Home Argentina BofA Raises Latin America’s GDP Growth Forecast, Says Accelerating Inflation Will Peak in 4Q

BofA Raises Latin America’s GDP Growth Forecast, Says Accelerating Inflation Will Peak in 4Q

BofA Raises Latin America’s GDP Growth Forecast, Says Accelerating Inflation Will Peak in 4Q

NEW YORK — Latin America’s largest economies are recovering their overall generation of products and services, but the good news come with a caveat: Inflation is also accelerating.

Analysts at Bank of America are now expecting the region’s gross domestic product will expand 6.5% this year compared with an initial projection of 3.8%, according to a 45-page research report dated September 22. The GDP will continue improving in 2022 at an expected rate of 2.9%, leaving behind the severe contraction of 6.9% the region endured in 2020 amid the COVID-19 pandemic.

“LatAm countries continue improving on their vaccination plans, with COVID-19 cases falling in most countries, even in Mexico, where we had a recent spike in cases,” analysts including Claudio Irigoyen, David Beker, Carlos Capistran and Gabriel Tenorio wrote in the report to investors. “Not surprisingly, economies are recovering much faster than what we expected at the beginning of the year, but also inflation is moving higher,” they added.

If the projection turns out to be accurate, Latin America’s economic growth will surpass this year the expected 5.9% for the U.S. economy and 4.8% projected for the Euro zone by Bank of America’s economic team. Only China will exceed the region’s expansion with an 8% growth forecast, according to the report.

In the region, countries such as Peru, Chile and the Dominican Republic will lead the economic recovery, while Venezuela’s total production output is still expected to contract another 5% on top of the 35% recession registered last year.

Source: Bank of America report LatAm Macro Viewpoint, Sept. 22, 2021.

Inflation Set to Peak

Bank of America estimates that the cost of living across the region is on pace to reach 6.4% y/y in 2021, after printing 3.4% last year. At this stage, the analysts expect a gradual decline to an annual rate of 3.8% in 2022

The so-called tradable goods explain most of Latin America’s inflation, led by surging food and energy prices, according to the analysts. In Brazil, the cost of living will reach 8% and Mexico will deal with consumer prices rising 6.2% y/y this year. “Inflation is still accelerating, but our view is that it is a transitory phenomenon and will peak across LatAm countries in 4Q21,” they wrote.

However, the main risk for inflation is to the upside. “We and central banks are keeping an eye on non-tradable goods inflation and wage inflation. Political uncertainty will could also impact inflation via weaker currencies. The risk is one of a stagflationary environment, as non-tradable goods inflation accelerates and central banks may have to hike further and abort the recovery in economic activity,” the analysts wrote in the report.

So, how the central banks will react?

Central banks will continue or start raising their reference interest rates. “We expect inflation targeters to continue hiking. We penciled an additional 275bp for Brazil, 75bp for Mexico (upside risks), 200bp for Chile, 175bp for Colombia and 200bp for Peru. Inflation is more persistent in Brazil and Argentina than in Mexico, Chile and Peru,” according to the report.

Brazil’s central bank, BCB, raised its benchmark lending rate by one percentage point on September 22 to 6.25% as consumer prices continue to rise rapidly, and said it expects to increase it by the same amount at its next meeting in October, Dow Jones Newswire reported. Mexico and Colombia will announce monetary decisions September 30.

Handle With Care, Six Recommendations

Bank of America’s analysts concur that “risk premium is very high” in Latin American local markets. “Even though there is value across the board, we are cautious about taking very directional exposure to LatAm rates,” the said pointing to how high the passthrough will be from tradables to non-tradables, an how fast the central banks will respond to climbing inflation expectations.

The analysts recommend:

  • Brazil: short 10y inflation BE
  • Mexico: short 7y inflation BE
  • Chile: long 10y inflation BE
  • Colombia: long 10y real rates, unhedged
  • RV: sell Peru’s 10y Soberano vs Colombia’s 10y TES, FX-hedged
  • RV: buy basket of MXN and COP against CLP


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