Latin America could once again emerge as the clear winner among emerging markets in 2023
As companies operating in Latin America (LATAM) build contingencies into their 2023 plans, they should continue to weigh global disruptors much more heavily vis-à-vis domestic factors, whether the former stem from a much-faster-than-expected Chinese slowdown, escalation of the war in Ukraine, or disruption to key commodities’ production and supply.
When it comes to disruption that could originate in LATAM or be directed at LATAM, our bias is to the upside for the first time in many years. The region already grew faster than expected in 2022, and we have reasons to believe that LATAM could emerge as a clear winner among emerging markets again in 2023. All downside risks are actually self-inflicted political transitions or result from poor policy decisions.
For a brief video overview of these events, please click here.
The following are the most important events to monitor in LATAM:
- Brazil removes all fiscal anchors: Our base is that Brazil will relax its current fiscal framework to allow for more government spending, but that new rules will still limit how much spending can increase in a given year. Our downside scenario would be that Lula’s government manages to break free from any spending cap. This would lead to a much weaker currency and push Brazil closer to a debt crisis down the line, leading to sharper budget cuts and tax increases already during Lula’s term.
- LATAM concentrates emerging-market (EM) investment: With both the US and Europe careening toward a recession in 2023, potential escalation of the war in Ukraine affecting neighboring countries, China remaining in lockdown, the MENA region suffering from high-inflation and heightened FX volatility, and Russia written off in global investment portfolios, suddenly LATAM feels like a safer investment bet. In this scenario, LATAM could become the top FDI destination, only trailing the US, Europe, and Developed Asia Pacific in absolute US dollar terms.
- Nearshoring doubles Mexico’s FDI: Mexico is the best-positioned country in LATAM to capture divestments from Asia manufacturing among companies willing to better serve the US market. In an upside scenario, Mexico would see foreign direct investment (FDI) at least double relative to 2022 levels in 2023, boosting the country’s manufacturing sector, employment, and consumer spending. Even if FDI does not double, we remain very optimistic about Mexico’s nearshoring prospects.
- USMCA trade dispute is settled: Even though we believe that President Andrés Manuel López Obrador (AMLO) has a vested interest in not resolving the conflict that it maintains with the US over Mexico’s protectionist energy policies ahead of elections in 2024, he could nonetheless feel compelled to yield to US demands and change current laws and regulations to allow for more competition from US and Canadian companies in Mexico’s energy matrix, especially on renewable energy generation. This unlikely turn would happen if AMLO were to deem possible sanctions against Mexico too costly for the country, although to this day he believes that regulatory changes under his administration still comply with Chapter 8 of the USMCA.
- Substantial easing of Venezuela’s sanctions: US sanctions on Venezuela remain a major handicap on the Venezuelan economy and, in particular, the oil sector. Removal or substantial easing of these sanctions is conditioned on negotiations with the opposition and substantive actions by President Nicolás Maduro’s regime to restore democratic norms. Given several past failures of dialogue efforts, we do not yet expect this outcome in our base case; however, the removal of US sanctions and even partial restoration of democratic norms in Venezuela would bolster regional stability and enable Venezuela to continue a slow climb out of its deep economic crisis.
- Chile’s new constitutional rewrite: While we expect that reforms to Chile’s constitution are likely to be implemented through Congress, if President Gabriel Boric’s administration is successful in negotiating a new constitutional reform process in early 2023, Chile could kick off another constitutional rewrite. This would prolong uncertainty an additional two to three years. Additionally, rather than focus on specific reforms, the rewrite could once again seek to alter Chile’s economic model, impacting the country’s investment attractiveness and long-term competitiveness.
- Castillo’s impeachment: Although President Pedro Castillo remains resilient regarding impeachment attempts, given support from left-leaning parties and overall public discontent with Congress, he could be successfully impeached next year if corruption allegations further diminish his political standing, and he loses the support of his former Peru Libre party and other allies. A sudden impeachment would force Vice President Dina Boluarte to take the reins of Peru’s government, unleashing short-term political destabilization and weighing further on market sentiment.
- President Lasso is ousted: President Guillermo Lasso won the presidency in left-leaning Ecuador in 2021 after running on a pro-business policy platform. However, nationwide protests have already surfaced during his term, and the opposition-controlled National Assembly attempted to impeach him. While we expect Lasso to ultimately finish his term in our base case, a hostile political environment leaves a substantial risk of his ouster. This would deepen instability and uncertainty in the business environment, with potential ripple effects for Ecuador’s neighbors by undermining trade integration and deepening insecurity challenges.
- CKF wins Argentina election: Although we do not expect ex-President Cristina Fernandez de Kirchner (CFK) to run for president in Argentina’s 2023 election, we cannot rule out this event, particularly given President Alberto Fernandez’s dwindling popularity. A win from CFK would likely lead to a local default and a refusal to repay the International Monetary Fund, provoking a steep ARS devaluation and stoking hyperinflation.
- Right-wing outsider wins Argentina election: Our view is that a moderate Peronist is likely to win the 2023 election; however, if Argentina experiences dual debt and currency crises next year, with inflation nearing triple digits, the likelihood that Argentines could seek to elect an outsider figure, such as Javier Milei, is high. Milei has vowed that, if elected, he would implement “shock therapy,” ending money printing and curbing government spending, a move that would seek to address Argentina’s macroeconomic imbalances but would also likely unleash protests throughout the country.
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