Surprisingly good outlook for Latin America’s economy

Corona infections have reached their all-time record high in Latin America since the beginning of the year – but without the feared dramatic consequences as before. Foreign investors are putting more capital into Latin America’s financial markets than they have in a long time.

by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung

 

The covid omicron wave has also reached its zenith in Latin America: after record high new infections as recently as January, the number of hospitalizations and deaths is falling. One reason could be that Latin America is now the continent with the highest vaccination coverage in the world. The waning of the pandemic is having a partially positive effect on the general economic situation.

Colombia and Chile, for example, were able to continue their growth trends from before the pandemic. However, the economies of Mexico, Brazil and Peru are still developing more weakly than two years ago.

Argentina remains the underdog among the big six economies, with expected growth of four percent and inflation of 56 percent at the end of this year.

New clouds are appearing on the horizon: Economists in the rest of Latin America are also worried about inflation. But unlike in Europe or the U.S., central banks here are already taking clear steps against inflation. In Brazil, Chile and Colombia, central banks have already raised interest rates so significantly that economists expect inflation rates to fall from the end of this year. Nevertheless, rising commodity and energy prices will exert further pressure on the general price level.

What is new, however, is that foreign financial investors are not being deterred by the uncertain outlook at the moment – on the contrary: since the beginning of the year, foreign capital in particular has been moving the stock markets in the region. The stock exchanges in Brazil, but also in Peru, Colombia and Chile, have made significant gains since the beginning of the year. This is in stark contrast to the leading stock markets in Europe, the USA and Asia.

Venture capital investors continue to focus on Latin America. Last year, about $15 billion flowed into Latin America as venture capital. That’s about three times as much as in the previous record year of 2019. By comparison, venture capital funds invested about $25 billion in Asia (excluding China) last year. In January, these investors again increased their inflows.

At the same time, many investors expect commodity prices to rise and are betting on mining and agricultural companies, of which there are many in Latin America.

The influx of capital has led to a strengthening of the region’s purchasing power: In Brazil, but also in Peru, Mexico and Chile, currencies have appreciated strongly against the dollar.

Political crises and tensions in almost all countries of the region remain an important factor of uncertainty. In Peru, it seems increasingly unlikely that Pedro Castillo’s government will survive the next few months. In Chile, Gabriel Boric will be the first left-wing president to take office in March, while at the same time the constitution is being revised. In Argentina, the government is split over whether to sign an agreement with the IMF. And in Brazil, as in Colombia, elections will be held this year, adding to the political tensions in these countries.

COVID-19 in Latin America

Development of case numbers in the region


Currently reported cases in the countries


COVID-19 vaccine doses administered


Share of people vaccinated by country

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