were most affected by lockdowns (recreation, hotels and restaurants, transportation). However, most of these sectors are also relatively small as a share of GDP, which means a return to normal in those sectors would not have a very strong impact on overall GDP growth, in most cases.

Table 4

Latin America: Sectorial Output Performance
Top-three worst-performing sectors Top-three sectors with highest share of GDP
(%) Average output versus pre-pandemic level as of Q221 Average share of GDP Average output versus pre-pandemic level as of Q221 Average share of GDP
Brazil (4.3) 13.2 (2.8) 16.1
Chile (15.6) 6.3 3.5 10.9
Colombia (19.6) 5.8 2.0 11.7
Mexico (29.1) 1.5 0.0 12.3
Average (17.2) 6.7 0.7 12.8
Source: Haver Analytics, S&P Global Ratings. Note: GDP shares are calculated as five-year averages from 2015-2019.

For example, the three worst-performing sectors across the major Latin American economies by this measure are Mexico's recreation sector, Mexico's hotel and restaurants sector, and Colombia's construction sector. Output in these sectors is on average 32% below the pre-pandemic level, but it only accounts for 3% of GDP of their respective economies on average. If we look at the top-three worst-performing sectors for each country across the region, on average, output is 17% below the pre-pandemic level, but their average contribution to GDP is just shy of 7% of GDP (see table 4). Conversely, the three largest sectors as a share of GDP in the region contribute nearly twice to GDP on average (almost 17%), and they are already 0.7% above their pre-pandemic level. As a result, the potential for large pandemic-driven quarterly GDP swings that we saw in 2020 and early 2021 is less likely, even as activity continues to normalize in sectors that are still operating under capacity. We expect GDP growth to fluctuate closer to its long-term trend than it has in recent quarters, which is roughly 0.5% on a quarter-to-quarter basis for the LatAm 6.

Trade, Monetary, And Fiscal Policy Will Affect Growth In 2022

As the impact of the pandemic on GDP subsides, factors that are not directly tied to COVID-19 will play a stronger role in influencing growth. These include trade, monetary, and fiscal policy and the implications of low policy predictability on investment. Starting with trade, it is likely to be less supportive than in recent quarters. Demand for the region's commodity exports, in particular industrial metals, has been very strong, fueled by stimulus measures around the globe. Exports in the region returned to their pre-pandemic level in the first half of this year (see chart 2). However, when stimulus measures are removed and major advanced economies begin shifting away from consumption of goods toward services as lockdowns are relaxed, this should soften demand for the region's exports of goods. Trade will likely be less of tailwind for Latin America in 2022 than it has been this year.

Chart 2

image

Moving to monetary policy, the ongoing normalization in interest rates that is happening across the region, in reaction to rising inflation, is also likely to soften domestic demand in 2022. Headline inflation across the region is above central bank targets, and in most cases inflation expectations for 2021 and 2022 are also above those levels. While temporary factors--such as the rapid rise in energy prices, supply-side disruptions, and the pass-through of weaker exchange rates on prices of imported goods--certainly play a role, core inflation is also rising rapidly. Core inflation in the region is already higher than its pre-pandemic level by two percentage points on average, and upside pressures will likely remain as the services sectors gradually reopen.

Chart 3

image

As a result, we see most central banks continuing to increase interest rates through the end of 2021 and into 2022. Real interest rates, in places like Brazil and Chile, are already above their pre-pandemic level, and in most other major economies they will approach those levels next year (see chart 4).

Chart 4

image

Fiscal policy will also be a drag on growth in 2022, as stimulus is removed, and in some cases, new taxes are introduced to pay for the COVID-19 stimulus bill. Removing stimulus measures--in an environment of high social discontent, high inflation, and high unemployment--will be a very challenging task politically. As a result, the risk of fiscal slippage is high. However, the greater the fiscal slippage, the greater the pressure for central banks to compensate the added fiscal risk premia through higher interest rates.

Finally, policy in the region has become less predictable because of the pandemic, with negative implications on investment. Middle- and lower-income households have been hardest hit by the pandemic--and in several cases have taken to the streets. Less-known political leaders have become increasingly popular as a result, and some have won key elections. Several Latin American economies will have important election cycles between the end of 2021 and 2022, and the rise of political figures that are less known reduces visibility over the future trajectory of policies. This is likely to at least delay some investment decisions, until there is more policy visibility.

Key Downside Risks Are Persistently High Inflation, Social Instability, The Fed, And China

More contagious variants of COVID-19 that trigger strict lockdowns will likely remain a risk to our outlook for some time. However, there are several risks that are not pandemic specific. The recent increase in domestic inflation, if it continues to persist in 2022, could prompt more aggressive monetary tightening than we envision, taming demand more than we expect. Several factors could lead to this, for example, continued supply-side bottlenecks, weaker exchange rates, or the potential for electricity shortages in the case of Brazil. In the current environment of high joblessness, further bouts of social instability could directly disrupt activity and amplify policy uncertainty, with negative implications for investment.

Two risks come from abroad--one from the U.S. and one from China. There is a risk that U.S. policy normalization happens earlier than what is currently priced in the market. The resulting repricing could cause market volatility, including widening spreads and diminished market access for higher-risk borrowers, leading to asset price volatility and downward adjustments, with knock-on effects on growth. Finally, if recent financial troubles facing Chinese property market developer Evergrande become more widespread, this could also take a toll on Latin American activity. This could play out through three channels: first, by tightening credit conditions for Chinese companies that invest in infrastructure in Latin America; second, by having a negative impact on commodities, by reducing the outlook of Chinese investment on infrastructure, which relies heavily on industrial metals; and third, by increasing risk aversion toward emerging market assets.

Our GDP Forecasts

Argentina:   We increased our 2021 GDP forecast to 7.2% from 6.9%, but we kept our 2022 growth forecast unchanged at 2.1%. This implies the economy will be among the slowest to recover in the region from the COVID-19 downturn, returning to its pre-pandemic GDP level toward the end of 2022. Inflation is likely to stay close to 50% year over year through the rest of 2021 and into early 2022, driven by wage adjustment and high cost of imported goods. The exchange rate will remain under pressure, given the combination of lower foreign-exchange reserves and a heavy foreign-currency debt burden. A recent cabinet shuffle, amid apparent tensions within the ruling coalition headed by President Alberto Fernandez, increases policy uncertainty ahead of the Nov. 14 presidential election. This increases pressure to ease fiscal policy, which will likely mean the net fiscal drag will be large next year. Conversely, if fiscal policy remains expansionary, inflation will be higher, and depreciatory pressure on the currency will also increase.

Brazil:   We increased our 2021 GDP growth forecast to 5.1% from 4.7% previously. This implies relatively subdued quarterly growth in the second half of this year, as the boost from stimulus measures fades. We lowered our 2022 growth projection to 1.8% from 2.1%, mainly due to higher inflation and tighter monetary policy than previously anticipated. Inflation is close to 10% year over year, and the potential for electricity surcharges amid a record drought that significantly lowered water reserves in hydropower plants risks keeping inflation high next year, too. This is likely to encourage the central bank to continue increasing interest rates in order to anchor inflation expectations, which are currently well above the target. We see the central bank policy rate ending the year around 8%, implying 600 basis points total in rate hikes in 2021. Fiscal policy will also be a drag on growth next year, as stimulus measures expire. Finally, uncertainty over next year's general election--in which former President Luiz Inácio Lula da Silva, known as Lula, is likely to run--could also result in delays to investment. We see the risks to our 2022 growth outlook skewed to the downside.

Chile:   We increased our 2021 GDP growth forecast for Chile to 9% from 6.9%, following much stronger-than-expected growth in the second quarter. The third round of pension withdrawals boosted consumption significantly, especially of durable goods, which grew 12.6% compared with the first quarter. However, this also means consumption will slow sharply next year as more pension-withdrawal-related spending seems less likely. Therefore, we now foresee GDP growth at 2.5% in 2022, compared to our previous 2.9% projection. Uncertainty over the rewriting of Chile's constitution and the November general election will also likely temper investment plans.

Colombia:   We now forecast 8.0% GDP growth this year, up from 7.0% previously. Despite the impact from nationwide protests at the beginning of the second quarter, the economy recovered swiftly since then. Consumption in particular has performed above our expectations in recent quarters, and it is now 4.5% above its pre-COVID-19 level, boosted by stimulus measures. Oil exports still have a long road to recovery, but they will perform better as travel-related and energy-dependent services continue to reopen in the coming quarters. Our 2022 growth forecast remains unchanged at 3%. The removal of stimulus measures will likely slow consumption next year, which will be a main driver of slower GDP growth.

Mexico:   We increased our 2021 GDP growth projections to 6.2% for Mexico from 5.8% previously. Second-quarter GDP growth was slightly better than what we envisioned, helped by a continued recovery in consumption as lockdowns in the country have been very limited in scope. Mexico is benefiting from--and will continue to benefit from--a strong U.S. recovery, via manufacturing exports and remittances, though manufacturing production has suffered from some disruptions due to the ongoing global shortage of microchips. Despite this, exports are about 4% above their pre-pandemic level, and remittances as a share of GDP are about 1% higher than normal. We project growth of 2.9% in 2022, with a weak investment outlook, especially outside of the manufacturing sector. This is partly because government policies have reduced investment incentives in key sectors, such as energy.

Peru:   We forecast 12.0% GDP growth in 2021, up from 11% in our previous projection, due to a better-than-expected first-quarter result; we anticipated a contraction, but GDP was flat. This puts the statistical carry-over impact on annual GDP growth for 2021 well above 10%. However, we lowered our 2022 GDP growth forecast to 3.0% from 3.5% previously. Despite this year's high growth number, given the 11% contraction in 2020, Peru will be among the last economies in the region to return to its pre-COVID-19 GDP level, which we project to happen in the second half of 2022. Political uncertainty has risen following Peru's highly polarized election in June, in which the largely unknown 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.

Appendix Tables

Table 5

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 8.1 4.0 3.2 3.2

Chile

3.0 3.0 5.9 3.2 3.0 3.0

Colombia

3.8 1.6 5.5 3.5 3.0 3.0

Mexico

2.8 3.2 6.2 3.2 3.0 3.0

Peru

1.9 2.0 5.3 2.4 2.0 2.0
Source: Oxford Economics; F--S&P Global Ratings forecast.

Table 6

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 7.8 5.9 3.5 3.2

Chile

2.3 3.0 4.2 4.6 3.2 3.0

Colombia

3.5 2.5 3.6 4.3 3.2 3.0

Mexico

3.6 3.4 5.5 4.3 3.2 3.0

Peru

2.1 1.8 3.8 4.0 2.2 2.0
Source: Oxford Economics; F--S&P Global Ratings forecast.

Table 7

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 38.00 33.00 30.00 28.00

Brazil

4.50 2.00 8.00 8.50 7.00 7.00

Chile

1.75 0.50 3.00 3.50 3.50 3.50

Colombia

4.25 1.75 2.75 3.75 4.25 4.25

Mexico

7.25 4.25 5.00 5.50 5.50 5.50

Peru

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

Table 8

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 84.15 110.00 155.00 200.00 220.00

Brazil

4.03 5.20 5.25 5.35 5.40 5.45

Chile

745 729 750 755 760 760

Colombia

3,277 3,432 3,725 3,750 3,800 3,850

Mexico

18.93 19.88 20.50 21.00 21.50 22.00

Peru

3.31 3.65 4.00 4.05 4.10 4.10
Source: Oxford Economics; F--S&P Global Ratings forecast.

Table 9

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 97.01 132.50 180.00 210.00

Brazil

3.94 5.16 5.30 5.30 5.37 5.43

Chile

703 792 740 753 757 760

Colombia

3,281 3,693 3,715 3,740 3,775 3,825

Mexico

19.25 21.49 20.15 20.75 21.25 21.75

Peru

3.34 3.50 3.88 4.03 4.08 4.10
Source: Oxford Economics; F--S&P Global Ratings forecast.

Table 10

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

Argentina

9.8 11.6 10.0 9.3 9.0 8.6

Brazil

11.9 13.5 14.0 12.9 12.3 11.8

Chile

7.2 10.8 9.3 8.9 8.2 7.6

Colombia

10.5 16.1 14.5 13.1 12.2 11.5

Mexico

3.5 4.6 4.4 4.3 4.1 4.1

Peru

6.6 13.9 11.6 8.7 8.3 8.2
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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