Key themes 2023 – LatAm central banks to debut rate cuts

The outlook for Latin America changed dramatically after Russia’s invasion of Ukraine last February. The region is a major exporter of many commodities and has very small trade or financial links with the two countries at war, so it has been one of the biggest beneficiaries of the resulting surge in prices. But entering 2023, international commodity prices seem to be on a firm downward trend, as is global growth, given that advanced economies find themselves squeezed between a cost-of-living crisis and rising borrowing costs.

What you will learn:

1. We expect five of the six biggest economies in Latin America – Argentina, Brazil, Chile, Colombia, and Mexico – to enter a synchronized but mild recession next year. The region is facing a triple whammy of weaker global demand, falling commodity prices, and tighter domestic policies. Peru might evade a recession next year, but growth remains well below its pre-pandemic pace.
2. But it’s not all bad news. Because most LatAm countries are further ahead of the policy tightening curve than the advanced economies and other emerging markets, we think they will be rewarded with the prize of cutting rates sooner than their peers. Consequently, we expect five of LatAm’s six major central banks (Colombia is the odd one out) to cut rates in H2 2023 – ahead of the US Fed by some six months.
3. Even though policy rates have peaked, we estimate the cost of issuing debt will remain high next year, so investors are unlikely to tolerate episodes of fiscal slippage. Unwinding fuel and food subsidies will take a toll on public finances in 2023 just at a time when government revenues are likely to disappoint, given the simultaneous declines in terms of trade and nominal GDP growth.