LatAm still struggles despite favorable global environment

Global growth is holding up in the second quarter, while inflation is going through a soft patch in developed markets and will likely become mixed in China. With slower reflation, the pressure on global interest rates is modest. Steady growth, modest private-sector leverage and a still-easy monetary-policy stance sustain risk appetite.

This favorable global environment makes life easier for LatAm countries, but growth in the region is still far from robust. 1Q17 growth was strong in Brazil and Argentina, but not widespread. Given the political uncertainties in Brazil, we reduced our growth forecasts for the country and, consequently, for Argentina as well. The Mexican economy is losing dynamism, as inflation reduces real wages and uncertainty over trade relations with the U.S. affects investment decisions. Growth in Chile, Colombia and Peru has been weak, even when excluding specific factors such as El Niño in Peru and strikes in the Chilean mining sector. We have reduced our growth forecast for Colombia as well.

Back to Brazil, the main problem that arises with the complex political situation is that it will probably delay much needed reforms that require congressional approval. This increases the challenge to regain fiscal equilibrium, with negative impacts on asset prices and business and consumer confidence.

We reduced our GDP growth forecast to 0.3% this year and 2.7% in 2018, and now anticipate a weaker exchange rate, at 3.50 reais per U.S. dollar by the end of 2017 and 3.60 in 2018. In light of recent favorable releases, we have trimmed our forecast for the IPCA consumer price index in 2017 to 3.7%, but lifted our call for 2018 to 4.1% from 3.8% due to the expectation of exchange-rate depreciation. The Selic rate is now expected to reach 8.0% by the end of this year.

Fuente: ITAU

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