Latin America has been the best performing market in the last months. The good results are mainly based on lower country risk perceptions derived from deep political changes.
The best example is Brazil. Last week the impeachment procedure against Dilma Rousseff was brought to an end and Mr. Temer was ratified president until the end of 2018. The focus of the new administration will be containing the growth of the fiscal expenditure, privatizing the assets under stated owned enterprises (mainly Petrobras and Eletrobras), concessions of public infrastructure such as ports, airports, roads, etc. One key reform that is supposed to be announced soon is the reform to the pension system, as it represents more than 38% of the total fiscal expenditure and thereby calls for an immediate solution in order to manage the fiscal imbalance.
In Argentina, the new administration led by Mauricio Macri is finally curbing down the inflation to less than 2% a month after the normalization in utilities prices (electricity prices went up almost 300%). Following what happened in Chile, the capital repatriation law in Argentina might be bringing in more money than suspected. We anticipate a boost in infrastructure investments, as the law includes tax benefits at this level.
In Chile we are starting to see flows coming into the local market, mainly to fixed income but also to equity. We believe the market is being driven by more certainty regarding next year presidential election, as former presidents Ricardo Lagos and Sebastian Piñera announced they’ll be running, anticipating more market friendly policies and a rise in economic confidence.
Despite the good moment of the region, Mexico has shown poor results. Several factors are behind it, one being the deviation of flows towards Brazil, and other the diminished activity in the US, which resulted in a lower-than-expected growth rate.