10 Mar Latin America 2022 Outlook
By Amanda N Perez
As the COVID-19 pandemic continues to evolve, regions rebounding from older variants continue to lose traction in their progressions as new variants emerge, as exemplified in the case of Latin America. Following the region’s economic rebound from the start of the pandemic with an average GDP growth of 6.4% last year, Latin America is projected to regress in its recovery in 2022, decelerating to 2.3% in the wake of the omicron variant. The surge of new variant COVID-19 cases this January has been affecting near-term economic growth, but the loss of overall momentum can be attributed to a myriad of interconnected factors, namely inflation, monetary policy tightening, and deteriorating political climates. With the issue of supply chain disruptions still prevailing, combined with resurgent demand, commodity prices will remain high, contributing to elevated inflation rates in a region already plagued by high inflation before the pandemic began. Also contributing to the region’s increased inflation rates, exchange rates and sovereign credit risk are likely to deteriorate, especially in countries relying on the International Monetary Fund. The combination of high inflation with large fiscal deficits is prompting monetary policy tightening, which is hurting investment climates. Political uncertainties in countries with elections this year are also dissuading investment as many left-wing parties are well placed to gain office.
However, this degression in recovery will not affect Latin America homogenously as asymmetries between developing and emerging countries affect their individual capacities to implement policy changes. These differences in key countries will be explored below.
Brazil, the largest economy in South America, is projected to account for the majority of financial growth in Latin America. The country has been emerging since its 2014 recession and led with the highest GDP in Latin America last year for a total of 4.7% growth, returning the country to pre-pandemic levels. However, this growth is expected to slow to 1.1% this year. Unsecured loans are expected to be vital for recovery, given the lack of credit availability, decline in real wages, and high unemployment rates. Nonetheless, these loans will likely face volatility due to increases in interest rates by the Central Bank of Brazil in response to elevated levels of inflation. Interest rates rose to 10.75% on February 2, 2022, and is projected to continue rising in correlation with the inflation rate. Demand for financing SMEs is projected to increase as transactions backed by trade receivable pools recovered strongly last year. Although, high inflation and interest rates compounded with supply chain disruptions will most likely continue to add pressure to production costs and liquidity requirements for most small and medium sized enterprises.
Brazil’s greatest risk however is lack of political cohesion as political gridlock and infighting will eliminate the government’s ability to pass reforms as instability shies investors away. The country will hold national elections in October of 2022, with former left-wing president Luiz Inácio Lula da Silva leading in the polls. If elected, his policies may contribute to Brazil’s escalating fiscal deficit, which already amounts to a net of 57% of GDP.
After a 5% rebound in GDP growth in 2021, Mexico, the second largest economy in Latin America with the second highest GDP last year, has a projected recovery rate estimated to slow to about 2.2% growth this year. Mexico has been underperforming economically for two decades and is not projected to regain pre-pandemic GDP levels in 2022. However, economic growth in the US is predicted to drive growth for Mexico, especially in light of recent trade agreements. Recent actions by the Mexican government led by leftist President Andrés Manuel López Obrador favoring state-owned companies are presenting to be high operational and security risks, potentially constraining investment and growth. This strengthening of the state’s role, along with contract revisions, is creating major distrust in Mexico’s regulatory processes, specifically in the energy sector, and is lowering business confidence. The country can make a turnaround, however, if Mexico begins to present sound economic policy and institutional stability.
Another policy risk is the most recent vote in February 2022 to increase interest rates to 6.0% in response to elevated inflation rates at 7.4%, the highest level in twenty years. This policy change was backed by recent nominated governor of Mexico’s Central Bank Victoria Rodriguez, indicating that tightening monetary policies will continue under her leadership. This tightening suggests that credit may decline, despite formal employment rates returning to pre-pandemic levels.
Argentina, the third largest economy in Latin America with the third highest GDP last year, has recovered from the pandemic’s hit on its GDP as a near 10% growth in GDP was seen last year. However, growth is set to slow this year to around 2.4% due to a lack of confidence in monetary policymaking, an unstable currency, high inflation, and a wide fiscal deficit. In an effort to combat the economic impact of COVID-19, the Fernández administration has granted extraordinary stimulus and expansionary monetary policies to bolster domestic and private-sector consumption. This private sector growth should be limited by high inflation, although the government intends to counteract through indexation and price controls. Meanwhile, the Central Bank of Argentina increased the liquidity rate to 40% early this year. This direct support to the population, however, will put pressure on the Argentinian peso and heighten the fiscal deficit.
The Fernández administration and the IMF recently reached an agreement on the repayment of the record high $57 billion loan obtained by the country in 2018. Under the original Stand-By Arrangement, Argentina was supposed to have repaid the largest portion of this loan between 2022 and 2023. After losses suffered due to the pandemic, the country’s ability to repay this debt became extremely unlikely given the time constraints set in 2018. There was widespread concern that the IMF would impose austerity measures as Argentina faced defaulting on this loan; however, the IMF decided to allow the country to continue its economic recovery instead by pushing back due dates while still maintaining certain payment targets. The IMF issued a statement on January 28, 2022, stating that the agreed fiscal path will improve public finances, reduce monetary financing, support social programs, and work towards addressing the issue of high inflation. As the details of this agreement are still in the works, the effects of the arrangement on Argentina’s recovery remain to be seen.
Economic growth and investment rates have been steadily increasing over the past two decades in Colombia, the fourth largest economy in Latin America. The country made a huge investment recovery of just below 12% of GDP in 2000 to an average of 23% in 2019. After increasing GDP growth to 9.1% last year after a 6.8% drop in 2020, the Colombia’s growth is expected to moderate to 2.3% this year. Both rates of growth can be attributed to oil, which accounts for about one third of the country’s exports, and unlike in the rest of Latin America, the rising price of this commodity is benefitting Colombia. However, vandalism and sabotage in politically unstable areas of the country are hurting this industry and increasing investor uncertainty. This political instability, exacerbated by uncertainty over the presidential elections and the deteriorating situation between the government and the Revolutionary Armed Forces of Colombia (FARC), combined with fiscal constraints, growing inflation, and the devaluation of the Colombian peso, will most likely decrease foreign business investments until 2023.
On the domestic side, private consumption fueled Colombia’s recovery in 2021 as demand rose and the government practiced expansionary fiscal policies. The finance ministry intends on continuing these policies, planning to invest 10% of GDP into mitigating the effects of the pandemic on the economy and raising the minimum wage by 10%. However, these policies, in conjunction with the acceleration in Colombia’s annual inflation rate to 6.9% this January, are putting pressure on the central bank to raise the interest rate, which is currently at 4.0% as of January 31, 2022.
Peru was one of Latin America’s greatest economic success stories as it increased its average annual GDP growth to 4.8% from 2000-20019, until the pandemic of 2020 which dropped growth by -11.1%. GDP growth has since recovered by 3.0% and is projected to remain unchanged for 2022. As covid restrictions began to relax and new rounds of stimulus payments were made to Peruvian households, private consumption began to recover last year.
However, this growth is threatened by severe political and policy uncertainty under newly elected President Pedro Castillo. Protests temporarily halted Las Bambas mine operations in December of last year. As mining generates two-thirds of export revenues, these protests are lowering forecasts for exports and GDP growth. Leftist Pedro Castillo himself poses a threat to Peru’s economic outlook as he has proposed revisions to the country’s open-economy model in favor of a much stronger role for the state. These policy shifts have already induced withdrawals of foreign investments, coinciding with a 14% currency depreciation uncharacteristic of the sol. Fundamental changes to Peru’s economic model may prove unfeasible given insufficient representation of his agenda in Congress; however, much is dependent on the cabinet ministers chosen by new historically right-wing Prime Minister Hector Valer.
Puerto Rico is predicted to have its economic recovery ease for the year of 2022 as GDP growth is set to expand by 1.5%. This recovery will be fueled by new changes in legislature and policymaking, as the government hopes to initiate Puerto Rico’s emergence from bankruptcy for the first time in six years. With the recent approval of their plan of adjustment by federal Judge Laura Taylor Swain, the outstanding debts of the commonwealth will be decreased from $33 billion to $7.4 billion, an almost 80% reduction. The deal will save the government more than $50 billion in debt payments, but creditors will still receive an average of 69% of their claims and GO bond recovery rates are set at 95% for older bonds and 83% for newer ones. This plan gives the government the ability to focus funds on quality-of-life initiatives, public education, public safety, public health, and pension trusts. While the plan has garnered much criticism and debate, the plan of adjustment will allow Puerto Rico to focus on implementing effective policies for economic growth and, finally, leave bankruptcy.
Another policy in the works that could bolster the economic recovery of Puerto Rico is the “Build Back Better” initiative under which the commonwealth would receive almost $3 billion in Medicaid in 2023 and a total of $2.5 billion of SSI assistance each year. These policies would repair significant inequalities Puerto Rico has faced as a US territory as the federal government currently covers only 55% of the island’s Medicaid costs and the commonwealth previously had not had access to any SSI assistance. While the bill has not yet passed the Senate, Senate Majority Leader Chuck Schumer has promised a revision to be brought back to the floor for voting.
Most recently on March 8, 2022, Governor Pierluisi reported that the government will dissolve the Puerto Rico Electric Power Authority’s Restructuring Support Agreement (the “PREPA RSA” or the “agreement”) of 2019. The agreement was introduced as a method for PREPA to exit Title III Bankruptcy by restructuring the $9.3 billion debt the agency accumulated. However, this agreement did not account for all the claims PREPA is at liberty to meet, and the terms are no longer feasible given the global pandemic and its economic repercussions that arose following the agreement. The governor stated that the next plan of adjustment will provide a more realistically achievable strategy for emerging from Title III Bankruptcy given the commonwealth’s current state of financial affairs, encourage conversion to a renewable energy source, protect PREPA’s pensioners, and ensure a reliable and affordable electric power to the residents of Puerto Rico.
Costa Rica, following a steady economic growth pattern over the past 25 years, is set to continue to progress with predicted GDP growth of 3.8% for this year. After a 4.6 % drop in GDP following the start of the pandemic in 2020, government spending and private consumption growth have helped bolster the country’s recovery. While most economic activities have recovered, tourism has been hit the hardest given COVID-19 travel restrictions and lockdowns, negatively impacting recovery rates. Correlating strongly with this drop in tourism was the rise in unemployment in Costa Rica to 17.4%. The acceleration of global inflation is also proving to be a detriment as the rise of commodity prices has deteriorated the country’s trading abilities.
In order to aid in the economic recovery of Costa Rica, the IMF agreed to provide a $1.7 billion loan to the country last year. However, the legislative assembly has been delaying approval of the policies in the loan agreement, calling the IMF too austere in their measures. This postponement could lead to a suspension of the agreement, thus providing an unfavorable likelihood of financial support from other institutions.
Another political risk to economic recovery was the failure to produce a clear winning candidate in last year’s presidential elections, and as such, will likely reduce investment. While current President Carlos Alvarado has remained committed to recovery through narrowing of the fiscal deficit and supporting outward-oriented strategy based on foreign investment and trade liberalization, there may be a delay in large-scale investments until there is more clarity on policy direction.
Sources: IHS Markit, Reuters, Financial Times, Bloomberg, The New York Times, IMF, The Tico Times, The Weekly Journal, U.S. News, OECD, The Economist Intelligence Unit, Oversight Board, Focus Economics, Trading Economics, Statista, Worldbank, CEPAL, Fitch Ratings, New York Fed, Clarín, The Hill, Puerto Rico Fiscal Agency and Financial Advisory Authority