Large Challenges Ahead For Region, But Mexico & Colombia To Outperform


In terms of political risk, we note that many Latin American economies are heading into presidential or legislative elections over the coming months, which raises the prospect for political uncertainty and potential for slowing investment . Recent approval numbers paint a mixed picture for the region, but what stands out the most is how support for the current government has fallen sharply in recent mont hs in countries such as Brazil and Peru . Indeed, we believe that the deteriorating growth outlook in these countries, combined with rising inflation and an increase in unrest has weighed significantly on popular support for the government. This suggests that policymaking will become increasing challenging, and could see fiscal slippage in the months ahead as incumbent governments try to appease voter demands and offset a slowing economy.

Moreover, we believe that the recent rise in bond yields and credit default swap (CDS) s preads as well as the recent sell off in Latin American foreign exchange will add to the challenges faced by policymakers. Indeed, not only are governments facing a slowing economy, weakening political support and higher borrowing costs, but central banks are also faced with a trade off between slowing growth and weaker exchange rates, which could spur inflation over the coming months. Although Brazil has been the only country to hike interest rates in recent months (and we see a further 7 5 basis points to 9.25% by year- end), other countries' central banks are monitoring the inflation-growth t rade off very closely. The risk is that central banks err on the side of caution and hike interest rates in order to ensure their inflation fighting credentials remain intact , which could lead to a weaker growth outlook and increased political dissatisfaction.

Given these domestic challenges, combined with rising yields in the US and still-attractive valuations in developed market equities, we believe that investors may opt to scale down their exposure to Latin America, and take a more selective approach. With this in mind, we continue to highlight the potential for Colombia and Mexicoremain theregion'smost attractive marketsas they have relatively stronger political andeconomicoutlooks than some of the other countries in the region, due in part to their less-significant exposure to the Chinese economy.

Growth Downgrades
Latin America - Selected Real GDP Growth Revisions & Forecasts, %

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