How Will Changing Global Conditions Impact Latin America's Largest Economies?

(ALFREDO ESTRELLA/AFP via Getty Images)

Different currency exchanges are seen outside the Mexican Stock Exchange building at Reforma Avenue in Mexico City on Jan. 5, 2024.

Changes in global economic conditions will lead to only a modest economic slowdown in Brazil and Mexico that should not affect political stability in either country, while political and economic uncertainty in Argentina will remain high as its new president's reforms are tested in his first year in office. Global economic cycles — which bring about changes in commodity prices, interest rates, exchange rates and global demand — have traditionally driven the fortunes and misfortunes of Latin American economies. In the late 1970s, a sharp increase in U.S. interest rates pushed much of the region into financial default for the following decade, a period known as the ''Lost Decade.'' Before the global financial crisis in 2008, a combination of low interest rates and a long, China-driven commodity boom then helped accelerate economic growth in Latin America in the 1990s, up until the global financial crisis in 2008. In the wake of the 2008 crisis, fluctuating global commodity prices continued to affect the region's economic performance, as prices rebounded and U.S. interest rates reached zero. While not the only factor at play, global economic conditions have and will continue to influence the performance of Latin America's largest economies: Brazil, Mexico and Argentina. As evidence, these three countries have very different economic characteristics and vary widely in terms of their financial strength, yet their long-term growth performances have remained broadly similar.

Brazil and Mexico's largely independent, inflation-targeting central banks have helped them keep inflation within the 3-5% range in recent decades. This contrasts starkly with Argentina, where heterodox economic policies — in which central banking is typically not independent — have resulted in hyperinflation, with inflation now running in the triple digits.
Argentina, Brazil and Mexico's overall economic stability as reflected in their international credit ratings also differs widely: Argentina is rated at near default levels, Brazil is rated below investment credit, and Mexico is rated investment grade. And while all three countries are net external debtors, Argentina has the largest financing needs by far.
However, in recent decades, all three economies have grown at relatively the same pace, with Argentina, Brazil and Mexico's real GDP growth averaging 2.0%, 2.5% and 2.1%, respectively, over the past 40 years. This is quite remarkable, given the vastly different economic trajectories and different approaches to economic policy and international economic integration taken in the three countries. Equally remarkable is the fact that real GDP growth has fallen even further in all three countries over the past decade.

Mexico, Brazil and Argentina will all benefit from lower U.S. and EU interest rates and a weaker dollar, even though the extent to which Argentina can take advantage of easier financial conditions will depend on the credibility and sustainability of its new government's economic policy. The U.S. Federal Reserve and the European Central Bank are expected to lower interest rates in the context of easing inflationary pressures this year. For Latin America's three largest economies, this will translate to easier financing conditions, as lower U.S. interest rates and a depreciating dollar tend to benefit net international debtors like Argentina, Brazil and Mexico by reducing debt servicing costs and increasing capital flows. A widening interest rate differential will lead to greater capital flows to all three countries, and give them space to cut interest rates to stimulate domestic demand without unduly weakening their exchange rates or increasing low-to-moderate inflation. While Argentina might be thought to benefit the most from more supportive global financial conditions, its ability to attract capital inflows will significantly depend on the credibility of its short- and medium-term economic policy strategy, which remains uncertain as the country's new radical libertarian president, Javier Milei, begins pushing his reform agenda. Although they are also net international debtors, Brazil and Mexico benefit from stronger economic fundamentals and greater credibility and will therefore more readily attract foreign capital inflows. If the United States experiences a soft landing, investor risk aversion will remain low and support capital flows to high-yielding economies, like Brazil and Mexico, to an even greater extent.

Mexico and Brazil's solid credit fundamentals and high interest rates will better position them to take advantage of falling U.S. interest rates than Argentina, whose economic outlook remains more uncertain following Milei's election in November 2023. Mexico is rated investment grade. Even though Brazil's rating is below investment grade, its international financial position is quite solid due to limited external financing requirements and a very manageable level of net foreign currency debt in the public sector. Mexico's and Brazil's central bank policy rates stand at 11.25% and 11.75%, offering foreign investors attractive returns in light of a weakening dollar.

By contrast, weakening global commodity prices will negatively impact all three countries, particularly Argentina and Brazil. The economies of Argentina, Brazil and Mexico are sensitive to changes in commodity prices, although to a lesser extent than most other Latin American countries in the region (including Chile, Bolivia, Ecuador, Peru and Venezuela, which are far more dependent on commodity exports). The composition of GDP in Argentina, Brazil and Mexico is very comparable in terms of primary, secondary and tertiary sectors, with the service sectors representing 50-60% of GDP in all three countries. But the differing export structures make Mexico less sensitive to lower commodity prices than Argentina and Brazil, despite the Mexican government's reliance on revenues from state-owned oil company PEMEX. Compared with Argentina and Brazil, Mexico has a slightly smaller agricultural sector, as well as a far greater share of manufacturing goods in total exports. Mexico's economy is also far more open than Argentina and Brazil's.

Exports account for 40% of GDP in Mexico, compared with 20% in Brazil and less than 20% in Argentina. While this might appear to make Mexico more susceptible to exogenous demand shocks, the lower share of domestic value-added in exports and the lower level of demand and price volatility of its exports makes it overall less vulnerable to foreign demand and price fluctuations, at least as far as the product structure of its exports is concerned.
Compared with Mexico, Argentina and Brazil are more sensitive to changes in commodity prices and terms-of-trade shocks due to their greater reliance on agricultural, energy and mining exports, where demand and prices frequently fluctuate depending on external factors. Agro-products comprise more than half of Argentina's exports and 40% of Brazil's exports. Fuels and mining goods account for another third of Brazil's exports. By contrast, agricultural, fuels and mining goods combined account for less than 20% of Mexican exports. Mexico instead relies heavily on manufacturing exports, which comprise about 77% of its total exports; this contrasts with Argentina and Brazil, where manufacturing goods comprise 14% and 25% of their total exports, respectively.
Brazil and Argentina's greater reliance on trade with China also makes them more susceptible to a further slowdown of Chinese growth (and, in turn, Chinese demand). China is Brazil's largest trading partner and Argentina's third-largest trading partner (after Brazil and the European Union). By contrast, only 2% of Mexican exports go to China. Compared with Argentina and Brazil, however, Mexico is far more reliant on U.S. trade, with around 80% of Mexican exports going to the United States. A sharp economic recession in the United States would thus lead to a sharp downturn in Mexico, given the high and increasing level of supply chain integration between the neighboring countries.

In Brazil, an economic slowdown and self-imposed spending limits may deter investment and reduce the government's ability to pursue social programs. The International Monetary Fund (IMF) forecasts Brazil's economic growth to decelerate from 3.1% in 2023 to 1.7% in 2024. Against this backdrop, Brazil's slowing economy may hinder the government's ability to achieve its goal of achieving a zero primary deficit (+/- 0.25%) of GDP in 2024 and likely limit new spending on social programs. Brazil's economy minister initially set the budgetary goals to shore up government finances and attract international investment, but it has garnered controversy in Congress. For example, a government-aligned party member referred to the fiscal goal as a ''straightjacket'' that would prevent President Luiz Inacio Lula da Silva from pursuing social spending. The government's credibility to reach its budgetary goals was put further into question when the National Treasury reported a 2023 annual deficit of $47 billion, equivalent to 2.1% of GDP, and the second-largest deficit the country has ever recorded. The government had previously estimated the 2023 deficit would only be 0.5% of GDP, and future breaches throughout Lula's remaining years in office would send a negative signal to capital markets, likely dimming international investor sentiment.

Brazil's lower house approved the fiscal framework in August 2023, creating a ''fiscal anchor'' for Lula's presidency that increases the budget surplus target from -0.5% of GDP in 2023 to 1% of GDP in 2026, pegging government spending to revenue.

In Mexico, an only moderate economic slowdown is unlikely to dim the ruling party's re-election chances and the economy will likely continue to benefit from a resilient U.S. demand. The IMF predicts that economic growth in Mexico will decelerate slightly from 3.4% in 2023 to 2.7% in 2024, citing ''slowing growth'' in the United States as one of the primary reasons for the decline. As Mexico's June presidential and legislative elections approach, the leading opposition candidate, Xochitl Galvez, will try to capitalize on the country's underwhelming economic outlook. But with unemployment reaching an 18-year low of 2.6% in December 2023, and President Lopez Obrador's popular infrastructure spending throughout the country's underdeveloped and oft-neglected southern regions, it is unlikely Galvez's appeal will dramatically sway voters. Moreover, while slowing, the U.S. economy is unlikely to enter a recession in 2024, as stronger-than-expected fourth-quarter economic growth data seems to suggest. Crucial U.S. demand for Mexico's manufactured exports will thus likely remain solid, supporting Mexico's economic activity and industrial development. Ahead of elections, this will likely boost Lopez Obrador's ruling Morena party, which is taking full credit for the growing number of foreign companies moving their operations to Mexico — a trend that is set to only accelerate as rising global geopolitical tensions, particularly between the United States and China, prompt more businesses to bring their supply chains closer to the massive U.S. market in a phenomenon known as ''nearshoring.''

According to a Jan. 3 poll conducted by El Financiero, 49% of Mexicans reported that President Andres Manuel Lopez Obrador's economic policies were either ''bad'' or ''very bad,'' but 56% said they also approved of his social programs.
Claudia Sheinbaum, the ruling Morena party's presidential candidate, holds a significant advantage six months out from the election. An Oraculus poll taken in January had Sheinbaum with 64% support to Galvez's 29%.
Annualized U.S. GDP growth reached 3.3% in the fourth quarter of 2023, greatly surpassing prior estimates of 2%. Average U.S. GDP growth was a solid 2.5% in 2023
Strong U.S. demand for Mexican products has fueled the development and expansion of industrial parks in northern Mexico, 97% of which focus on exports. With the U.S.-Mexico-Canada (USMCA) free trade agreement and industrial hubs popping up in Northern Mexican border states, bilateral trade between Mexico and the United States has expanded in recent years, leading Mexico to overtake China as the largest exporter by value to U.S. markets. From January to November 2023, Mexico exported $439 billion worth of goods to the United States, while China exported $393 billion.

In Argentina, President Javier Milei's economic reforms will face significant constraints from opposition lawmakers and labor groups but, if passed, his austerity campaign could help stabilize the country's economy. The IMF projects that the Argentine economy will contract 2.8% in 2024, reversing an October estimate pre-dating Milei's election the following month that the economy would grow by 2.8% in the coming year. While it is too early to predict how Milei's austerity drive in Argentina will affect his presidency, the country's political stability will ultimately depend on both the patience of Argentine society and how Congress responds to his reforms. With annual inflation reaching more than 200% as of December 2023 — the highest inflation rate across Latin America — and poverty affecting 2 out of every 5 Argentines, Milei's decision to slash fuel and electricity subsidies, among other public spending cuts, will temporarily exacerbate the cost-of-living crisis and, consequently, frustration toward his government. Since he took office on Dec. 10, Milei's ''mega-decree'' and 664-article ''omnibus'' law have generated significant controversy, leading to Supreme Court appeals, fierce legislative battles and massive street protests organized by the country's powerful labor unions. However, even if only parts of his reforms are passed, Argentina's economy may begin to stabilize in the medium term on the back of increased competition, improved business climate and, eventually, lower prices for goods and services. Furthermore, projections of a stronger-than-expected soy harvest in 2024 and a weaker peso should drive agricultural exports in the coming year, helping Milei's government bolster international reserves.

The Rosario Board of Trade estimates that the 2023/2024 bumper soybean harvest will reach 52 million metric tons, a four-year high and a 160% increase from last year's drought-stricken harvest.