Amid a tougher global environment, emerging markets facing greater vulnerabilities are experiencing sharper currency depreciations

Global Economy
Emerging Markets under pressure
Trade war remains a major risk to China and the global economy, while US Fed continues its gradual hikes and Europe growth moderates amid rising political risks. In this tougher global environment, emerging markets are under pressure

Facing turmoil
Volatility returned in the region, damaging mostly emerging markets with weaker fundamentals.

A more volatile scenario
The recent slowdown in economic activity data and the worsening of financial conditions add downside risk to our growth forecasts.  

No time to lose
Argentina has committed to target a primary fiscal deficit of 0% of GDP in 2019 and asked the IMF to speed up disbursements to ensure debt service is met in 2019, as financial conditions in the country deteriorated further.

NAFTA deal closer, but not certain
President Trump announced a trade deal (agreement of understanding) with Mexico in the White house, while the new administration is promising additional expenditures for the 2019 budget.

The first reform   
President Piñera has presented a bill to modernize the tax law and boost investment. Without a majority in Congress, the bill is likely to be vigorously debated and modified before approval only sometime in early 2019.

A balanced recovery
Economic activity accelerated to 5.4% year over year in 2Q18, supported by investment and private consumption. Expansionary macro policies and favorable metal prices were key drivers.

Activity at a turning point
Activity rebounded in 2Q18, boosted by advancing consumption, while gross fixed investment is no longer shrinking. Nevertheless, growth remains below trend.


Emerging Markets under pressure amid a tougher global environment

In August, U.S. and China kept moving closer to a full-scale trade war, with President Trump threatening to impose tariffs on all imported Chinese goods. The Fed is likely to continue to gradually raise interest rates as U.S. growth remains above potential and the labor market is tight, but in the case of a full-blown trade war, we would expect more moderate rate hikes. In Europe, we see limited, albeit rising, political risks, with the far-right anti-EU Sweden Democrats party likely to post solid performance in the elections, but still unlikely to be a part of the government. The Italian budget process is another risk, given the government majority´s proposal, which significantly increases deficit.

Amid a tougher global environment, emerging markets facing greater vulnerabilities are experiencing sharper currency depreciations. In Argentina – a country with wide twin deficits, low reserves and high inflation – the exchange rate depreciated by 35% in August. While this helps to reduce the current account deficit, the government’s financing needs increased with the depreciation (given the high foreign currency share of public debt). In this context, the government asked the IMF to frontload disbursements, tightened monetary policy further, used part of its reserves and, more importantly, announced a faster fiscal deficit reduction (targeting a zero primary deficit next year, with the help of taxes on exports). The depreciation of the Mexican peso in the period was more modest, as authorities announced a bilateral trade agreement, which has the potential to become a trilateral agreement depending on negotiations with Canada. On the other hand, news on fiscal policy in Mexico have not been favorable as the new administration is promising additional expenditures for the 2019 budget.

In Brazil, recent data confirmed the slowdown in economic activity. Our GDP growth forecasts are at 1.3% for 2018 and 2.0% for 2019, but worsening financial conditions add downside risk to our call. Our estimates for the consumer price index (IPCA) are unchanged at 4.1% for 2018 and 4.2% for 2019. Similarly, our year-end forecasts for the exchange rate remain at BRL 3.90/USD for 2018 and 2019, but domestic and international uncertainties pose relevant risks to our view. With plenty of spare capacity and a low inflation backdrop, the Monetary Policy Committee will likely keep the benchmark Selic rate stable at 6.50% at its September meeting.

Fuente: Itaú

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