Morning Note /

IMF expects tepid growth in Latam, but some outliers exist

  • Talking Points: IMF highlights regional growth concerns, but commodity-linkages will help Latam

  • Forex: Weakening USD sets up a rebound for Latam FX today

  • Fixed Income: Chile places new bonds easily with strong demand for linkers

Lloyd Miller
Lloyd Miller

Head of Developed Markets and Latin America Research

Danny Greeff
Daron Hendricks
Kieran Siney
ETM Analytics
20 April 2022
Published byETM Analytics

Talking Points: IMF highlights regional growth concerns, but commodity-linkages will help Latam

Brazil: The outlook for commodity-exporting countries such as Brazil have seen an improvement according to the IMF’s latest WEO report. Notwithstanding surging inflation, ongoing supply chain issues and the significantly tighter monetary conditions, the IMF upwardly revised Brazil’s 2022 GDP forecast from 0.3% in January to 0.8%.

Meanwhile, Economy Minister Paulo Guedes said on Tuesday that Brazil condemns Russia's invasion of Ukraine but is against economic sanctions imposed on Moscow, a sign that it will not take a tough stance against its BRICS partner. Guedes added that Russia should not be kicked out of multilateral bodies, such as the International Monetary Fund and the World Bank, which would destroy bridges and stimulate the economic war. According to Reuters, Russia has asked Brazil for support to help it counter crippling sanctions imposed by the West since it invaded Ukraine.

Guedes reiterated that Brazil is a key player in guaranteeing the security of both global energy and food supply chains in the wake of the conflict in Ukraine, which has triggered supply concerns in both markets. Note that Russia and Ukraine are large exporters of food and energy products to the rest of the world. Therefore, the war is resulting in supply shortages, driving commodity prices to fresh highs..

Mexico: Yesterday, Mexican senators approved a mining bill that confirms the government’s monopoly over lithium extraction. President Lopez Obrador presented the initiative after his bid to increase government control of the electricity market failed on Sunday. A ruling coalition of lawmakers, led by the president’s Morena party, fast-tracked the bill, getting lower house approval on Monday. Senators approved the bill in general terms, with 87 voting in favour, 20 against and 16 abstaining. After the voting, some articles were debated further, and once those were passed, the bill was ready to be signed into law by the president. During his morning press conference, the president said Mexico would review existing contracts to extract lithium, which has grown increasingly important as a component in rechargeable batteries, including for electric cars. Mexico has yet to produce lithium commercially, but previous governments granted permits, including to Bacanora Lithium Plc, which China’s Ganfeng Lithium Co later bought. The president’s policies have prioritised strengthening state-owned companies over private investment.

The International Monetary Fund (IMF) cut Mexico's 2022 economic growth forecast to 2% from 2.8% in its latest World Economic Outlook forecast. The revised growth forecast is due to the economic consequences of the Russia-Ukraine war and supply chain challenges. Though Mexico and Latin American economies have fewer direct connections to Europe, the region is expected to be affected more by an environment of higher inflation and higher interest rates. The IMF also added that the adjustment resulted from lower-than-expected economic growth in the US, Mexico’s main trading partner. Moreover, recent lockdowns in China will likely compound supply disruptions elsewhere. As a result, supply-side inflationary pressures are expected to remain elevated for longer than anticipated. Inflation has become a central concern in many economies and will require central banks to adjust their monetary policy stances even more aggressively should inflation expectations continue to move away from the central bank's targets. The IMF forecasts inflation in Mexico to end the year at around 6.8% this year before moderating to 3.9% in 2023.

Colombia: Conservative presidential candidate Federico Gutierrez put forward some of his economic plans yesterday. He noted that Colombia should have a more flexible labour market, in which workers can be compensated per hour without affecting employee benefits. Gutierrez maintains that hiring workers per hour could expand job formalization, which is a key issue in Colombia at the moment. Additionally, Gutierrez said that he would focus on decreasing government expenditure to shore up the fiscus, in particular by cutting government bureaucracy by 10%. However, he did not rule out presenting a new tax bill to Congress, but said the government must make an effort to cut spending first. Other proposals included keeping the mixed private-public pension system, redirecting pension subsidies to the poor, and training programmers to prepare Colombia for the fourth industrial revolution.

Today, an empty local data card means the focus will be on the Colombian presidential debate, which could help undecided voters to pick a candidate in what is shaping up to be a very polarised election.

Chile: The pension fund withdrawal topic remains front and centre at the moment. President Gabriel Boric told reporters yesterday that It is necessary to end with the idea that structural crises can be solved by using the people’s ’ personal savings”. The tone is certainly more pragmatic than what he has been quoted as saying before. The fact of the matter is that raiding the pension fund pot will add to the structural fragilities and create a forward liability that will be difficult to quantify. Borrowing from the future is never a great idea, the level of debt in the system is rising and creating additional liabilities now would not be prudent as the global macro backdrop is uncertain and fragile at the moment.

Peru: Global growth concerns have emerged with both the World Bank and IMF revising their global growth forecasts down. Forecasts released by the IMF yesterday showed a sharp downward revision to global growth for 2022 to 3.6% from 4.4% predicted in Jan. For Peru specifically, the fund estimates economic growth at 3.0% for this year and next, while inflation will average 5.5% in 2022 before slowing to 3.6% next year. The forecasted growth rates are above the average for South America as a whole, but below the likes of Argentina and Colombia. Finally, the IMF sees Peru's current account deficit narrowing through the next two years, coming in at -1.5% of GDP and -1.4% for 2022 and 2023, respectively. The deficit was -2.8% at the end of last year.

The growth projections are unchanged from the last WEO report released, but the IMF has noted that uncertainty remains high and that risks are skewed towards the downside. The main risks relate to a sharp tightening of global financial conditions, extended global supply chain disruptions, geopolitical tensions, and an abrupt growth slowdown in Peru's main trading partner China. Added to this now, are the local issues facing the mining sector and the social unrest generated by surging inflation.

Forex: Weakening USD sets up a rebound for Latam FX today

Brazil: Commodity-linked currencies came under pressure on Tuesday as the dollar rallied and commodity prices fell. Commodities were hit by concerns that the harsh Covid restriction would hurt China’s economy despite the government’s pledge to support the economy. The BRL ended amongst the laggards yesterday, losing 0.28% against the USD to end the session at 4.6681, according to Bloomberg data. While the BRL ended the session in the red, its losses were modest in comparison to the South African Rand, which weakened by 1.66% against the USD as idiosyncratic factors weighed.

The latest CFTC data shows that traders remain bullish on the BRL, with the currency maintaining its positive net position. As mentioned in previous commentary, with commodity prices expected to remain elevated against the backdrop of elevated real interest rates and the undervaluation in the currency, there is still room for further appreciation in the BRL..

Mexico: The USD-MXN advanced almost 0.8% yesterday, lagging the USD-ZAR, the best gainer on the session. The USD and US Treasury yields extended gains as investors continued to brace for multiple half-point rate hikes from the Federal Reserve as it sought to rein in soaring inflation. As a result, the USD-MXN bounced off the 19.800 support to close above the 20.000 psychological level. However, the weighted trade DXY has come under pressure this morning following four consecutive daily advances and moderating UST yields, resulting in the USD-MXN retreating ahead of the NorAm session. Still, moves to the downside are likely to be capped by the 19.800 support.

Colombia: The COP has been unable to hold out against a broadly-firmer USD at the start of the week, as it retreated 0.45% yesterday to add to Monday’s 0.30% decline. This has been consistent with regional currency performances, although yesterday’s move was slightly more pronounced due to an oil-market selloff on the day. Pulling the lens back slightly, the COP remains strong relative to levels seen in January, but is struggling to build further bullish momentum to recover all of its Q4 2021 losses.

Chile: The USD-CLP closed above the 100DMA moving average overnight (817.55) at 820.08, which was not surprising given the stronger dollar. Pulling back the lens, we would expect the CLP to come under pressure with the prior highs of 823.72, certainly not off the cards in the coming days/weeks.

Peru: The USD-PEN retreated yesterday, bucking the general trend within the region as higher copper prices supported the local unit. The pair ended the session just above the 3.7000 handle as a result, keeping this as a key support level to watch. Technically, the stochastics are reversing their direction after breaching the overbought threshold, but the current backdrop makes it difficult to see the pair heading significantly lower from current levels.

Fixed Income: Chile places new bonds easily with strong demand for linkers

Brazil: While US Treasury yields continued to rise on Tuesday on the back of the hawkish comments from Fed speaker Bullard on Monday evening, Brazilian swap rates were received lower yesterday, a sign that the market is comfortable with how much rate hike risk is already priced. For context, the shorter-dated 2yr swap rate shed 10bps to end the session at 12.53%, while the benchmark 10yr rate fell 6bps to 12.04%. While Brazilian swap rates edged lower yesterday, the market is still pricing in a significant amount of rate hike risk as inflation pressures continue to surge. Hawkish bets and the aggressive rate hikes seen over the past 12 months is underpinning the inversion in the swap curve.

Shifting the focus to the US Treasuries market. The yield on the 10yr US inflation-protected Treasury rose to pre-pandemic levels, with the real yield breaching back above zero. The Fed’s hawkish stance has resulted in a remarkable turnaround in the 10yr UST real yield, which was trading below 1% just over a month ago.

US swaps traders, meanwhile, are pricing in around 140bps worth of rate hikes over the next three FOMC meetings. This implies that the professional market is pricing in at least 50bps worth of rate hikes for the next two FOMC meetings. While we are of the view that the FOMC could well deliver a 50bps rate hike next month, two subsequent 50bps still seem unlikely but can’t be ruled out.

Market focus in the session ahead will be on the weekly bond auction. National Treasury plans to sell Selic-linked bonds maturing in 2022, 2024 and 2025 and inflation-linked NTN-F bonds maturing in 2029 and 2033. As always, the results of the auction will be published at 10:30 am local time.

Mexico: Mexican bonds weakened yesterday due to a combination of factors. The MXN’s depreciation, alongside a persistent rally in UST yields as well as escalating tensions in the Russia-Ukraine war, have all weighed on global bond markets. Adding to the complexities, the World Bank and the IMF downgraded their global economic growth projections. The current macroeconomic backdrop suggests that MXN bond yields will continue to head higher in the near term. It is worth noting that the yield curve is trading relatively flat from the 3yr tenor out to 30yr at roughly 9%. With the market pricing in 270bps of interest rate hike risk, the yield curve has the potential to broadly flatten or, worse, invert if economic growth fears intensify.

Colombia: Colombian bonds have started the week off on the defensive, with yields rising notably across the curve since the long weekend. This is unsurprising given how US Treasury yields have surged recently, with Colombian bonds trading in sympathy. Interestingly, moves along the Colombian yield curve have been particularly pronounced at the belly, likely reflecting growth concerns for the period following the current tightening cycle. The broader bias for yields also remains to the topside, although falling UST yields today suggest there may be a reprieve for the market.

Chile: The Treasury yesterday successfully placed $1.65bn worth of vanilla and inflation linkers across the curve in what could be termed a successful auction. The treasury placed 2043’s, and 2050’s in size while placing 2028, 2033 and 2050 linkers which also drew strong demand from the investment community. Linkers are becoming a hot topic at the moment since the US TIP 10yr moved back above 0% for the first time in 2yrs yesterday.

Moving over to the bond curve we see that 10v3 is looking to trade flat in due course. The spread is slowly moving out of negative territory now quoted at -11 bpts after trading at an all time low of -153.22 bpts on the 14th March 2022. The very front end of the curve remains driven by inflation expectations and thus the PPI numbers due for release this Friday will hold special significance.

Peru: The surge higher for local bond yields continued yesterday, with the benchmark 10yr tenor's yield rising to over 7.500%. Taking a technical look at the bond, we see that the stochastic is looking very oversold at the moment. However, the yield is nearing the 100% retrace of the January 2016 high of 7.702%, which the bears will surely be looking to push through. Therefore, there may be room for even higher yields over the near term, especially given the global macro backdrop at present, which is faced with surging inflation, tighter global financial conditions, and elevated levels of uncertainty.