Market Outlook 2021 Latin America

After posting its worst recession in modern history in 2020 due to the Covid-19 hit, multilateral and international institutions forecast a recovery for Latin American economies in 2021 as external demand and domestic activity revive. According to Standard & Poor, the region’s GDP is expected to grow 4.1% in 2021 (vs. -5.3% FY20).

In 2020, Latin America affronted social and economic challenges. Before the crisis, economies were growing below the average, and after it, most of them enter a recession. There was inefficient government support to sustain the labor market and firms, especially SMEs. There are high rates-of-unemployment and inflation, especially in countries such as Argentina (11,7%; 35,8%), Brazil (14.3%; 4,31%), and Mexico (4,7%; 3.33%). Fiscal stimulus varied widely, reaching 12% of GDP in Brazil and 1% of GDP in Mexico. However, the fiscal stimulus will expire in most countries at the end of 2020.

Despite liquidity measures implemented by the central banks and the flexibility of adjusting spending programs, there are some countries which budgetary restriction is limited. Furthermore, the downsloping in intern demand and the increase of unemployment rates are causing a deterioration on sovereign debt. As an example, countries such as Spain and Greece are expected to have a major economic contraction.

The impact of reduced fiscal support on economic growth could be quite dramatic, mainly because domestic demand has been affected by unemployment. Real fixed investment growth has been just 0.3% since the financial crisis, compared to 5% in emerging markets overall, due to high unpredictability in government policies, heavy regulatory burdens, large informal sectors, and low public investment.

The outlook for markets in Brazil, Mexico, and Argentina (the biggest economies in the region) is uncertain. Brazil has not presented a vaccination program, and households, at the beginning of 2021, expect to stop receiving economic transfers from the government. Mexico is facing a drop in manufacturing (-38% from March-April 2020) and construction (-33.4%). Simultaneously, the mining sector is contracting (-9.8% from Jan-Oct. 2020).

Finally, Argentina has a weak currency, and consequently, at least one million Argentinians are adopting cryptocurrencies as an alternative to the Argentinian Peso. In the three markets, the expenditure is weak, and inflation in Argentina and Brazil is above the respective central banks’ targets.

To sum up, the challenges for 2021 are economic growth, the pandemic, incentivize investments, and deal with changes in the international scenario, both political and commercial. Countries like Mexico are working on research for a local vaccine, however in December 2020, the health authority began to immunize medical personnel with the formula of the pharmaceutical company Pfizer. The Brexit will bring new commercial relations between the region and the United Kingdom (in Mexico, there will be the Most Favored Nation Tariff until the new trade agreement came into force), and the change of presidency in the United States will bring a new relationship between the country and Latin America (e.g., more financial support for Central America).

This article is in our Market Outlook 2021

Andrés Damián Cerda, BSs in Economics

Fernando Balandran-Oviedo, BSs in Economics

Published by lisboninvestmentsociety


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