Since our last update, Mexico cancelled a USD13.3bn airport infrastructure project, Brazil now has a new president and the IMF updated its forecasts for the Argentinian economy.
Lower confidence, softening activity
At the regional level, market turmoil and policy uncertainty had a clear impact on confidence: the Sentix index (Figure 1) shows a trend reversal in sentiment starting in June, after Argentina requested IMF help and Brazil’s trucker’s strike curbed economic activity. Despite a slight improvement in October, institutional and private sector respondents remain pessimistic about the future economic situation in Latin America.
The drop in the activity index (Figure 1) was temporary and caused by Brazil (-1.5% in May) and Argentina (-4.6% in June); indeed, better August figures in Brazil and solid performance of the Andeans compensate for the recession in Argentina. However, we are likely to revise downwards our forecasts for Mexican growth next year (currently at +2.7%) after a risky policy choice of the president-elect, who is losing investor support. Besides, we see Brazilian growth capped at +2.5% and Andeans decelerating as central banks will start tightening monetary policies while commodity prices (copper, oil) are easing or stalling; 2019 gives no reasons to cheer.
Sentiment indicator (Sentix) and growth of activity index in Latin America (y/y, %)
Headwinds for private sector credit
Lower confidence could further hamper financing for companies amid rising global interest rates, in turn curbing even more growth. Argentina’s real private sector credit growth (Figure 2) decelerated abruptly to +14% down from +25% in March, firstly due to a surge in inflation. Going forward, the emergency rate hikes (from 30.25% in April to 60% in August) which mechanically raised lending rates should take a toll on credit growth, in a depressed economic environment and higher policy uncertainty. Mexico’s tight monetary policy (the latest June rate hike left the policy rate at its highest level in 9 years, at 7.75%) and imported inflation led to a deceleration in real credit growth. The recent confidence shock after the announcement of the cancellation of a USD13.3bn airport project by the president-elect could also hinder credit supply and demand, with banks increasingly cautious about political risk and companies’ investment in wait-and-see mode.
Mexico: mind the next policy choice – oil in focus?
Mexico’s president-elect, Andrés Manuel Lopez Obrador (AMLO) had done its best to reassure investors since his election early July: he aligned with the current administration’s stance on NAFTA, committed to fiscal discipline and met extensively with business leaders and financiers to reaffirm the compatibility of his social policies with investors’ interests. Yet, we had warned early this fall that Mexico was not fully out of the woods, due to a still sizable probability of policy mistake. The political decision of cancelling the USD13.3bn airport infrastructure project – one third of which was already built –spooked investors indeed. Should AMLO’s nationalistic stance on the oil sector lead to restrictions on future foreign investment or cap gas prices, markets could definitely turn their back on his administration’s policies, curbing growth prospects even more significantly. AMLO touted his opposition to the previous administration’s energy sector reform, which opened the industry to foreign investment. Yet, overturning such constitutional reform is unlikely as it would require two thirds of Congress. Hence, he intends to revise contracts in place and consider each future auction on a case by case basis. He plans on expanding the role of national oil company PEMEX, adding two big fuel refineries at least and end trade deficits in energy and agriculture.
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The View November-December 2018