Global Markets Overview: Latin America
Updated: Mar 27
By Tom Ives, Analyst at the York IFS Global Market Telegraph
“LatAm markets struggle as second wave of coronavirus devastates the region; the
Ibovespa gains despite fractured political system and will further government bailouts to Pemex rejuvenate the Mexican economy?”
The Fed’s decision to leave interest rates unchanged offered little respite to Latin American markets as rising inflation fears and a recent surge in coronavirus cases weighed heavily on
sentiment. The MSCI Latin America index looks set to close the week flat as strength in the
Chile IPSA index eased losses in other markets. The Chile IPSA index is now trading at its
highest level in over 14 months despite a recent pullback in copper prices from decade
Despite Brazil’s political landscape falling into turmoil, the Ibovespa index edged higher
tracking strength in the real. Alarm bells rang last month when President Bolsonaro fired
Petrobras chief Castello Branco, sparking worries of future government intervention in other sectors. This is one of many controversial decisions made by the current President who has already deservedly received widespread criticism for his handling of the pandemic. This
crucially comes at a time where the more contagious Brazilian virus has devastated an
already depleted healthcare system. Coronavirus deaths in Brazil have now surpassed those of the US despite Bolsonaro’s unconvincing claims that the outbreak is ‘comfortable’.
The introduction of leftist politician Lula into the fold for the upcoming election in 2022 has
fermented an already dire political crisis in Brazil. Similarly to Bolsonaro, Lula is renowned
for his unconventional and rash decision making. Former president Lula is now eligible to re-run following his surprise acquittal by the Supreme Court. One of the politicians held
accountable by the “Lava Jato”, the Supreme Court ruled in his favour against the numerous
corruption claims now against him.
The economic climate in Brazil is just as worrying. After keeping the interest rate at historic lows during the pandemic, Copom shocked markets with their decision to raise rates for the
first time in 6 years. They have announced a 75-basis point increase in the Selic rate to
2.75% in response to greater than anticipated inflation headwinds. With inflation now at
5.2%, above their annual target of 3.75%, the Central Bank have warned that there might be
further increases in the future.
However, the rise in the Selic rate is some much-needed good news for the Brazilian real.
The real has been hurt by spiralling government debt and rampant fiscal spending and
remains one of the worst performing currencies year-to-date. The currency has struggled
even despite intervention from the Central Bank as they sold over 10,000 foreign exchange
swap contracts in an attempt to support the currency. Given that the US Federal Reserve
maintained its benchmark rates at record lows; the rise in the Selic rate has resulted in the
rising appeal of carry trades as interest rates between the two nations diverge. Whilst
analysts at Barclays and Citi have recommended buying into the real for the short-term, the
consensus is unclear on how long this optimism will last. Real interest rates still remain
negative and this is unlikely to change in the foreseeable future.
Mixed fortunes for state-owned giant Pemex have led to further volatility in Mexican markets
as the Mexican IPC index reversed earlier gains to end the week lower. The index initially
climbed 4% following the discovery of a new oil field in Tabasco. In his latest press
conference, President Lopez Obrador announced that they believe the field contains over 1
billion barrels of crude oil. The firm has come under a lot of pressure as critics question the credibility of Lopez Obrador’s promise of a revived energy market. Current output levels have fallen dramatically since his predecessor Nieto even despite cancelling bidding rounds on untapped Mexican reserves.
However, the optimism was soon short-lived. Despite numerous injections by the Mexican
government, worries persisted over the management of the Latin America’s most indebted
firm. In its latest earnings call, Pemex stated that its debt stands at US$131 billion at the end
of 2020. Pemex’s burden on the Mexican economy has already seen downgrades from
credit agencies Moody’s and Fitch. The stock fell further now Lopez Obrador has outlined
that the Mexican government will absorb US$6 billion of current debt. It remains to be seen whether this move can help rejuvenate a sluggish economy.
This article was first published in the University of York Investment and Finance Society's Global Market Telegraph (GMT) Edition 4 in late March 2021.
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