LatAm Weekly – June 6

Colombia – Financial Markets will attack EM countries with twin deficits As global growth decelerates and risk-aversion increases, foreign investors tend to sell EM assets. However, EM countries with twin deficits—deficits on the fiscal front and in the current account—tend to be the preferred targets of foreign investors. Currently, this is the case with Colombia, where the average current account balance and fiscal deficit since 2014 are -4.5% (of GDP) and -2.5%. Brazil –We are downgrading our 2019, 2020 GDP Forecasts The Brazilian economy is sharply decelerating. Therefore we have downgraded our 2019 GDP growth forecast from 1.6% to just 1% YoY. Also we are souring on the prospect of a possible rebound in 2020, even in the event that congress approves the pension reform. In reflection of such, we revised our 2020 GDP forecast down to 1.5% YoY from 2.5%. Argentina – Is the Massa broad opposition coalition with Kirchenerismo credible? Sergio Massa’s announcement, expressing his willingness to form a broad opposition coalition against Macri, which would include the Kirchenirstas, was surprising. However, it is unclear whether it is credible or not. Mexico – The Tariff Tiff At the time of publication (June 6), the US-Mexico negotiations are ongoing. We see there being a 50% chance that the US goes through with imposing the 5% blanket-tariff on Mexican exports. However, we see the probability of the US holding the 5% tariff over a prolonged period or increasing it to 10% is low. The high degree of economic integration between the two economies (especially in the manufacturing sector) implies a considerable impact on US equity markets. Aside from targeting Republican controlled areas, Mexico has already started purchasing corn from Brazil signaling that it is willing to substitute its US imports. Mexico – Rating agencies downgrade Mexico Fitch downgraded Mexican sovereign debt, one notch, to BBB with stable outlook. “The downgrade of Mexico's IDRs reflects a combination of the increased risk to the sovereign's public finances from Pemex's deteriorating credit profile together with ongoing weakness in the macroeconomic outlook, which is exacerbated by external threats from trade tensions, some domestic policy uncertainty and ongoing fiscal constraints.” Further, Mexico was given a negative outlook by Moody’s relative to its prior “stable” rating.