Latin America: Risk That External Sector Poses to Macro Stability Has Declined

• There has been a fairly significant improvement in the external accounts of Latin America’s major economies since 2019, which has helped to reduce what is a perennial threat to macro stability in the region. Current account balances in the ‘Big Six’ (i.e., Argentina, Brazil, Chile, Colombia, Mexico, and Peru) have improved by an average of 1.3% of GDP over this period, aided by a 0.9 percentage point (pp) narrowing of the goods trade deficit.
• The tailwind provided by higher commodity prices helped to lift exports (particularly in Brazil, Chile and Peru), while Mexico was the chief direct beneficiary of robust United States (U.S.) domestic demand. These dynamics worked to offset generally solid growth in imports linked to strength in private consumption, which has been driven largely by increased social transfers that have seen fiscal deficits widen throughout the region with the notable exception of Argentina.
• Trends in the region’s balance of payments data look even more positive when considering shifts in the financial account. The core balance, which comprises the current account balance and net FDI inflows, is firmly in surplus for each of the six major economies in the region. This reflects the imposition of government controls on some international transactions in Argentina’s case, but in general terms, the uptick in investor interest in commodities in response to the price action and the allure of ‘nearshoring’ has seen foreign direct investments (FDI) inflows hold up relatively well. Of note, the share of global FDI flowing to Latin America has crept up from 9.1% in 2019 to 14.5% as of 2023 (latest data available).
• These positive developments have, in turn, paved the way for a modest reduction in the external debt ratios, contrasting somewhat with trends seen in other emerging markets and the region’s own experience during the last commodity bull run (roughly 2000-2014). Additionally, narrowing current account deficits have also been used to build back up FX reserves, after they were spent down during the first half of 2020 as concerns over dollar shortages prompted a ‘dash for cash’.
• Looking ahead, Fitch expects that some of the post-pandemic improvement in the region’s external positions will reverse, as a more challenging global macro backdrop linked to shifts in U.S. trade policy works to cap commodity prices relative to recent levels.
• That said, the current account deficit for the Big Six will remain significantly narrower than the 2010-2019 average of 2.7% of GDP, at about 1.5% over 2025-2026. However, anticipated fiscal consolidation across the region over the coming years will help to prevent a more pronounced deterioration. High copper prices in Chile and Peru, as well as a booming agricultural sector and increased domestic energy production in both Argentina and Brazil, should act as further supports.

(Source: Fitch Connect)