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Economics & Country Risk Research & Analysis


EMERGING RISKS IN LATIN AMERICA IN 2022

05 January 2022 Carlos Caicedo Jeremy Smith Rafael Amiel, Ph.D.
 * Latin America will start 2022 in a very fragile position given the economic
   fallout from the Coronavirus disease 2019 (COVID-19) pandemic, a deteriorated
   fiscal position, weak FDI, and the erosion of real wages due to high
   inflation.
 * The strong economic rebound in the second half of 2021 is likely to slow in
   2022, not least because of rising policy rates (notably in Brazil).
 * Business uncertainty will be compounded by tightly contested elections in
   major countries (Colombia and Brazil) where marked policy shifts appear to
   have significant probability; the victory of the left in Chile further
   compounds uncertainty.

Economic rebound will likely lose momentum due to tighter monetary policy,
declining real wages, and a deteriorating political environment for businesses.

Following a partial regional rebound in 2021 from the COVID-19-induced
recession, external demand will be the main driver of growth in 2022. IHS Markit
forecasts 4.3% real GDP growth for the world economy and 4.1% for the United
States, the primary trading partner of many Latin American countries, implying
increased exports along with higher remittances and expanded foreign direct
investment. Although the Omicron variant brings renewed global economic
uncertainty, strict lockdowns and mobility restrictions are unlikely in Latin
America.

However, high inflation will constrain private consumption through tightened
monetary policy and eroded household purchasing power. Political and policy
uncertainties will damage business sentiment and near-term investment in Brazil,
Colombia, Peru, and Chile.



Left-wing parties are well-placed to gain office in Brazil and Colombia, posing
a major threat to the business environment.

The leftward shift, already seen in Peru, Bolivia, and Chile in 2021, appears
likely to continue this year. A victory for former president Luiz Inácio Lula da
Silva would pose significant uncertainty for Brazilian fiscal policy, which
remains the country's main challenge given a large structural fiscal deficit and
a very high public debt. In Colombia, a victory for Gustavo Petro of the radical
left would lead to a hostile stance towards the oil and mining industries,
potential reviews of infrastructure contracts, and an expansionary fiscal stance
rejecting austerity.

Latin American currencies face near-term downside risk from political
uncertainty but could well recover in late 2022.

Latin America's electoral calendar will strongly influence exchange rates in
early 2022, as foreshadowed by Peru's large-scale capital flight and 14%
currency depreciation following President Pedro Castillo's unexpected victory in
2021. Threats to policy continuity, weak public finances, and earlier US Federal
Reserve interest rate tightening are common stresses.

Nonetheless, there should be scope for recovery later in 2022. Politics-driven
depreciation may lead to overshoot, and new administrations may moderate their
rhetoric to stem currency weakness. The external environment should also remain
broadly favorable.



Regional inflationary pressures will continue, prompting further monetary policy
tightening, but should ease later in 2022 as energy and food price inflation and
supply-chain disruptions abate.

Monetary authorities in Brazil, Peru, Colombia, Mexico, and Chile have increased
their policy rates in response to high inflation, reflecting the autonomy they
enjoy. In Brazil, inflation reached double digits in September, bringing the
most aggressive response from any central bank.

Worryingly, inflation in services is also increasing, implying there have been
second-round effects or contagion from commodity-driven inflation. IHS Markit
expects oil prices to decline in 2022, reducing external inflationary pressures,
but supply chain relief is unlikely before late in the year. Semiconductor
import shortages will hurt carmakers in Mexico, Brazil, and Argentina, and Latin
American exporters of perishable agriculture goods face shortages and high
prices of fertilizers into early 2023. Strikes by truck drivers' associations in
Argentina, Brazil, Chile, and Peru are an additional risk.



High provisioning and capital ratios should mitigate systemic asset quality
risks in the banking sector.

Throughout the pandemic, both small and medium-sized enterprises (SMEs) and
nonmortgage consumer debt have been the weakest segments in terms of impairment
(as measured by recorded non-performing loans) and for indicators of future
deterioration. In Ecuador, Honduras, Panama, and Peru, full impairment in the
banking sector is still to be realized, with many loans still benefiting from
forbearance. The banking sectors in Mexico, Brazil, and Chile exhibit a
healthier position but higher interest rates are likely to lead to increased
defaults involving heavily leveraged debtors.

Sovereign credit risk is likely to deteriorate, particularly in countriesrelying
on International Monetary Fund (IMF) support.

Argentina, which has delayed reaching an agreement with the IMF on rescheduling
its existing liabilities, will struggle to meet the Fund's demands for fiscal
and monetary restraint given government reluctance to embrace austerity.
Political opposition to fiscal reform packages complicate IMF disbursements to
Costa Rica and Ecuador, and Fund talks with El Salvador have been jeopardized by
the introduction of Bitcoin as legal tender. Pressure on Brazilian and Colombian
public finances may worsen following the 2022 elections.

Oil-producing countries will accelerate the monetization of hydrocarbons
post-COP 26, but renewables offer increased opportunities for foreign investors.

In the context of a growing global ESG focus, Brazilian deforestation creates
reputational risk and threatens further delays to the EU-Mercosur trade
agreement. In addition, proposed EU carbon tariffs would disproportionately
impact Latin America's key sectors, including oil and gas, agribusiness, coal,
and cement production. Nonetheless, renewable energy has become the most
attractive sector for FDI in Latin America, according to the United Nations
Economic Commission for Latin America and the Caribbean, with investment
opportunities in Brazil, Chile, and Colombia standing out.

Posted 05 January 2022 by Carlos Caicedo, Senior Principal Analyst, Latin
America Country Risk, IHS Markit and

Jeremy Smith, Sr. Economist, Economics and Country Risk, IHS Markit and

Rafael Amiel, Ph.D., Director, Latin America & Caribbean Economics

Previous Economics & Country Risk Post All Economics & Country Risk Next
Economics & Country Risk Post


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