A return to sub-trend economic growth in 2022-23 After a sharper than expected economic recovery in 2021, which should see Latin America match global economic growth for the first time in almost a decade, we expect the region to underperform once again in 2022-23. We are forecasting sub-trend growth in the period, with the region expanding by 2.1% and 2.2% in 2022 and 2023 respectively. While Latin America will still benefit from COVID-related economic reopening, a less supportive external environment (lower commodity prices, rotation from goods to services consumption), tighter financial conditions, and the need to rein in fiscal stimuli will weigh on growth. Moreover, policy uncertainty, exacerbated by a complicated political calendar, will likely keep private investment at bay.

Inflation to subside in 2022, but further monetary tightening ahead The rise in Latam’s inflation is not dissimilar to that of DMs: it responds primarily to a global energy and food shock; supply-chain bottlenecks hitting goods markets; and services reopening. We see the current inflation spike as largely transitory and expect it to subside in 2022. Still, inflation is unlikely to converge to central bank target ranges until 2023. In this context, we expect central banks in the region to continue hiking interest rates, in some cases well above neutrality. Unlike DMs, inflation is not rising from a prolonged period of underperformance and the inflation expectations channel remains critical. Moreover, monetary policy is having to counterbalance fiscal concerns.

Next year will be all about the electoral season and fiscal prospects in Brazil Despite pandemic easing, recent fiscal rule developments, along with the upcoming electoral season, have increased uncertainty in Brazil. We now expect a below-potential 1.2% growth for 2022. Real time inflation is more resilient than forecasted and expectations for 2022 deteriorated. The BCB is now tightening more and faster. We project the Selic at 11.50% by March 2022, and a return to neutral only in late 2023 (around 6-7% pa). The main unknown is how high the public debt/GDP will get in the long run. We expect it to reach about 90% by 2030's vs. the current 83%.

Mexico: Lagging the recovery Despite its relative fiscal stability, its close economic relation with the US, and the absence of any major election in our forecast period, Mexico has thus far lagged the recovery. Some of this weakness may prove temporary, as with the shortage of microchips hitting autos. But part of it can also be attributed to ongoing policy uncertainty --heightened recently by the proposed electricity reform -- and its impact on investment. On the monetary front, we see Banxico raising rates to 6.25% by Q1'22.

Argentina: All eyes on IMF negotiations Rising inflation and FX pressures, and dwindling international reserves in the face of mounting external debt service should translate into a sizable devaluation in the near term. We still see a new IMF agreement as the most likely scenario, but recognise that much will depend on the outcome of the mid-term elections in November.

Andean countries: Heading to another electoral season In Peru, the new government has struggled to generate confidence, which will likely affect investment in coming years. Meanwhile in Chile, November elections and the Constitutional Convention imply potentially sensible changes to the pillars of its institutional and economic model, which add to the significant challenges of the country on the economic front amid growing macroeconomic imbalances. Lastly, Colombia is also heading to presidential elections in May-22, after which the new government will have to focus on addressing the long-dated fiscal issues facing the country.

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