Banco Bilbao Vizcaya Argentaria : BBVA Research lifts its Latin America 2017 forecast

BBVA Research has upgraded its Latin America 2017 growth forecast by 30 basic points, citing improvement in domestic demand in Mexico and Peru. The BBVA Group study service expects the region to grow 1.1% in 2017 and 1.6% in 2018.

Macroeconomic data trends confirm that 2017 will be a turning point for Latin American economies after five years of decline in the region. The external economic context will also drive this recovery.

'In recent quarters we have seen that global growth has stabilized at a robust pace, which we expect to continue,' says Juan Ruiz, BBVA Research Chief Economist for South America. 'On the other hand, financial markets have shown very low volatility, and broad global liquidity is driving the inflow of capital into the region.' In this context, it should be noted that the rise in commodity prices, especially copper, is benefitting Latin American economies.

In this scenario of high global liquidity, Latin American stock markets and assets have continued posting gains, while volatility has remained low. This is in contrast to the relative weakness of economic activity, although countries such as Argentina, Brazil or Chile have recovered in recent months.

We are keeping our growth forecast for 2018 unchanged at 1.6%, based on the boost provided by both the external sector and the inflow of investments'

In its Q4 Latin America Outlook report, BBVA Research upgrades its regional growth forecast by 30 basis points to 1.1%, as a result of growth in Mexico and Peru, supported by their robust domestic demand, which remained stronger than expected.

'We are keeping our growth forecast for 2018 unchanged at 1.6%, based on the boost provided by both the external sector (with better terms of trade and increasing global growth), and the inflow of investments in countries such as Argentina, Colombia and Peru,' states the report.

However, BBVA Research points out that this growth rate remains low, both compared to the region's potential (between 2.5% and 3%) and developed economies (about 2%).

Price deceleration

In its report, BBVA Research notes that inflation rates are still declining across Latin America, and that prices are starting to drop in Mexico as well. Prices growth rates have been dwindling in recent months, thanks to exchange rate stability and weak domestic demand, and that food prices have also been declining in some countries.

'With a prospect of lower inflation looking forwards (or below the target in the case of Brazil and Chile), we expect regional central banks to adopt an even more accommodative tone, as interest rate cuts continue in South America through the end of the year and early 2018,' say BBVA Research economists.

In the case of Mexico, the study service expects the central bank to start cutting interest rates as of Q3 2018.

There is a risk that financial markets may be very accommodating, considering the prospect of a normalization of the US Federal Reserve's monetary policy'

Risks skewed downward

Given this growth scenario in Latin America, the risks are biased downwards. 'On the foreign trade side, despite their slight decline, risks linked to U.S. policies remain high,' says Juan Ruiz. 'The risk of an abrupt slowdown in China has also decreased'.

However, Juan Ruiz does note that the risk of asset-overvaluation in the international financial markets has increased, as well as the risk of a sudden spike in volatility from current low levels, which would affect capital flows into the Latin American region.

'There is a risk that financial markets may currently be very accommodating, considering the prospect of a normalization of the US Federal Reserve's monetary policy,' says Juan Ruiz.