Monetary and Financial Conditions are easing in Latin America . Yet country stories bring balance to the regional picture
The IMF defines monetary and financial conditions (MFC) as “the ease of obtaining financing.” It showed MFC’s predictive impact on GDP.
Favorable regional picture
First, the Institute for International Finance’s (IIF) bank lending survey indicates bank lending conditions in Latin America eased for the first time in four years in Q3 2017 (index above 50, at 52.9). They should have eased further in Q4 (57.0). Credit standards eased and demand for loans increased, facilitating financing of the real economy.
Second, credit spreads have narrowed after peaking in 2016, with the corporate spread (CEMBI for Latin America) now lower than in 2013, and the sovereign spread (EMBI for Latin America) back at its early 2015 level. Lower bond yields translate into lower borrowing costs, thus stimulating investment and consumption. Two-year CDS spreads have significantly narrowed, benefiting from higher levels of risk appetite. Latin American economies have thus managed to increase sovereign bond issuances by 15% in the first three weeks of 2018 compared to 2017.
Finally, the Latin America MSCI Composite index surpassed the 3000 mark in Jan. 2018 after tumbling as low as 1600 early 2016. It now approaches the pre-2015-16 recession peak of 3700 points. This easing of MFC could spread to the economy, through equity markets (better access to financing for companies) and wealth effect on households (potentially higher consumer spending).
Zooming in, country stories are more balanced
In Brazil, MFC eased, as the central bank cut the policy rate seven times in 2017, and is expected to maintain an accommodative stance. While corporates are still deleveraging, credit to households is accelerating (+5.8% last Nov.), which should strengthen the recovery of private consumption. Still, we expect market volatility (especially foreign exchange) to hamper financing; the culprit is political uncertainty ahead of October’s presidential election. This supports our scenario of a modest recovery in an exceptionally uncertain election year.
Mexico’s high level of financial integration in the region makes its MFC positively correlated with global financial conditions, which have recently improved. However, the central bank has hiked its key rate ten times since Nov. 2016 (now at 7.25% up from 3.0%) to counter the peso depreciation and inflation. Concurrently, total Mexican credit growth has started to decelerate. Moreover, peso volatility looms amid NAFTA talks and the election campaign; resilience but slight deceleration could be in sight.
In Argentina, financial conditions are closely linked to commodity prices, which steadily improved in 2017. In addition, despite a tight monetary policy regime which lasted until early Jan. 2018, credit growth has accelerated (+51% in Dec. from +31% a year earlier). Yet, this growth is explained by persistently high inflation (+25% in Dec.) and a weak banking system (financial credit now amounts to only 15% of GDP, versus 47% in Brazil). Finally, the recent rate cuts should further weaken the peso, helping curb the current account deficit by boosting exports. Along with the return of business confidence and prospects of structural reforms, MFC easing should give Argentina’s growth an additional boost.
Charts 1-3 National Credit Growth in Latin America