Latin America economies appear to have been an outlier


Over the last few years economies around the world were significantly impacted by the COVID pandemic, war and geopolitics that crimped trade and tied up supply lines. While these disruptions impacted most markets negatively, Latin America economies appear to have been an outlier, benefitting from the resulting boost in commodities prices and their own disciplined macro policies.

We spoke with Bertrand Delgado, Senior Emerging Markets Strategist, Societe Generale Americas, for his insights into the unique characteristics of the Latin American markets, his expectations for monetary policy in the coming months, and the potential impact of the US election on the region.

At a high level, what is fueling Latin American markets right now? 

Monetary policy in the US is a big factor – the recent repricing of market expectations on the Fed easing cycle being pushed from March to June has created new entry points and made LatAm markets much more appealing. Latin American central banks have been ahead of the curve in the global fight against inflation and, consequently, developed enough cushion or wide interest rates differentials to withstand the Fed hiking cycle until recently. Now that the Fed prepares to embark on cutting rates, LatAm should benefit from it. We expect the Fed to cut rates by 100 basis points to 4.38% by 1Q of 2025, which, coupled with softer US Treasury yields and weaker US dollar, will be very favorable for LatAm markets.

Our team is also expecting the Fed to start reducing quantitative tightening come June of this year and to finish by 1Q of 2025 which will also have a positive impact on the global risk appetite and liquidity conditions, further fueling the LatAm economy. 

Beyond US monetary policy, our economists also expect China’s economy to grow around 4.5% in 2024 which should support demand for LatAm exports and buttress commodity prices. 

Also, policy risk in Latin America has been easing after spiking during and right after the COVID pandemic. This is mainly because of the strength of the institutional framework and check and balances and the fact that the political pendulum has been moving back to the center and away from radicalism. 

Are there specific macro trends that are benefitting the Latin American region? 

We’re looking at two major macro trends that are creating an especially favorable environment for LatAm markets. The first is the green energy transition which tends to favor LatAm for its abundance of key metals and energy inputs. LatAm also has the cleanest electricity matrix globally, with 61% coming from renewable sources – that’s higher than any other region and well above the global average, according to the Inter-American Development Bank. 

The second is the ongoing reshaping of global supply chains – Mexico has benefitted from this trend more than any other country or region, displacing China as the United States’ main source of imports as lingering geopolitical issues between the US and China have continued. 

Together, these trends should improve the outlook for capital and financial flows to LatAm in the near term. 

What potential risks to Latin American markets do you see on the horizon? 

The biggest risk factors we’re looking at are the possibility of a US recession or a geopolitical development that causes an inflationary shock. Overall, it’s fair to say that the risk of a US recession has cooled significantly in the last several weeks alone. Our team now thinks gains in US jobs and consumer spending are not signalling any major problems ahead. Inflation is also softening toward the 2% target from the Fed even despite the growth in jobs and spending. Certainly, recent US inflation numbers suggest a rocky but still downward path ahead.

We’ve got a US election coming up this year – how could the outcome impact LatAm markets? 

We are still a long way to election day so many things can happen, but so far it is fair to say that either result – a Biden or Trump win –will likely be positive for LatAm. Our team is expecting a high probability that the elected candidate will not hold a majority in Congress and that the winner’s policies will have a neutral impact on US inflation and the Fed’s policy path and thus a neutral impact on LatAm. 

What other factors are you watching as we lead up to the US election? 

Geopolitical tensions for the US continue to be on our radar. In either presidency, China will likely continue to be a primary risk to the US, and lasting trade tension between the two countries should support continued nearshoring and the remapping of global supply chains, which will continue to be positive for LatAm. Also, there is not a high risk of a geopolitical event within Latin America which makes it attractive compared to other parts of the world. 

Assuming global financial conditions improve, larger US budget deficits in the next candidacy would also make LatAm’s disciplined macro-management – comprised of orthodox monetary policies, manageable fiscal positions, and net debt creditors standings – look attractive to investors. 

Your expectation is for the Fed to start rate cuts this spring – what’s your outlook for monetary policy for Latin American countries? 

LatAm’s ongoing disinflationary process and elevated real interest rates has given central banks across the region more room to either continue with their easing cycles, as is the case with Brazil, Chile and Colombia, or move closer to entering an easing cycle, as is the case with Mexico. 

We expect Chile to accelerate its pace of easing with a 100 or even 125 basis point rate cut at their next meeting, while we anticipate Brazil and Colombia to stay the course with a 50 basis point and 25 basis point rate cut respectively. 

Mexico is a bit of a different story – we expect the central bank to stay on hold on cuts likely until March. At its most recent meeting this month, Banxico left rates unchanged at 11.25% in a unanimous decision. It also noted that, while inflation presents a continued challenge, it will keep its year-end 2025 headline and core inflation forecasts unchanged at 3.5%. With elections coming up this summer in Mexico, it will be interesting to see how the data continues to come in across the region.