The Banker asked a group of economists to share their views on Latin America’s prospects in 2019, as new administrations promise change, Argentina deals with austerity and US-China trade tensions threaten to hit exporters. Silvia Pavoni reports.

Q: Under Jair Bolsonaro, Brazil is supposed to be becoming a more open market. Will this happen? What are the main obstacles? And how might geopolitics get in the way?

Mario Mesquita: We believe that the new government will follow the strategy of a gradual opening of the Brazilian economy, focusing on the reduction of subsidies, tax breaks and tariffs that proved to be inefficient, especially those aimed at specific sectors rather than the whole economy. This agenda may start moving only in 2020, together with the simplification of the tax system and after the approval of the pivotal pension reform. The main obstacle will be the resistance of the sectors that benefit from government protection, which have a strong [lobbying presence] in society and Congress.


  • Martin Castellano, head of Latin America research, Institute of International Finance
  • Edward Glossop, emerging markets economist, Capital Economics
  • Claudio Irigoyen, head of Latin America economics and foreign exchange and fixed-income strategy, Bank of America Merrill Lynch
  • Mario Mesquita, chief economist, Itaú Unibanco
  • Carlos Serrano, chief economist, BBVA Bancomer

In terms of the relationship with other countries, Brazil will likely prefer bilateral agreements with developed countries rather than multilateral ones with countries from the region; for example, in the context of Mercosur [the customs union between Brazil, Argentina, Paraguay and Uruguay]. Despite criticism during the election campaign, we don’t believe the government will hesitate on negotiating some trade deals with China, as it is a major trade partner for Brazil.

Claudio Irigoyen: The focus of the Bolsonaro administration under finance minister Paulo Guedes’ leadership on the economic side is to pass the social security reform in Congress as soon as possible. The goal is to pass a Temer-like reform [in line with the proposal of previous president Michel Temer’s administration] with some extra tweaks, but basically come up with a reform that can secure 700bn reais [$188bn] in 10 years, in order to stabilise the country's debt-to-gross domestic product [GDP] ratio around 2021. At this point it is more important to pass the reform towards the end of the second quarter of 2019 rather than going for an ambitious reform that can take the whole year to discuss in Congress and might make market participants nervous if the reform is unlikely to be passed in Congress.

In addition, the plan is also to pass the Central Bank Independence Law, as well as start discussing a tax reform that will focus on lower corporate taxes, as well as other micro reforms and foreign trade deals that will increase total productivity. The main obstacle for Mr Bolsonaro is governability; in other words, whether he is able to get all the votes necessary to pass those much-needed reforms. We expect 3.5% GDP growth for 2019 in Brazil.

Martin Castellano: I think the government is very much focused on making it work. The new administration inherits a relatively sound economy, which provides solid ground. This includes strengthening activity, well-controlled inflation, a small current account deficit and high international reserves. Also, several difficult reforms have already been carried out by the previous government. The priority is to quickly cut the sizable fiscal deficit – the country’s Achilles’ heel – to boost confidence.

I see two positive factors. First, the government seems willing to spend political capital addressing tough issues such as pension reform and privatisations. Second, the economic team looks cohesive and could benefit from less political interference. The main obstacle could be gaining legislative support amid uncertainty over the ability of the new team to reach consensus with politicians in Congress. Externally, increased protectionism worldwide could hinder Brazil’s open-market push. While Mr Bolsonaro’s economic agenda is pro-market, it will likely follow a sequence, such as improving the tax system before opening the economy, which should help implementation.

Q: As with Brazil, Mexico has had a drastic change in leadership with the election of Andrés Manuel López Obrador as president. What will Mexico’s business environment look like by the end of 2019? What are the implications for banks?

Carlos Serrano: There is significant uncertainty regarding the types of policies that the new administration will adopt. There have been both positive and negative signals. On the positive side are a fiscally responsible budget, good appointments on the central bank board, a proposed reform to the pension system, and a set of measures that will strengthen capital markets. But on the negative side is the energy policy – the government has announced that it will suspend auctions of oil fields and joint ventures with state-owned oil company Pemex, the cancellation of Mexico’s City airport and the annulment of the education reform.

For now, it appears as that what will come is macroeconomic stability but with micro distortions that will have a negative impact on growth. So far, the signals from the federal government towards the banking industry have been positive, but those coming from some members of Congress are worrisome, in particular the initiative to prohibit banking fees.

Mr Irigoyen: In the case of Mexico, we are more concerned about the agenda of Andrés Manuel López Obrador. We expect a more interventionist approach and excessive reliance on referendums. The new Mexico City international airport episode is just one example. We think policy uncertainty will continue to remain high, in particular if the US economy decelerates and the need to implement more redistribution policies puts pressure on fiscal accounts. We have reduced our growth forecast to 1% for 2019. We think the weakest link will continue to be Pemex, which is at risk of losing its investment grade this year.

Mr Mesquita: Mr López Obrador took power in December 2018 with substantial support, in Congress and from the population. Some micro policies the new administration is pursuing, such as the cancellation of the new Mexico City international airport and the suspension of oil field auctions, combined with fiscal risks, will likely be a drag on confidence and business spending. Fiscal risks derive from the fact that although the government is targeting an increase in the primary surplus in 2019, new social programmes and public sector investments, combined with a likely slowdown of the economy, mean risks of higher fiscal deficits. At the same time, there are also some legislative initiatives to change regulation in sectors such as banking and mining that also contribute to high uncertainty.

In this environment, inflation risks rise because the exchange rate moves in line with the new policy announcements. Given that inflation is already above the 3% target, the central bank is adopting a cautious approach, keeping monetary policy tight. As for the banks, the combination of slower growth, uncertainty and monetary policy tightening will likely curb credit growth and has the potential to increase non-performing loans.

Mr Castellano: In Mexico, the government has tried hard to gain investors’ support during the transition. The new authorities were constructive regarding the North American Free Trade Agreement [Nafta] renegotiation process, maintained Mexico’s long-standing fiscal policy framework, and put together a prudent budget for 2019. However, delivering on campaign promises while maintaining fiscal discipline and sustaining market support will be a difficult balancing act. Several controversial initiatives reflecting increased state intervention in the economy have already fuelled investor concerns. A lack of pragmatism could exacerbate financial volatility, weighing on growth. In the absence of increased policy flexibility, a gradual deterioration in the macroeconomic position could make the business environment more challenging.

Q: How is Argentina’s economy likely to perform in 2019 and how might this influence the October presidential elections? How will the International Monetary Fund [IMF]-imposed reform schedule affect the economy and, potentially, the political climate?

Mr Castellano: A tough economic adjustment is under way. External accounts will also keep adjusting to a new set of prices in 2019, mainly through import compression and slower resident capital outflows, helping reduce external financing needs. The IMF funding should be enough to cover those needs, providing some relief. Inflation will continue to fall throughout the year, although it will likely remain at a very high level. The fiscal adjustment [to 1% fiscal primary surplus in 2020, from the 2.6% deficit expected for 2018 in mid-September, before the IMF’s new, steeper requirements] is very ambitious in terms of the magnitude of the effort in an election year. It will not be easy to deliver, but it is feasible.

Fiscal performance in 2018 was [encouraging] and the government managed to approve the 2019 budget. We expect front-loading of spending to prop up the exit from the recession. The government aims to regain business and consumer confidence by successfully implementing the IMF programme, which would allow for a gradual reduction in interest rates ahead of the election. A key challenge is not only to maintain public support while making a significant adjustment but also to reassure investors that sound policies will survive the political cycle. Signals by the different presidential candidates on the continuity of certain policies and basic agreements should be closely monitored in the run-up to the election.

Mr Irigoyen: We expect Argentina to continue in recession this year, with economic activity stabilising towards the second half of 2019. The tight fiscal and monetary policies implemented with the second IMF programme helped to stabilise the peso, which also benefited from a more stable global backdrop, particularly in Brazil. The government’s financing needs are shielded for 2019, but from 2020 onwards remain challenging.

The October presidential elections are crucial for the medium-term outlook, and the recent polls indicate a contested second round between [current right-wing president Mauricio] Macri and [former Peronist president] Cristina Fernández de Kirchner. The key for Mr Macri to be re-elected is to stabilise the foreign exchange market, and for the economy to start showing signs of recovery as we get closer to the elections. The economy still remains vulnerable to a significant worsening of the external backdrop.

Mr Mesquita: The government is reducing the primary deficit, and the current account deficit is falling due to a weak currency and weak internal demand. Considering that there is no access to international capital markets now (or at least not at reasonable borrowing costs), if it wasn’t for the IMF package, fiscal and balance-of-payment adjustments would need to be even harsher.

With the new monetary policy framework, which essentially targets a stable monetary base, the exchange rate has stabilised and both inflation and interest rates are falling, but remain high. In this context, we forecast zero growth in 2019, after a 2.2% decline in 2018, but the risks are tilted to the downside despite the expected normalisation of the agricultural output, which was an important drag for the economy in 2018. As a result, current polls show Mr Macri virtually tied with former president Ms Fernández de Kirchner in a likely run-off for the presidential race this year. In our view, uncertainty regarding the outcome of the elections could trigger further exchange rate depreciation, keeping inflation high and preventing interest rates from falling, with negative consequences for the popularity of the ruling coalition.

Q: More broadly, how do you see the future of Latin America in terms of economic growth, trade and investment, both with regards to integration within the region and its place within global flows?

Mr Irigoyen: We expect Latin America to grow 1.6% in 2019, being the only region within emerging markets that will show some acceleration in growth in a context where we expect some global slowdown. The pick-up in growth will be led by Brazil on the back of higher consumption and investment, while Mexico is expected to underperform. We expect some mild deceleration in the Andean countries due to the drop in commodity prices and the slowdown in China, but Chile, Colombia and Peru will still grow by close to 3.5%. We expect a recession in Ecuador that will likely force the country to ask for IMF financing. Most countries are in the process of fiscal consolidation, which even though it will positively affect potential output in the medium term, will cap the cyclical recovery in the short term. Exports will remain limited (with some exceptions, such as Argentina) due to relatively depressed commodity prices, and investment will pick up selectively.

Mr Mesquita: Latin America will likely continue to grow at a pace below the one registered in the previous decade, during the terms-of-trade boom. Still, a growth improvement from recent years is likely, especially in those countries that advance reforms. In the case of Brazil and Argentina, the two largest South American economies, it is crucial that their governments adopt measures to stabilise and reduce the public debt burden while advancing a productivity-boost agenda, reducing the cost of doing business. On the other hand, for Mexico to preserve or increase its economic growth rate, it is important that the new administration works to maintain the current solid macro fundamentals as well as the important reforms in labour and energy approved over the past years, especially considering that the US economy will not grow as fast as in the recent past.

Regarding trade integration within the region and with the rest of the world, we have more pro-free-trade governments today in two key markets of Latin America – Brazil and Argentina, both with closed economies – which bodes well for boosting trade. However, there are obstacles to advancements in a free-trade agenda: more protectionist political forces gaining ground in the core economies and the governments of Brazil and Argentina needing to fix their macro imbalances.   

Mr Serrano: Global deceleration will affect the region’s recovery. Tighter financial conditions, lower growth in advanced economies and in China, and trade conflicts will take a toll in the region. Growth will be higher in Peru, Colombia, Paraguay and Chile, but will be lower in Uruguay, Mexico and Brazil. In general, fiscal policies will be restrictive, but in most countries monetary policy will be expansive and will help to mitigate the negative external factors. We will see significant volatility in asset prices.

Mr Castellano: Beyond the progress made by the countries of the Pacific Alliance – Chile, Peru, Colombia and Mexico – much remains to be done in terms of regional integration. The scope for boosting intra-regional trade is significant. As Pacific Alliance countries have based their growth strategy on free-trade agreements, Mercosur has followed a more inward-looking approach. Brazil’s new government could help revamp Mercosur, facilitating tax and regulatory framework harmonisation, capital market integration and infrastructure financing regionwide.

Q: How do you see Latin America-China trade and investment relations developing, and what might be the impact of escalating tensions between China and the US on Latin America?

Mr Castellano: China has been an increasingly important trade and investment partner for most countries in the region. Latin America is highly dependent on China through different channels such as commodity prices, loans and infrastructure investment. Protectionism is a major risk factor because it could affect external demand. While a potential escalation of tensions between China and the US could provide some trade opportunities for certain Latin American countries in the short term, it would also lead to a global slowdown in economic activity and a reduction in trade, adversely affecting the region.

Mr Mesquita: Latin America’s growth would slow down significantly in a full-blown trade-war scenario. The impact would be seen on two fronts: weaker global growth – and its resulting effect on international trade – and tighter financial conditions. Argentina has a lot to lose from tighter global financial conditions. But soy bean, which accounts for about 60% of the country’s exports, could benefit from barriers and tariffs imposed by China on US agricultural products. Mexico’s economy might suffer less because it competes with Chinese manufacturing exports in the US market and has already reached an agreement with US and Canadian governments, pending congressional approval, to renegotiate Nafta [now rebranded as USMCA].

Mr Serrano: Escalation of trade tensions between the US and China will affect those economies that are more dependent on exporting commodities to China such as Chile, Brazil, Peru and Colombia. They would see lower growth rates. In the short term they could be beneficial to Mexico because it can gain market share in the US. But if trade tensions escalate further and that results in lower global growth, the results will be negative even for Mexico.

Edward Glossop: Mexico, alongside several smaller countries in Central America including Nicaragua, Honduras and Costa Rica, is most vulnerable to a general escalation in US protectionism. But individual sectors in some countries – such as aeronautics in Brazil – would also be vulnerable in the event of targeted action on specific products.

Critical for Latin America is the extent to which growth in China slows, either due to the trade war or due to domestic factors. This would weaken China’s demand for the region’s commodity exports and push down commodity prices. Given that we expect growth in China to slow in 2019 due to domestic factors, this will weigh on growth in Latin America.

Mr Irigoyen: The structural slowdown in China, as well as the rebalancing away from manufacturing and into services, will put a natural cap on Latin American growth, so the recovery we expect for this year and next year is more cyclical in nature. We expect a gradual improvement in capital flows, contingent on a dovish Federal Reserve and a reasonable trade deal between the US and China that moves some of the global policy uncertainty off the table. The 6% growth that some Latin American countries registered during the commodity booms are gone, and now the focus should be on fiscal consolidation and micro reforms to increase total factor productivity to keep expanding potential output.


All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker

For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Top 1000 2023

Request a demonstration to The Banker Database

Join our community

The Banker on Twitter