Latam Charts: Where We Stand  

• We look at four different benchmarks for the recovery in economic activity across the Latam-6. Rolling annual GDP is expected to get back to 2019 levels first in Chile around Q3-2021, with the rest to follow later.

• In the meantime, Latam central banks are expected to remain hold until at least mid-2021. 

HOW RECOVERED ARE WE?

The extended first wave of the pandemic has abated in much of Latam and policymakers have accelerated their normalization processes: the Latam-6 economies are all 90% or more re-opened—but this doesn’t mean economic activity is 90% recovered. There are a variety of ways to characterize how far the Latam-6 have progressed in getting their GDPs back on track, which we look at in turn.

• Basic. The lowest bar for recovery is getting monthly economic activity back to levels from a year ago. The year-on-year comparison takes account of seasonalities in national GDP proxies, but it sets a relatively low threshold for comparison by ignoring growth between the 2019 base month and the onset of the pandemic and lockdowns in March 2020. Moreover, events last year that caused economic disruptions, such as the October 2019 social unrest in Chile, make for even more favourable base effects. By this very basic yardstick, September GDP was down only -0.77% y/y in Brazil compared with the same month a year ago (chart 1). The rest of the region’s economies saw September prints that were between -4.84% y/y (Chile) and -7.26% y/y (Colombia) below economic activity in the same month of 2019. By October, Chile’s monthly GDP was down only -1.16% y/y (it is the only country that has reported October 2020 economic activity data to date).
• Good. A somewhat more effective measure of recovery compares the latest month of economic activity with the data for February 2020, the last full calendar month before lockdowns were imposed across all of the Latam-6 in March. On this metric, Brazil’s non-seasonally-adjusted (NSA) monthly economic activity has been above pre-pandemic levels since July, while Chile moved above February’s GDP threshold in October (chart 2). Mexico, by contrast, was still -5% off its February activity level in September. A within-year comparison, however, should be based on seasonally-adjusted data: on this basis, September economic activity hadn’t recovered to February levels in any of the Latam-6 (chart 3). Peru was the worst off, still down -12.4% versus February, while on the rosier side, Brazil was down -2.5% from its pre-pandemic watermark.
• Better. Monthly numbers are an excessively narrow snapshot by which to assess where Latam’s recoveries stand. Comparing quarterly GDP to Q4-2019, the last full quarter untainted by the pandemic, provides a better measuring tape for comparison. On this benchmark, our forecasts (see the November 28 Latam Weekly) imply that Brazil and Chile could see single-quarter GDP back to end-2019 levels by the beginning of 2021 (chart 4). The others would require until at least H2-2021 to reach this point.
• Best. The real mark of a full recovery would be the point where the rolling four-quarter sum of economic activity is back on par with real GDP in 2019 as a whole. The time required to get back to that point is set to vary widely across the Latam-6 (chart 5). On our current projections, Chile is set to return to 2019 levels in Q3-2021, with Brazil following in Q2-2022, and Colombia and Peru in Q4-2022.

OUTPUT GAPS AND EXTENDED HOLDS

Given that negative output gaps are set to remain open across the Latam-6 into at least mid-2021, and in some cases much longer, we continue to forecast that central banks will keep their benchmark policy rates on hold until at least Q2-2021, with Brazil’s BCB expected to provide the first hike (chart 6). Even in Chile, where four-quarter GDP is forecast to get back to 2019 levels relatively quickly, we expect the BCCh to eschew hiking until Q2-2022; similarly, we anticipate that Mexico’s Banxico and Peru’s BCRP will stay on hold until Q2-2022 as well. The long deferral of rate hikes in Mexico corresponds to the country’s still relatively high real rates (see charts 4 and 5 in the Key Economics Charts section) despite -275 bps in nominal rate cuts, the largest easing effort in the region.

COVID-19: PROGRESS, BUT NO TIME TO RELAX

Latam’s COVID-19 trends have improved recently, but a recent uptick in new incidences in Brazil and Mexico augurs for continued caution. Our Key COVID-19 Charts show that the pace of new infections remains low in Chile and Peru after very hard times with the pandemic earlier this year that prompted intensive efforts to control COVID-19. In contrast, the recent rise in incidences in Brazil and Mexico falls in the two major Latam countries that have put forward less concerted responses to this year’s public-health challenges. Recent experiences in Argentina and Colombia fall somewhere in between. In Argentina’s case, the country’s extended control measures have brought the country’s winter surge in infections back to levels last seen in August. In Colombia, progress seems to have stalled with new infection numbers holding in a range over the last five months. 

PERUVIAN YIELDS: REMARKABLE RESILIENCE

Despite a November marked by political upheaval, Peru’s soberano market was a testament to faith in the country’s strong economic institutions and the abundant global liquidity that is flowing back into emerging markets. After the Vizcarra impeachment and public clashes with the short-lived Merino government, the sovereign still managed on Monday, November 23, to issue USD 4.0 bn in global bonds that included tranches with 12-year, 40-year, and 100-year ‘century’ maturities at a 3.8x bid-to-cover ratio. Nevertheless, yields tightened over the course of November by -2 bps at the 5-year tenor, -25 bps at the 10-year horizon, and by -33 bps at both the 20-year and 35-year nodes of the curve (chart 7)—a remarkable set of developments in the midst of political turmoil and unprecedented new issuance.

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