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Financial reports 27 May 2016

BBVA Research: “Growth will vary significantly across Latin America, but will increase from 2016 to 2017 in all countries”

Slow recovery of commodity prices and weak economic activity have affected tax revenue. This has lead to adjustments in government spending in many Latin American economies. Therefore, despite some recovery in commodity prices over recent months, BBVA Research has lowered its growth outlook for the region to an expected contraction of -1.1% in 2016. In its Latin America Economic Outlook report on the second quarter, BBVA Research affirms that it does expect to see 1.7% growth in 2017.

Growth is not uniform, but depends on each country. “It is difficult to talk about Latin America’s growth outlook as a whole, given the wide range of changes in growth we expect,” explains Juan Ruiz, BBVA Research’s Chief Economist for Latin America. “On the one hand, we have Brazil with a recession that will put it around -3%, similar to last year. On the other, there are the countries of the Pacific Alliance (Chile, Colombia, Mexico and Peru) which will grow an average of 2.3% this year,” he continues.

Rising commodities

BBVA Research found that the global economic scenario has improved, although global growth will remain low. Lower global risk aversion over recent weeks has boosted commodity prices, and in general, the price of Latin American financial assets.

Most countries in the region will make significant adjustments in spending

However, recovery of commodity prices (a substantial number of countries in the region export commodities) has been slow and insufficient to compensate for the adjustments in government spending in many countries. This will weigh on growth in 2016.

“Most countries in the region will make significant adjustments in spending, greater than expected three months ago, with the notable exception of Brazil,” explains BBVA Research’s report.  Slow recovery of commodity prices and weak economic activity have affected tax revenue, which has led many countries to announce cutbacks. Lower government spending largely explains lower expected growth.

BBVA Research has lowered its growth outlook for Latin América to an expected contraction of -1.1% in 2016, but expects to see 1.7% growth in 2017.

Economic activity will recover in 2017

“What we do see in common for most countries in the region is higher growth in 2017, for two main reasons,” explains Juan Ruiz. “First, the external sector will contribute more to growth in 2107 due to greater global growth and some improvement in the terms of trade. Internally, we expect to see a strong push from investment countries like Argentina, Peru or Colombia.” BBVA Research estimates 1.7% growth for the region in 2017.

Peru, Paraguay, Mexico, Colombia and… Argentina will grow the most

Peru (+3.6%), Paraguay (+3.1%) Mexico (+2.2%) and Colombia (+2%) are the countries with the highest growth for 2016. They will also be the most dynamic in the region in 2017, when Argentina will join them with estimated growth of 3.2% for next year, “once the economic normalization program has corrected this year’s imbalances and private investment recovers,” the report maintains.

What we do see in common for most countries in the region is higher growth in 2017

Central banks’ wait-and-see policy

Inflation pressure has declined slightly in the region thanks to the appreciation of exchange rates due to less financial tension and less risk aversion in international markets. This situation is allowing central banks to adopt a wait-and-see policy for their monetary stance, except in Colombia where BBVA Research expects to see higher interest rates in the short term. “The recent moderation of inflation and weak internal demand will make central banks leave their interest rates untouched for the rest of the year in Brazil, Chile, Peru and Paraguay,” notes the report. “On the other hand, rising inflation in Colombia will continue, leading to interest rate hikes up to 7.5%, while Mexico will continue to follow the U.S. Federal Reserve’s decisions to raise rates. Argentina and Uruguay will maintain a restrictive monetary policy.”

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