LatAm set for slow growth amid 'tense calm'

Latin America is this year seeing a turnaround in growth helped by a modest, but positive correction in commodities prices and a global recovery in trade; however, multiple downside risks have instilled what BBVA Research has termed "a tense calm" in the region.

Reports from the Spanish firm and Fitch Ratings point to a scenario of slow regional growth ahead that depends on relative stability abroad, particularly with regard to China and the US, and domestic political risk as several countries have upcoming elections.

In its report titled "Risk Radar Latin America 2Q17", Fitch forecasts regional 2017 GDP growth to reach 1.2%, down from its 1.3% forecast in April.

"Latin American economies remain vulnerable to a sharp deceleration in the Chinese economy and its knock-on effects in commodity prices," said Rui J. Pereira, Fitch's regional credit officer for the Americas. "Other primary risks include increased U.S. trade protectionism, political risk and corruption, market volatility, and capital outflow."

The Fitch projection was, nevertheless, more optimistic than the 0.8% GDP growth forecast from BBVA Research, which noted in its Q3 regional situation report that the expected 2017 rate still represents a considerable recovery from the 1.6% contraction that Latin America registered in 2016.

BBVA Research added that this year's recovery is largely built upon Brazil and Argentina exiting recessions, whereas "the majority of the remaining countries will generate a deceleration in activity with respect to 2016."

"Looking ahead, we continue to predict that the main impetus for growth in South America will come from both the external sector (with better terms of trade and rising global demand) and boosts from public and private investment in countries such as Argentina and Colombia," said the BBVA Research report, which foresees domestic investment to give a boost to GDP growth in Peru during this year's second half and 2018.

Compared to Latin America's growth potential of close to 3% and the expansion rate of developed economies at around 2%, the current pace of growth in the region is slow, the report pointed out.

The research arm of Spain's second largest lender, BBVA, forecasts higher growth for Latin America next year at 1.7%.

The regional growth picture could turn for the worse in the event of a sudden deceleration in China; the adoption of damaging protectionist policies, particularly from the US; or even erratic monetary tightening from the US Federal Reserve, according to BBVA Research.

Signs that any of these may be occurring, could also have negative impacts in the short and medium term, even if only temporary, the firm added.

NAFTA TALKS

The upcoming Nafta discussions appear so far to be moving towards a win-win-win scenario for the US, Mexico and Canada, particularly if the US leadership can maintain its composure. However, the political pressures stemming from the US mid-term elections in November 2018 and Mexico's presidential election in July 2018 have placed a clock on talks.

The recently surfaced plan to execute Nafta renegotiations via seven rounds of discussions separated by three-week intervals would allow talks to finish before Mexicans go to the polls. This is broadly appealing to the governments, as a leftist candidate [Andrés Manuel López Obrador], who could potentially disrupt any efforts at revising Nafta, is currently leading in the Mexican polls.

The timetable could also provide US President Donald Trump and his administration with a reason for avoiding any major changes that would require legislative approval, bypassing deep divisions among legislators within both major parties.

OIL & GAS

In a separate report, Fitch said political uncertainty could also affect potential oil and gas investment in the region.

"Latin American energy, oil and gas investor concerns about upcoming elections range from the potential impact on state-owned oil and gas companies, to credit implications from the continued fall-out from Lavo Jato in Brazil."

"Upcoming Presidential elections, in Brazil, Chile, Colombia and Mexico, have resulted in a period of increased policy ambiguity with possible rating implications for the sovereigns," said Fitch director Jay Djemal in the report. "Businesses have opted for a cautious wait-and-see approach regarding new investments while the political uncertainty lasts."

KEY RATES & FX

The region's economies are at the home front broadly seeing improving inflation outlooks, said BBVA Research. Even Mexico, which saw inflation double in the 12 months through June, appears to have hit its CPI peak at 6.3%.

Fitch added that weaker domestic demand has eased inflation, and both firms see lower inflation rates driving benchmark rate cuts across Latin America to stimulate growth. Beyond the global trade recovery and rising commodity prices, economies are also feeling some benefits from moderate currency appreciations.

Nevertheless, the situation remains fairly volatile given the current geopolitical environment, and shocks of uncertainty could drive cancellations and delays in foreign direct investment and public infrastructure initiatives, stalling growth despite otherwise favorable macroeconomic metrics in the region.