Outlook for Latin American; market reaction to the conflict in the Middle East; upcoming elections in India, and pressure on the renminbi

To vote is like the payment of a debt, a duty never to be neglected, if its performance is possible: Nearly a billion people in India are eligible to head to the polls for parliamentary elections from 19 April to 1 June, with results expected on 4 June. Narendra Modi is poised for a third term with his Bharatiya Janata Party leading the coalition government; continuity is critical - a look at how the world’s most populous country votes in the world’s largest democracy and one of our hot paper stories this week. Also in this week’s edition: an analysis of the market reaction to the conflict in the Middle East, and the People’s Bank of China (PBOC’s) strategy to contain depreciation pressures on the renminbi. Using the dance analogy, we’ve investigated the ongoing transitions across Latin America, striving to paint a comprehensive picture for trade and investment – the result being a rhythmic journey, sometimes resembling a waltz, in other areas more of a break dance.

Latin America: Shall we dance? What’s the outlook for Latin American economies?

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We have looked into the ongoing transitions in Latin America in light of recent events to provide a complete picture for trade and investment in the region. The question we tried to answer is whether the region is fit for purpose in the different areas.

This time was different: Latin America’s post-pandemic paso doble with inflation and the exchange rate. Latin America's post-pandemic resilience has been bolstered by prudent monetary policies, stable commodity prices, and increased investor confidence. The region has become more resilient due to lessons learned from previous crises, including reducing reliance on foreign currency financing, improving financial regulation, and maintaining central bank independence. Economic recovery is expected to be gradual in 2024, with growth converging to around +2%. However, insolvency risk remains proportionally higher in Latin America, potentially undermining confidence in the region's businesses and affecting working capital requirements. Mastering the rhythm. Latin America can be at the forefront of the new green industrial deal and the global trade reshuffling.

Latin America is a key producer of critical raw materials, accounting for more than one-third of total global production of silver, copper, and lithium. The region is in a position to benefit from the global race to secure the supply of critical raw materials to accelerate the green transition. The global shift towards friend-shoring and near-shoring is also benefiting some countries, such as Mexico, and sectors, such as the automotive industry and the related supply chain. To fully capitalize on opportunities from friend-shoring and unlock its growth potential, the entire Latin American region will need to address low levels of intra-regional trade and improve trade infrastructure and logistics.

It takes two to tango. Managing political, social, fiscal, and financial credibility remains key:

Social risks are being contained, but the digital divide remains vast. Despite political swings, social unrest in the region declined last year and the first quarter of 2024 suggests that this trend could continue. Asymmetric developments on digitization and preparedness for artificial intelligence could be a challenge for the ability to maintain democratic governance and stability in the long run.

Climate change challenges the region's growth prospects, with potential losses equivalent to 11% of GDP by 2050.

Fiscal and financial risks are non-negligible either, with fiscal slippages likely as Brazil and Colombia are still on our fiscal policy watchlist.

Demographic change is a cause for concern, with the number of people aged 65 and older set to increase to 142mn in 2050, from 63mn today, and pension systems largely unfit for purpose. Policymakers should use all instruments to mobilize savings, reinforce pension systems and mitigate persistent inequality in the region.

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What to Watch this week

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Is the Talion law driving markets? The conflict in the Middle East is fuelling market pessimism, a flight-to-safety, and a shortened investment horizon visible in “W-shaped” market volatility patterns. Indeed, investors seem to continuously adjust to the shifts between geopolitical escalation and relaxation, or a form of Talion law – the “eye for an eye” principle. Current oil prices, at USD90, appear to include a geopolitical risk premium of USD5 to USD10. It also appears that the current geopolitical scenario is likely to prompt a slightly dovish stance from central banks. Significant intraday volatility in equity markets, influenced by technical and fundamental factors, will likely amplify short-term market volatility, regardless of the news source (be it political, geopolitical, or financial earnings).

Indian elections: continuity is critical. India will conduct parliamentary elections from 19 April to 1 June, with results expected on 4 June. Narendra Modi is poised for a third term with his Bharatiya Janata Party leading the coalition government. The continuation of reforms should focus on regulations, infrastructure, the labor market, and the manufacturing sector to sustain fast-paced growth and position India as a prime destination for foreign investment. The government aims to elevate India’s infrastructure and trade logistics to rank among the world’s top 25 countries by 2030. India could become the second-largest economy in the Asia-Pacific region and the third largest globally by 2030, yet downside risks remain.

PBOC’s strategy to control the depreciation of the renminbi. Despite global pressure, notably from strong US data, the onshore Chinese yuan (CNY) has shown remarkable stability, with a slight depreciation of just -0.1% this month. The People’s Bank of China (PBOC) aims to contain this pressure, likely accepting modest, controlled depreciation but keeping the USDCNY onshore rate below 7.34. Policy measures to support the economy such one more cut in both the reserve requirement ratio and the one-year loan prime rate can still be anticipated, although implementation may be delayed. The controlled depreciation of the renminbi could benefit other Asia-Pacific currencies strongly correlated to the renminbi.

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