LATAM FX Talking: An extended rout, exacerbated by local drivers
From the incipient political crisis in Brazil, following the resignation of the popular Justice Minister Sergio Moro, to the persistent credit-rating downgrades seen in Mexico and the potential sovereign default in Argentina, the three largest economies in the region appear to be facing considerable challenges that should exacerbate volatility
Executive summary
The political crisis in Brazil took us, and most investors, by surprise and it is still too soon to gauge its implications. Moro’s resignation should reduce President Bolsonaro’s political capital and investors are, naturally, likely to worry about the risks to the economic agenda. The near-term outlook for fiscal accounts, following the fiscal relief packages approved by Congress, is a particular source of concern. The risk is that Congress, or Bolsonaro, decide to abandon the fiscally-conservative tenets advocated by Economy Ministry Paulo Guedes, resulting in his departure from the administration. Such an event would be especially negative for local assets and could ultimately threaten the sustainability of Bolsonaro’s own administration.
In Mexico, the fast-deteriorating economic outlook, illustrated by the decision by three major rating agencies to downgrade the sovereign, pushed the central bank to conduct another emergency meeting. This was the second off-schedule meeting in one month, that resulted in another 50bp rate cut. The central bank’s more assertive stance contrasts with the resistance by the federal government to provide fiscal relief to private sector corporations. Considering prospects of a 7-8% GDP contraction in 2020, rating agencies have maintained the negative outlook and, so, further downgrades are possible. But a sub-investment grade rating is still unlikely in the nearer-term.
Elsewhere in the region, Andean economies stand out for their superior capacity to provide stimulus, as seen especially in Chile and Peru, which should help pave the way for a faster post-crisis recovery. An outperforming bias for these currencies could also emerge amid more solid prospects for the eventual normalisation of commodity prices and global demand.
Download
Download report"THINK Outside" is a collection of specially commissioned content from third-party sources, such as economic think-tanks and academic institutions, that ING deems reliable and from non-research departments within ING. ING Bank N.V. ("ING") uses these sources to expand the range of opinions you can find on the THINK website. Some of these sources are not the property of or managed by ING, and therefore ING cannot always guarantee the correctness, completeness, actuality and quality of such sources, nor the availability at any given time of the data and information provided, and ING cannot accept any liability in this respect, insofar as this is permissible pursuant to the applicable laws and regulations.
This publication does not necessarily reflect the ING house view. This publication has been prepared solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ING does not represent that it is accurate or complete. ING does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice.
The distribution of this publication may be restricted by law or regulation in different jurisdictions and persons into whose possession this publication comes should inform themselves about, and observe, such restrictions.
Copyright and database rights protection exists in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved.
ING Bank N.V. is authorised by the Dutch Central Bank and supervised by the European Central Bank (ECB), the Dutch Central Bank (DNB) and the Dutch Authority for the Financial Markets (AFM). ING Bank N.V. is incorporated in the Netherlands (Trade Register no. 33031431 Amsterdam).