The MSCI Latin American Index which captures large and mid-cap equities across five Emerging Market (EM) countries, namely Brazil – by far the largest constituent, Mexico, Chile, Peru and Colombia, has on a year-to-date basis climbed 10 per cent in US dollar terms. Such performance markedly contrasts with that noted in the MSCI All-World index – a barometer for global developed and emerging market stocks, which has fallen close to 12 per cent.

The outperformance is notably a result of the region’s stock market benefitting from a surge in commodity prices, favourable foreign exchange currency movements, and insulation from geopolitical risks. That said, underlying issues, such as surging inflation and political uncertainty, linger in economies within the region.

Brazil: Inflation and political uncertainty overshadow pick-up in business activity

Latin America’s largest economy has seemingly emerged from an unsettling economic period brought about by the coronavirus pandemic. Business activity, aided by growth accelerating in services and manufacturing registering a slower contraction, pointed to the fastest expansion in the country's private sector since last September. That said, the country is yet not out of the woods.

Persistently high inflation, stemming from a rise in energy and food costs, primarily driven by the unfortunate events occurring in Ukraine have crippled consumer’s purchasing power.

Annual inflation rate in Brazil edged higher to 10.5 per cent in February of 2022 from 10.4 per cent in the previous month, in line with forecasts. The reading points to the sixth successive month of double-digit inflation rates. Biggest price increases were seen for transport (18.26%) namely in fuels, housing (14.61%), and food and drinks (9.12%). On a monthly basis, consumer prices were up 1.0 per cent, almost twice the 0.54 per cent rise noted in January.

In response to such elevated inflationary pressures, Brazil’s central bank has since 2021 been swiftly responding, raising its benchmark rate, better known as the Selic rate, by a total of 8.25 per cent over nine interest rate hikes. The Monetary Policy Committee (Copom) – the body of the Central Bank, which defines the basic interest rate of the economy, on March 16 stated that it will continue evaluating the situation and alter its guidance as necessary.

The most vulnerable to economic shocks, have since inflation started on its upward trajectory, struggled. President Jair Bolsonaro, in a bid to both increase his popularity ahead of the upcoming presidential election and to mitigate economic struggles families are facing consequent to Russia’s invasion of Ukraine, is evaluating a temporary increase of the government’s Auxilio Brasil welfare programme, which had previously replaced Bolsa Familia – a backbone of Brazilian social policy for almost two decades.

The social program, which pays monthly installments of around 400 reais (equivalent to €70.90) to almost 18 million families, would be temporarily adjusted should conflicts persist and energy prices keep boosting inflation. The plan for such increase is currently viewed as a back-up, and has not yet been formally designed.

Obrador’s six-year term under pressure

Mexico, witnessing similar price pressures with headline inflation rising to 7.28 per cent in February despite increases in benchmark policy rates, is also faced with political uncertainty.

In April 10, Mexico’s citizens will have the right, through a referendum as established by the constitution, to express their opinion on President Andrés Manuel Lopez Obrador, by confirming or revoking his mandate. Obrador, seeking to complete his six-year term is said to have been displaying little regard for democratic norms, by attacking journalists not conforming with his views, lashing out at non-governmental organisations and civil society movements for investigating corruption and defending human rights.

Disclaimer: This article was written by Christopher Cutajar, credit analyst at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd and is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.

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