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Regional analysis 07 Feb 2019

BBVA Research: "The global downturn will limit Latin America’s recovery"

BBVA Research modified its forecast of Latin America’s growth. The region will continue recovering, but growth will be more moderate and gradual than expected, primarily due to external factors. BBVA economists estimate that Latin America will grow 2.1% in 2019 and 2.14% in 2020 (or 0.3% and 0.2% less than previously expected, respectively).

When presenting the report, Latin America Economic Outlook 1Q19, BBVA Research Chief Economist for South America, Juan Ruiz, explained that slower growth in developed countries combined with greater financial volatility on a global scale, and lower commodity prices would have a negative impact on the region.

These outlooks expected in the international environment have led BBVA Research to alter its predicted growth for Latin America. They estimate that the region will grow 2.1% in 2019 and 2.14% in 2020 (0.3% and 0.2% less than previously expected, respectively).

“Despite the recovery, the region will not experience growth as robust as several years ago in the near future,” reported Juan Ruiz. He added that the reforms to boost productivity have been relatively scarce and insufficient to counteract the effects of lower commodity prices. The report specifies that growth will be higher in Peru, Chile, Colombia and Paraguay – where Gross Domestic Product (GDP) will be around 3.5%. Meanwhile, Mexico, Brazil and Uruguay will grow around 2% and Argentina will once again have negative growth in 2019. However, the country will continue its road to recovery quarter by quarter, pointing to 2.5% growth in 2020.

“Monetary normalization in the U.S. will also contribute to increase interest rates in the region”

Withdrawal of monetary stimulus measures and limited fiscal space

In terms of economic policies, BBVA Research indicates that there is little margin for expansionary fiscal policies in the region, in some cases due to high levels of debt, and in others to the need to comply with fiscal regulations. Therefore, in many cases, fiscal policy continuing to weigh on aggregate demand will be unavoidable.

However, the region will still benefit from lax monetary policies – except in Argentina and Mexico. And given the recovery in economic activity and gradual increase in inflation, central banks will slowly eliminate monetary stimulus measures in the coming years.

“Monetary normalization in the U.S. will also contribute to increase interest rates in the region, although to a lesser degree than previously anticipated, as we are now expecting two interest rate hikes from the Fed instead of three,” notes Juan Ruiz.

Meanwhile, monetary policy is expected to be less restrictive in Mexico and Argentina as inflation moderates. Interest rates are expected to be stable throughout the year in Mexico, while Argentina’s monetary base will not grow in the first half of 2019, but will increase by 1% in the second half of the year.

Inflation remains high in both of these countries, although there are signs of moderation. It is under control in the rest of the region and in line with central bank targets, except in Uruguay.

Volatility is putting pressure on exchange rates

Following currency depreciation in most of the region’s currencies in 2018, this trend is expected to change in 2019. BBVA Research reports that “global financial volatility will continue putting pressure on currency markets in the coming months, but there is room for the currencies to recover part of their losses throughout 2019 and 2020 – at least in Chile, Colombia, Mexico and Peru.”

In Argentina, currency depreciation is expected to continue, but at a slower place, similar to Brazil, which is subject to the markets’ expectations of its new government.

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