Latin America is failing to capitalize on a once-in-a-generation opportunity

We have been arguing for some time that Latin America could benefit from a rapidly evolving world order. The region enjoys relative peace in a world marked by seemingly endless geopolitical turmoil. It boasts a stock of human capital and infrastructure that makes some of its countries desirable near-shoring destinations as global supply chains are being redesigned. It also touts an abundance of natural resources, many of which carry heightened geoeconomic importance, such as lithium. Now that the US Federal Reserve has finally begun cutting interest rates, the list of external tailwinds faced by Latin America has grown even longer.

Yet, it takes two to tango, and countries in the region seem slow to seize this favorable global backdrop.

Monetary policy remains the bright star in Latin America. During the most recent global inflation spike, central banks in countries such as Brazil and Chile first tightened and later eased monetary policy well ahead of the developed world. They continue to act professionally; even the central bank of Brazil has managed to fend off political pressure to deepen interest rate cuts in order to boost domestic economic activity—its latest move earlier this month was actually an interest rate hike.

However, fiscal dynamics—Latin America’s perennial Achilles’ heel—are reemerging as a concern in countries like Mexico, Brazil, Colombia, and even Peru. Most concerning is the absence of productivity-enhancing reforms, with Argentina as the sole exception. Those countries pursuing changes to their institutional setups are actually scaring global and domestic investors off; Mexico’s recent legal reform is case in point.

In this context, Latin America’s growth for 2024 and 2025 is expected to remain lackluster at around 1.5% and 2.5% year over year, respectively. Yet not all countries are created equal, and more details on each major country we cover are presented below.

And from the perspective of an investor in financial assets, it’s an ill wind that blows no good. Risk premia remain elevated across a number of Latin American asset classes, often beyond levels in our view justified by fundamentals.

• Argentina: We anticipate Argentina’s macroeconomic imbalances will continue to narrow. The Milei administration is on course to achieve a 1.3% of GDP primary surplus this year, aiding in reducing inflation. Although growth has collapsed, we expect a recovery driven by initiatives to boost private sector participation. Fiscal consolidation and structural reforms should enable Argentina to secure new IMF funds and meet upcoming dollar liabilities.
• Brazil: Brazil’s growth has exceeded expectations this year, fueled by expansionary fiscal policy and the delayed effects of rate cuts from a year ago. A booming agricultural sector is a key driver, though its incremental impact may wane due to base effects. Political risks surrounding fiscal accounts remain significant. While the 2025 budget aligns with fiscal framework targets, it appears to underestimate expenses and overstate revenues.
• Chile: This year, Chile is showing a more balanced macroeconomic picture with reduced political noise. The constitutional reform process is complete, and general elections are not due until late 2025. Following last year’s mild recession, growth is gradually aligning with its estimated potential rate of 2% year over year, supported by more favorable monetary and fiscal policies. The government has introduced a new fiscal framework aimed at anchoring debt after a decade of deteriorating credit metrics.
• Colombia: Colombia is grappling with debt dynamics as recent data indicates fiscal deficits wider than projected. The latest budget proposal features overly optimistic revenue projections and growth prospects amid rising spending pressures. Although the government introduced a financial law to boost revenues, it includes a clause for “environmentally friendly” spending. Economic and political uncertainty is likely to remain high.
• Mexico: Mexico’s institutions are experiencing controversial changes. The Morena-controlled Congress passed a reform that could lead to a more politicized judiciary. The economic impact will hinge on the bill's implementation, set to occur through secondary laws under President-elect Claudia Sheinbaum’s administration. Mexico’s ties with the US, nearshoring trends, and financial markets may serve as crucial backstops. If implementation is prudent and Sheinbaum signals responsible fiscal policy, rating downgrades might be avoided.
• Panama: Panama’s credit rating has faced pressure following last year’s closure of the Cobre Panama copper mine. However, we believe the country will maintain its investment grade status due to a more muted economic impact than expected and a strong commitment to fiscal prudence. We anticipate growth will exceed 4% year over year, surpassing the Finance Ministry’s 2.5% forecast. Authorities have clearly committed to ensuring fiscal sustainability, as mandated by law.
• Peru: Peru faces several crosscurrents. Political risk is temporarily contained, with President Boluarte expected to remain in power until the 2026 election. The country is likely to return to growth rates of 3% or higher sooner than anticipated, driven by record-high copper production and critical infrastructure. However, fiscal accounts are worsening, and authorities seem reluctant to cut spending. Missing fiscal targets for the second consecutive year could increase the likelihood of rating downgrades.
• Venezuela: The electoral authority declared President Nicolas Maduro reelected in July’s presidential elections, despite the opposition presenting verifiable evidence of its victory. With Chavismo firmly entrenched in power, the prospects for an economic turnaround and sovereign debt restructuring remain very low.

Investment implications

Sovereign USD bonds: Argentina’s bonds are appealing, as our baseline scenario of no default is not fully priced in. Intermediate-dated Brazilian and Colombian bonds are also trading at attractive levels. Brazil has underperformed similarly rated sovereigns as uncertainty about the country’s ability to achieve fiscal targets persists. Were the country to underperform targets by less than feared, which we expect, this should modestly support bond prices. Despite Colombia’s negative fiscal outlook, the 6 to 7% yield on the country’s bonds is pricing in three credit ratings downgrades, which seems excessive.

Corporate USD Bonds: We favor large corporations with global scale and industry leadership. Our preference is for industrial and agricultural commodity producers, large telecommunications and integrated logistics service providers, systemically important financial institutions, and regional development banks.

Currencies: Most Latin American currencies can see modest gains in a context of a broadly weaker dollar. The Mexican peso could rebound from oversold levels if Claudia Sheinbaum signals moderation. The Brazilian real, Chilean peso, and Peruvian sol should see modest appreciation as commodity prices grind higher in the year ahead. Meanwhile, while Fed rate cuts will be somewhat supportive of currencies in the region, low or declining domestic policy rates will make this channel less impactful, in our view.

Equities: Latin American stocks are trading at attractive valuation multiples. A strategic allocation to the region’s stocks is justified, in our view. However, given the challenges described, investors will need patience to see equity market value unlocked in the region.

Co-authored with Solita Marcelli , Chief Investment Officer Americas

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