Latam Advisory Board Takeaways

The global outlook in 2024 will remain volatile with leadership changes due to different geopolitical events, such as presidential elections in the United States and elsewhere. Meanwhile, global inflation is expected to recede, and the focus will now be on the rate cuts the US Federal Reserve implements in 2024.

Considering China's slowdown, the value proposition of emerging countries without China has sparked investors’ interest and could pose a great opportunity for the region, led by Brazil and Mexico, as well as Andean economies, considering their integration with the world and relative political stability, in addition to the lack of major geopolitical events. Regionally, there are several issues that intertwine and form a common agenda:

Pension reforms

The three Andean economies are engaged in active discussions on the subject. In the case of Peru, the initial concern has been to cap pension fund withdrawals, which have become habitual since 2020, with capitalization that has fallen from 30% to 22% of GDP. Meanwhile, in Colombia there is technical consensus regarding the progress of a proposal, which gives it a good chance of passing, but debate continues regarding the amounts that will go to the individual capitalization and the distributive systems, thus mirroring the debate in Chile, where the matter has been held up in Congress.

All members believe that the contribution to the system is not just to provide good pensions but also to have a national pillar of financing, fundamental for the deepening of the financial system. In this sense, from the local perspective the committee experts point out that the AFP system has proven to be resilient, and the private sector has remained active, complementing the proposal with an agenda of changes that the regional financial sector intends to continue promoting.

It should be noted that the Brazilian pension reform approved in 2019 made the system sustainable, while the 2020 reform to Mexican Afores significantly increased total contributions, which are expected to rise from the current 19% of GDP to 32% in 2030.

Fiscal challenges

The pandemic and high fiscal burden have brought the sustainability of fiscal debt to the fore. The case of Colombia is arguably the most complex one, considering its twin deficit situation, though that does not seem to be the main focus of concern for local investors, whose biggest problem is lack of confidence. Meanwhile, Peru has maintained orderly fiscal accounts despite political pressure and Chile’s projections have deteriorated slightly but remain stable.

The case of Mexico has been a positive surprise for us due to the austerity of the Andrés Manuel López Obrador administration and its low execution of current expenses, while Brazil continues to make progress on the VAT reform that promises to simplify its tax system – with positive effects on potential GDP – and is on the verge of presenting a new proposal to boost its revenues.

Governance and politics

The doubts that emerged over the direction Gustavo Petro is moving in Colombia after regional election defeat a few months ago have kept the door open regarding whether he will radicalize his position or not, considering that he will seek to make progress with part of his reform agenda despite his lack of congressional support, making the approval of structural reforms like the ones proposed in health and labor unlikely. Meanwhile, Peru is going through a similar situation, with a weak government and a Congress that has followed a parallel path. However, in the latter the 2050 Development Plan promises a series of positive structural reforms for the country.

The 2024 elections in Mexico anticipate the possible continuation of a Morena government, led by Claudia Sheinbaum, though it is unclear whether it will have a big enough majority to push through structural changes. For his part, Lula da Silva has focused on the international agenda, as well as the country's commercial positioning in the BRICS+ bloc.

In the case of Chile, the Boric administration has maintained low but stable approval and has been unable to materialize its reform agenda, which could continue to drive its moderation. Lastly, the region is following the new Javier Milei government in Argentina closely and optimistically, as it promises profound changes at the social, political and economic levels. While the outlook is challenging, analysts agree that success on the part of his administration would tilt the balance more toward center-right governments.

Economic Developments

While the economic cycle has favored an export boom in the region, especially in Brazil, structural changes project a growing economic drive. Given copper's importance as a future-facing mineral fundamental to the green transformation, a positive balance is expected for Chile and Peru. Meanwhile, Brazil has shifted from being an importer to a net exporter of oil, in addition to posting one of the best agricultural trade balances in its history.

In addition to this, there have been structural improvements that should boost long-term GDP, such as the strengthening of investment driven by nearshoring in Mexico and the aforementioned strengthening of the pension system, in addition to progress on the Brazilian reform agenda, which aims to improve the business climate and make it friendlier, with less red tape for investors.

Conclusions

Considering the available evidence, the participants agree that the region is experiencing a positive moment, both cyclically as well as structurally. Investors’ attention has focused on the convergence of macroeconomic imbalances and monetary policy, though politics is always an active player in the region, which more recently has leaned toward more market-friendly proposals.

The political implications of the constitutional plebiscite results in Chile and the prelude to the presidential elections in United States and Mexico are on the more immediate horizon.

Latam Advisory Board

LarrainVial Asset Management established the Latam Advisory Board in early 2021, comprising three seasoned external consultants. The primary goal of the Latam Advisory Board is to serve as a platform for thoughtful analysis and reflection on the overarching trends within the region. Its purpose extends to providing valuable insights for LarrainVial's investment divisions, facilitating discussions on financial initiatives, and identifying potential products tailored to specific markets.

A key focus of the board is to enhance LarrainVial's international credentials by leveraging the expertise of professionals from diverse Latin American markets. Demonstrating a steadfast commitment to the long-term development of regional markets, LarrainVial views the Board as an essential mechanism for strategic dialogue. The annual meetings provide an opportunity for members to share perspectives and engage in discussions about the region's future outlook.

Advisory Board Members

• Juan Andrés Fontaine

B.A. in Economics from Pontificia Universidad Católica de Chile and M.A. from the University of Chicago. He served as Minister of Economy (between 2010-2011 and 2019), Minister of Development (between 2018-2019), and as Director of Research at the Central Bank of Chile (1984-1990). He has been an economic adviser to several banks and corporations, and consultant for World Bank Group and other international entities. Currently he is partner in "Fontaine Consultores", an economic and financial consultant firm in Chile. He has also taught as a professor at the Economics Institute in Pontificia Universidad Católica, the Economics Department from Universidad de Chile, and as a visiting professor at University of California, Los Angeles. Juan Andrés has been a member of the Editorial Committee of “Estudios Públicos” magazine, member of the council of “Instituto Libertad y Desarrollo", and “El Mercurio”. He is a columnist for various Chilean newspapers, authored several publications and an active speaker in conferences on Chilean and Latin American economies and public administration.

• Martín Carrizosa

Lawyer from Universidad de los Andes. Founding Partner of Philippi, Prietocarrizosa, Ferrero DU & Uría, a law firm with a presence in Colombia, Chile, and Peru. He practiced corporate law until his retirement in 2018. Carrizosa served as Economic Presidential Advisor and International Affairs Advisor to the Colombian government during President César Gaviria's administration. He was Chief of Staff at the Organization of American States (OAS) in Washington DC and a Member of the Colombia Chapter and ProTempore President of the Business Council of the Pacific Alliance (CEAP). Currently, he is the President of the Board of the Ideas for Peace Foundation (FIP), a member of the Board of the University of the Andes, President of the Board of LarrainVial Colombia, and a board member of Scotiabank-Colpatria. In 2019, he was an Academic Visitor at St. Antony’s College, University of Oxford, England.

• Ramón Barúa

Graduate in Economics from Catholic University of Leuven, Belgium, and with a Bachelor in Industrial Engineering from Universidad Nacional de Ingeniería in Lima, Peru. He has served as a Director for companies such as Intercorp, AFP Horizonte, Cosapi Organización Empresarial, and CEO at Perubar, among others. Currently, he is a member of the Board of Interbank, Interseguro, Inteligo Bank, Financiera Oh, Intercorp University, Peruvian Supermarkets, Peruvian Stores, Peruvian Homecenters, Inretail Pharma, Urbi Propiedades, Technological University of Peru, and a member of the Steering Committee of Aviva, among others.

The Advisory Board met with the following members of LarrainVial: José Manuel Silva (Partner, CIO), Pedro Laborde (Partner, Head of Credit), Alexandre Larraín (PM LarrainVial Gavekal Local Currency Debt), Gonzalo Tocornal (Head of Reserach & PM LarrainVial Gavekal Local Currency Debt), Martín Benítez (Head of Institutional Sales), María Ignacia Lagos (Institutional Sales Analyst ), Alejandro Guin-Po (Senior Economist, Secretary), Sergio Godoy (Senior Macro Strategist),.