Latin America Confidential
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Latin America Confidential reports provide insights into key events, economic trends and policy changes, helping investors to navigate through official and unofficial data sources and forecasts.
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Growth Diagnostics: The case of El Salvador and Peru
Latin America Economics Update
September 16, 2012
Inflation, growth tick up
Economic activity across much of Latin America remains resilient to the soft global backdrop, while the regional heavyweight- Brazil- appears to be tracking our call for strong acceleration this quarter. In Mexico, stronger –than-expected IP for July indicated continued decoupling from weak US data and prompted us to revise our 2012 GDP forecast. Next week Peru’s July GDP data are released and if the release meets our expectations, an upward revision to the full-year growth forecast may also be in order. In turn, Columbia’s upcoming release of its July IP should also show improvement and offset some of the recent weakness in retail sales. Importantly, Brazil seems to be reconnecting with the region, with recent data showing a pickup following 1H12. July retail sales and the IBC-Br activity index were slightly better than expected, consistent with the positive data flow in recent weeks.
With Growth holding up and commodity prices on the rise, inflation is becoming a concern across the region. Among the inflation-targeting countries, headline inflation 4.6%oya in August. While this was only a touch above the July reading, we expect further pass-through of commodity prices in the months ahead and have revised up year-end inflationforecasts in Brazil, Mexico, and Columbia. While we keep inflation forecasts unchanged in Chile and Peru, risks are to the upside. Despite these forecast changes, our monetary policy calls remain unchanged and only expect one more 25bp rate cut in Columbia in the remainder of the year.
Investment Insights: Brazil
Following a policy-induced rebound in 2010, growth in the Latin American region slowed to 4.3% in 2011. We forecast a further slowdown to 3% in 2012, in a context of outright contraction in the Eurozone and below-par growth in the US. The slowdown in the region will be led by Brazil, the largest economy. We maintain our view that the slowdown is cyclical rather than structural. From 2013 we expect growth to accelerate to average 4.1% in 2013-16, sustained by continuing sound macroeconomic policies in most countries in the region, resilient domestic demand and a recovery of economic activity in the OECD area.
In 2012 the Brazilian authorities will be challenged to deal with a likely less supportive external backdrop than in 2010-11. However, fortunately the authorities enjoy significant policy flexibility and seem determined to adjust counter-cyclically the macroeconomic policy mix to help the economy adjust to a less favorable external environment. As such, we expect the authorities to, in the near-term, continue to ease monetary policy, provide fiscal incentives to selected sectors, and stimulate credit origination through official banks, in order to support domestic demand.
Latin America has made significant progress since the 1990s in fostering a more supportive growth environment. The region currently ranks above other emerging markets in the terms of macroeconomic stability (low/moderate public debt and fiscal deficits), school enrolment, life expectancy, and access to technology, especially mobile phones penetration. However, these developments, while favorable, have not been deep enough to allow the region to increase visibly its still limited potential real GDP growth. One key factor hindering progress in this regard is the inadequate and poor quality of the existing stock of infrastructure, which is the result of years of low investment spending as a share of GDP.
Brazil is a good example in the prioritization of infrastructure spending, with the launching of the Growth Acceleration Program (PAC) in 2007. The program is essentially a medium-term investment package geared to accelerate the country’s economic growth potential through key investments in social and physical infrastructure: housing, transportation, utilities, and sanitation. Overall, the PAC program is an encouraging sign of the commitment of the Brazilian authorities to enhance the competitive edge of the economy through the expansion and modernization of the stock of public infrastructure.