Speyside’s Predictions for 2023: Latin America

As 2022 draws to a close, the Speyside team would like to wish all our partners and friends the very best for the holiday season, and of course a prosperous and peaceful 2023.

As has become tradition at this time of year, our teams around the globe have summarised some of their thoughts on the outlook for the year ahead across global emerging markets. We hope you find this an enjoyable and useful read.

Global Outlook

The debate still rages:

The bulls point to inflation slowing, China opening, energy prices easing, and the US economy increasingly likely to have a soft landing.

The bears point to the commitment of central banks to bring down inflation, the prospect of a long war in Ukraine, tech and crypto shocks and uncertainty around China.

Much of this discussion centers (understandably) on North America and Western Europe, but from our EM vantage point, there are reasons for optimism.

• China is opening fast and appears on a one-way track, releasing huge pent-up demand domestically and easing supply chain pressures globally.
• India is posting stronger than expected GDP numbers and the fundamentals look good, with the government poised to stimulate growth further ahead of 2024 elections.
• Latin America is a mixed bag, but there are reasons for optimism in Mexico which is benefiting (like India) from from “friendshoring” and strong fundamentals

None of this is to doubt the IMF, World Bank, OECD and others who are forecasting a very difficult global outlook with a global growth rate of around 1.2% in 2023, on par with 2009, when the world was only beginning its emergence from the financial crisis.

However, opportunities do exist, and many of them sit within global emerging markets, especially in Asia and Latin America.

LATAM

Brazil: New President, same old gridlock?

In 2023, the political model will again be tested. Arthur Lyra, president of The House of Representatives, was all-powerful under the Bolsonaro’s presidency. He is likely to now be reelected for a second term. That means that he will maintain leadership in parliament and dictate what goes to a vote on the floor and what goes to the drawer. This arrangement has held Brazilian presidentialism hostage to parliament in the last few years, holding back many of the actions that the government proposed. This will be a particularly interesting new chapter to look upon, as Mr. Luis Inácio Lula da Silva is a sophisticated political operator and has a strong track record of dealing with congress. But this time around, Lula’s political base is not as strong as in his two previous terms, from 2003 to 2010. This will be the relationship that will determine Mr. Lula’s government’s success or failure.

In the economy, there is the expectation of some anticyclical measures, and the use of federal resources to move strategic sectors of the economy, such as energy, transportation, and IT. But it may not be sufficient to surpass the negativity of the market players. The interest rate in Brazil is now 11.75% yearly, which is another obstacle to strong GDP growth because it makes it more difficult for entrepreneurs to ask for credit, for customers to ask for loans to buy houses, and to move the real estate market. Many of the economy analysts are predicting a difficult year, with a minor GDP growth of around 2, and a steady inflation of about 5.5% a year.

Mexico: 2023 Could Bring Great Opportunities Not to Be Missed

Although the growth estimated for the Mexican economy for 2023 is only 1.4%, it is estimated that private investment will return to pre-pandemic levels, and annual inflation is expected to be kept under control, reaching 4.8% (one of the lowest in the region), in addition to the strengthening of the Mexican peso against the US dollar.

However, Mexico’s great attraction lies in new opportunities to receive significant foreign direct investments due to the advantages of nearshoring, especially in the wake of the trade disputes between the United States and China, which has prompted many manufacturers to cut the distance with the supply chains, making them resilient to the current distortions.

The Mexican government has agreed with representatives of the private sector and its counterparts in the United States to improve the economic and fiscal benefits for the relocation of companies in the country, which will promote the arrival of companies from Asia to North America and the strengthening of supply chains, particularly those related to the printed circuit and semiconductor sector.

On the other hand, the risk of protectionist and anti-competitive policies from the Mexican government remains, such as those imposed on the electricity industry, generating commercial disputes due to violations of the USMCA, putting at risk not only the North American commercial relationship by initiating a process consultation and potential dispute resolution panel, but the ability to meet the energy demand of new companies and facilities that will arrive in the country.

There is indeed a certain distrust from the private sector due to regulatory uncertainty and the legal changes that the president has promoted in congress, not only in the electrical field but also in the agro-industrial and biotechnology fields.

For Mexico to capitalize on the arrival of FDI, it will be necessary for the government to make sustained investments in infrastructure, electricity supply, connectivity, and logistical access over the next year, as well as to generate legal certainty so that the country can become an important exports hub worldwide.

Colombia: A Year Marked by Uncertainty

After four months of Gustavo Petro in office, both the strategy and results of his presidency are still unclear. Nobody really knows what will happen: whether announcements will become a reality, whether the country is really heading towards more equity and stability, whether the private sector will be severely affected, or whether the rich, used to more favorable rules of the game, will in fact lose.

These recent months have been marked by announcements regarding an economic reform that has gone through very strong debates and that was finally approved by congress with some modifications. Petro’s diverse cabinet, where some are technical and some seem like more political figures, is just beginning to understand their dynamics of working as a team while having a very impatient public opinion. In the meantime, citizens have blamed Petro for whatever happens, including a dollar that already reached 5,000 pesos, and he rejects any sort of blame and puts it on the economic and private sector.

A huge foreseen risk is that if things don’t go as planned, it is very likely that his speech will be more radicalized towards antagonism between the rich and the poor. Petro already proved to be a very strong opponent to the government; now we need to see if he can be a strong player in the government as well.

The times of good figures for the Colombian economy seem to be turning the page—prospects for 2023 are quite moderate. The International Monetary Fund (IMF) lowered its forecast for Colombia to 2.2% in 2023 from a previous figure of 3.2%. Another entity that expects a slowdown is the World Bank, which on the same dates published an outlook report for the region, in which it lowered the country’s forecast for next year by 1.1 percentage points (pps), to 2.1 %.

Peru: Continued unrest and uncertainty

After the failed coup attempt by former president Pedro Castillo and his subsequent removal from office and arrest, the inauguration of his vice-president, Dina Boluarte, seems to be only the beginning of a new political crisis that has the country in check. National protests calling for early elections and Castillo’s release are becoming increasingly violent and massive. President Boluarte will have to negotiate with congress a timetable for a political reform process to ensure that new elections are held in 2024. At the same time, she will have to promote dialogue with citizens, social organisations and local and regional authorities with an articulating message that promotes social peace.

Surprisingly, despite the permanent political crisis in which the country lives (six presidents in the last six years), the Peruvian economy has been on a path of economic growth for more than 30 years and is one of the countries with the best macroeconomic data in Latin America, having successfully weathered the recent global financial crisis. According to experts, this is due to the independence of the central bank, the economic model of free investment, and various constitutional laws that protect the country. However, the outlook for the near future is not very promising. Mining investment seems to be at a standstill due to uncertainty and ongoing social conflicts around large mining operations. And the international context, marked by inflation and the war in Ukraine, does not invite optimism for an economy like Peru’s, which, due to its open nature, is highly permeable to what happens abroad.

Ecuador: Positive Outlook with the Entry into the Pacific Alliance

2022 in a Nutshell: Guillermo Lasso’s first full calendar year in office turned turbulent, after a relatively positive start due to the successful implementation of the COVID-19 vaccination plan in 2021. The Lasso administration has lost its legislative coalition and thus any hopes of passing meaningful economic reforms. After a widely unpopular tax reform was approved in the end of 2021, the administration was unable to pass flagship labor and investment incentive reforms. Now, 2023 does not look dissimilar, with the added complication of provincial and municipal elections and a referendum to reform the country’s constitution in areas ranging from deportation and water conservation to the number of legislators scheduled for February.

Aggravating political headwinds for 2023, there have been no significant breakthroughs in the dialogue tables with Indigenous and social movements that were created as a response to the national strike of June 2022 against austerity measures and fuel subsidies reduction. A significant factor in President Lasso’s weakened approval rating is the rise in perceived insecurity with Ecuador making global headlines in October when violence surged in coastal cities as criminal gangs attacked security forces in response to mass prisoner transfers, prompting a state of emergency in three provinces.

Political Outlook: In 2023, Ecuador’s political scene will remain divided. Guillermo Lasso’s center-right governing party, CREO, will try to regain lost ground in the legislature, but opposing forces are likely to block his policies and pursue a prolific anti-graft campaign. At the same time, left-leaning movements will gain strength, with Rafael Correa’s Citizen Revolution still being an important force. The referendum questions will be approved with ease, but implementation will be hampered by the lack of a legislative majority. Municipal and provincial elections are expected to supply further evidence of weakened political support.

Economic Outlook: Despite not being able to implement much needed labor reforms, unemployment is slowly decreasing from pandemic highs. A positive aspect of the unpopular fiscal reform of 2021 is that tax collection reached record figures not seen since 2015—tax revenues totaled USD 14 billion between January and November 2022. As a result, the fiscal deficit for 2022 is estimated at 2.14% (down USD 1.4 billion from 2021), according to the Ministry of Finance. The fiscal outlook will be stable, despite lower oil prices than in 2022, largely due to continued austerity and continued IMF support. Trade has a positive outlook with the entry into the Pacific Alliance and noteworthy progress on a trade deal with China to be announced in December. Inflation is expected to remain moderate in 2023 and economic growth is set to remain low, as private investments and consumer spending will remain relatively flat.

Argentina: A Year Marked by Elections

The year 2023 will be an electoral year in the midst of a growing political polarization. Cristina Kirchner’s recent announcement about not being a candidate for 2023 opens a big question mark on what will happen to Peronism in the country. The right wing will need to decide if they want to reinforce polarization or find a more centered posture. In the first case, the candidate will probably be Mauricio Macri and, in the second, Horacio Rodríguez larreta. For Peronism, the most likely candidate is Sergio Massa.

In the meantime, the current president will have a difficult year due to the lack of power and credibility that he is already facing, and he will not pursue a reelection. Social movements will become stronger and put pressure on the president.

In economic terms, the scenario also looks very complex. After a fierce inflation in 2022, it will keep increasing in 2023 at a lower speed.

The government projects a growth of 2% for 2023. To lower inflation, the IMF thesis maintains that it is necessary to cool down the economy. But local economists do not believe that a slowdown in activity could generate lower inflationary pressures. On the contrary, they could lead the economy into a stagflation scenario.

Chile: Finally, a new constitution

Many different political analysts now agree that the new Chilean Constitution will result in a less “radical” text that would be “better received” by the markets, although there is still a dose of uncertainty in the process that will take place next year.

In economic matters, the Chilean Central Bank projects a recession for 2023 and higher-than-expected inflation because inflation rose 1% in November 2022, according to the Consumer Price Index (CPI) recently released by the Institute National Statistics (INE). This is a rise above what was expected by the market because, according to the Central Bank’s Survey of Economic Expectations, the rise in the cost of living in the penultimate month of the year would reach 0.4%.

In parallel, the issuing body released its Monetary Policy Report (IpoM) for December, where it projects that Chile will face a deeper recession in 2023 than expected last September. If three months ago the Central Bank estimated that GDP would fall between 1.5% and 0.5%, this report indicates that it could be in the range of 1.75% to 0.75%.

CCA: Tourism driven recovery

In 2023, the economic recovery of Central America will not yet reach pre-pandemic levels. However, tourism (mainly in Costa Rica and Guatemala) will boost the domestic market by 65%.

The Costa Rican Congress approved in its 2023 budget an amount of $730 million to invest in road infrastructure, improvement of seaports, and the construction of a second terminal at the Juan Santamaría airport, with the expectation of promoting commercial exchange and positioning the country as a regional hub. In Guatemala, the Ministry of Energy and Mines has an ambitious plan for 2023 to ensure affordable energy by prioritizing the development of the renewable energy industry. Guatemala has the most robust electrical network in the region, with 177 transmission substations to guarantee industrial operations in its territory.

In the political and social sphere, Nicaragua, Honduras, and El Salvador will continue to have difficulties regarding human rights and freedoms. In Nicaragua, one-person power and the dismantling of civil society organizations, and checks and balances within the government continue to be consolidated. On the other hand, Honduras began a new stage in the fight against gangs, following the example of El Salvador, through the application of State of Exception policies reducing legal certainty and citizen guarantees.

International rating agencies give El Salvador a grade of CCC/Caa3 as the worst in the region (unlike B for Costa Rica and Nicaragua, and BB- for Guatemala and Honduras), mainly due to the policies to use bitcoin as a currency for legal tender. In addition, the Salvadorian public finances have had significant losses after the devaluation of the value of the crypto assets, so the great expectation generated a couple of years ago with this decision is detrimental to the country’s economic development.