Latin America at Mid-Year: A turning point between challenges and new opportunities

As we reach the midpoint of 2025, Latin America stands at a pivotal crossroads, navigating a complex landscape shaped by global trade tensions and unique regional challenges. While the region has largely played second fiddle to U.S. tariff policies, it is not immune to their macroeconomic repercussions. The economic growth outlook across Latin America is deteriorating, with several countries revising their forecasts downward. The IMF has adjusted global growth down by 0.5% to 2.8%, including a -0.3% year-over-year GDP contraction in Mexico due to tariff uncertainty. However, the impact could have been much worse, had the region not learned from past crises, leading to the strengthening of key financial institutions, such as central banks. Amidst these challenges lie opportunities for strategic positioning and growth, particularly in sectors such as natural resources, infrastructure, and manufacturing.

The year was set to be challenging for Latin America even before considering tariffs. As noted in our 2025 Mid-Year Outlook, expectations were already pointing to a growth deceleration compared to 2024, especially in countries where domestic demand is heavily supported by remittances. Remittances have played a crucial role in supporting domestic demand in the region. While job creation grew by 3.8% on average over the past four years¹, remittances in Central America, Mexico, and Colombia grew by an astounding 2.3%². In Mexico, remittances reached a record $63 billion in 2023, representing 3.5% of GDP, 3.1% in Colombia, and an astounding 8.1% of GDP in the Dominican Republic. As downside risks to growth in the U.S. increase, the outlook for the labor market and thus remittances also worsens. Further challenging domestic consumption are weak consumer confidence and declining investment, haunting the region. In Brazil, household savings and a resilient labor market continue to support consumption, but fiscal constraints and high interest rates pose challenges.

Beyond short-term macro dynamics, exogenous political shifts will continue to play a role in the region, especially those related to U.S. trade policy. As of the time of writing, Latin America has been among the most shielded regions with a “mere” 10% reciprocal tariff implemented for most countries, with the majority of imports from Mexico protected by USMCA. We expect this to remain in place, alongside sectorial tariffs on autos and possibly copper.

Argentina: Enough of “Tell Me”, Time for “Show Me”

Argentina's bold economic reforms have impressed markets and raised hopes for structural change after decades of hyperinflation. Now it's time to prove the medicine worked. Milei’s prioritization of orthodox economic policies over political convenience allowed for successful anchoring of inflation expectations and the renegotiation of a $20bn credit facility from the IMF. With greater liquidity under its wing, the Central Bank has committed to an exchange rate band regime that will widen over time, eventually leading to full flexibilization and elimination of capital controls. The risk of too much flexibilization lay in inflationary pressures from FX depreciation, yet that has yet to materialize. On the contrary, the ARS has traded closer to the lower end of the band, allowing our economists from the Investment Bank to marginally reduce inflation expectations for the year.

As we move into the second half of the year and approach regional mid-term elections, two questions emerge: (1) Will the government be able/willing to sustain a disciplined approach to public spending? and (2) Could the medicine be too strong, jeopardizing the patient’s health? Regarding the former, the results from the mid-term election in Buenos Aires City are an encouraging indicator of public approval of Milei’s La Libertad Avanza. However, it is also worth noting that these came on the back of a +18% increase in social transfers during 1Q25, explaining 74% of the increase in real expenditures during the quarter after last year’s lows. In the wake of the October elections, fiscal discipline is key to meeting IMF requisites, especially considering the elimination of other sources of government income such as the “PAIS” tax.

The other important point to watch for is that public funds are not used for electoral purposes or taken as a means to offset economic weakness stemming from global trade uncertainty coupled with draconian monetary constraints. While overall activity growth was healthy during 1Q25, March’s result came in significantly below expectations, especially in key sectors such as construction, whose recovery remains below 2022/23 levels. Of note, in April, tertiary services—namely financial—are leading the recovery, which can be taken as an early sign of greater corporate transactions amidst an improved investment outlook for the country.

In short, we remain positive on the outlook for Argentina but also recognize that it has become consensus among fixed income investors. Our credit team believes valuations are well-priced, leaving upside mostly in the equity space, especially if consultation kicks off regarding reclassification of Argentina from standalone to EM. Earlier this year, our colleagues from the Investment Bank estimated that inflows to the Argentinean market could surpass $2.6bn, with Argentina weighing more in the MSCI Latam Index than Chile (currently the third-largest constituent after Brazil and Mexico).

Brazil: There’s hope, but don’t rush

Brazil is tracking its third year in a row of exceeding analyst growth estimates. Despite fluctuating recession risks in the U.S., Central Bank surveys of economic expectations have only been marginally reduced from 2.1% at the beginning of the year to 2% for full-year 2025, and from 1.6% to 1.5% for 2026. Our Investment Bank economists are even more sanguine for this year, anticipating a 2.3% acceleration in growth yet a drop to 1.2% by 2026. This year, the key engine growth prospects have been strong domestic consumption and above-average primary sectors, namely agriculture. As the year progresses, our main concerns lie in the sustainability of the former. While the cyclicality of the latter could prove a high hurdle to beat into 1Q26, we believe it is precisely the key long-term opportunity for the country to capitalize on global trade realignment.

Next year, the country will hold presidential elections in October. Lula’s approval rating is hovering near record-lows at 46.1% and there is very little visibility into who could succeed him from the Partido dos Trabalhadores. Lula’s age and health are likely to prevent him from running for a second consecutive term, making the question of his successor ever more important. On the other hand, consensus is building around the possibility of a more market-friendly candidate emerging from the opposition, with locals rooting for Tarcisio de Freitas, currently the Governor of the State of Sao Paulo. One of the key characteristics of Tarcisio’s administration has been fiscal responsibility, which is at the core of market concerns around Lula. The expectations of a political shift towards a market-friendlier stance coupled with stark discounted valuations have driven appetite for Brazilian assets in the last few months.

Beyond 2025 and as things stand, our bias is more positive. The 2026 elections will be the key development to watch, alongside any investment announcements and/or trade deals struck by the country (regardless of partner) that speak to the country’s leverage in the commodity space.

Colombia: Beware of unsustainable growth

Expectations are quite low for Colombia. Yet the equity market is up 34% this year despite a “mere” 6% appreciation in the COP. Nonetheless, it remains the cheapest market in EM. By looking at the picture only, one can understand why. Activity is expected to accelerate this year from 1.7% growth in 2024 to 2.4% in 2025 and then further improve in 2026 to 2.8% as per Bloomberg consensus. The country has not grown at this pace—excluding the post-COVID bounce—since 2019. However, the devil is in the details, as is usually the case. While we appreciate attractive valuations with strong bottom-up results, financials make up nearly 80% of the MSCI Colombia index, hence a lot depends on the sustainability of the pace of activity, which we doubt will stand.

Domestic consumption is expected to do the heavy lifting this year and next, especially after the c.10% YoY increase to the minimum wage this year. However, despite strong domestic activity, government income contracted slightly in terms of GDP in 1Q. Coupled with a surge in primary expenditure (making up for lack of investments in 2024), the fiscal deficit is expected to be at or slightly above -6% of GDP in 2025, with only a minor improvement in 2026 but still above pre-COVID levels.

What is concerning is the lack of government investments, which are expected to grow by a mere 1.6% this year. Where is the deficit going to? Current spending. Fixed investment growth plunged by nearly 20% in 1Q25 and sits well below pre-COVID levels. Next year, Colombia will face presidential elections in 1H26. However, the picture is less clear than in Brazil, with a very fragmented opposition and low rankings for Petro’s left-leaning allies, such as Gustavo Bolivar. The key risk to monitor for markets as we move into the second half of 2025 and closer to 2026’s elections will be the government’s use of public funds to continue to artificially support domestic consumption towards the electoral race.

Given looming fiscal risks, BanRep is also facing a challenging decision. Amidst upside risk to fiscal and trade deficits (from stronger exports), April’s inflation print came in slightly above expectations. This uneasiness was evident in the latest BanRep minutes where, despite a unanimous decision to cut 25bps, the message was one of caution ahead. Nonetheless, both consensus and our own Investment Bank economists for the region continue to expect cuts into this year and next, bringing the terminal rate to 7% by YE26 (consensus).

Chile: Resilience in the face of global uncertainty

The resiliency of domestic consumption took many by surprise at the beginning of the year. Even considering a worse outlook for global trade and higher probabilities of a U.S. recession, robust export activity, a strong agricultural and tourism sector have helped activity surpass economists’ forecasts. Consensus now stands at a 2.2% growth for the full year, building on the back of a 2.6% pace in 2024 and remaining stable throughout 2027. Even Central Bank Staff have acknowledged the little effect the deterioration of the external environment has had on domestic activity in Chile, with impacts rather expected in the mid-term, especially if copper tariffs are confirmed.

Nonetheless, inflation remains well-behaved. When excluding electricity prices, the headline is running at ~3%, in line with the Central Bank’s target. Long-term inflation expectations are also well-anchored, which justifies consensus expectations of two cuts this year, leaving the funding rate close to 4.5%. While our economists see that as the terminal level for the overnight rate, consensus is discounting between one and two more cuts in 2026.

Chile approaches its upcoming November presidential election from a place of strength, with significantly more fiscal space than many of its Latin-American peers. The market expects some degree of fiscal consolidation, with the fiscal deficit closing in this year at 1.9% vs. last year’s -2.9%. The leading candidate, Evelyn Matthei from the UDI – Democratic Independent Union—is well-regarded by the market for her moderate conservative stance and focus on economic stability and institutional reform. Johannes Kaiser, who is closing in on Matthei as per some polls, is running on deregulation and a pro-corporate agenda. However, some voices have raised concerns about his proposals leading to a renewed bout of social unrest after the mass protests of 2019. Kaiser’s radical reform agenda is sometimes compared to that of Javier Milei in Argentina, especially regarding a move towards budget surplus after years of increasing social transfers. Nonetheless, Chile’s situation is far from that of Argentina, hence the scope of radical and swift economic changes seems more limited. As such, the CLP has been among the most “stable” currencies in LatAm, appreciating “only” 6% YTD (as of the time of writing). Similarly to the rest of the region, we foresee a stable to slightly weaker CLP from here on the back of weaker growth, lower rates, and risks ahead (aka copper tariffs) offsetting part of the tailwind of a cyclically weaker USD.

Mexico: Balancing growth and trade tensions

Mexico's economy is teetering on the edge of recession, with a marginal 0.6% growth in Q1 2025 driven by a surge in exports to the U.S. ahead of tariff implementations. However, domestic demand remains weak, with investment in free-fall and private consumption declining. As the transitory boost from exports fades, consensus estimates point to 0% growth this year. Banxico itself has lowered growth estimates both for 2025 and 2026 to 0.1% and 0.9% respectively, from 0.6% and 1.8% before, yet highlighted that inflation risks “remain biased to the upside.” Nonetheless, consensus widely anticipates the next June meeting to end with a 50bps cut. Our economists in the Investment Bank anticipate a more dovish outlook with Banxico taking the O/N rate to 7% by year-end 2025 and 6% by year-end 2026, vs. an expectation of 7.5% and 7% respectively, according to Bloomberg consensus estimates. Regardless of magnitude, the onus is now on whether the economy can withstand the confidence shock from U.S. trade uncertainty in the face of a domestic activity slowdown driven by lower remittances, slower job creation, and—more importantly—a sharp stop to investments.

While we still believe in the prospects of nearshoring, it will take some time to digest the exuberance from anticipated flows that drove domestic investments to increase by 8.2% in 2022 and 16.6% in 2023 vs. a –71.2% and –39.5% for new foreign flows respectively. This is likely to imply a recovery towards neutral growth (1.5%-2%) closer to 2027 and onwards. Added to exogenous risks, speculation around security and rule of law will continue to weigh on domestic investment confidence, yet an earlier renegotiation (instead of a mere revision) of USMCA into 2H25 will help visibility into 2026. It is important to consider though, that while not our base case, we still believe there is a non-negligible probability of a break-up of USMCA into two bilateral agreements of each country with the US (MX-US / MX-CA). 

Peru: Leveraging natural resources for growth

Peru’s economy has remained surprisingly stable in the face of global trade turmoil and possibly the risk of sectoral tariffs on copper. During the 1H25, activity was driven by exports and strong domestic consumption, anchored on a resilient labor market. This in turn has been supported by fixed investment gains, which have translated into healthy employment growth. Despite exogenous risks to global trade dynamics, our team of economists have revised up expectations for Peru’s GDP from a trough of 1.9% to 3.1%, in line with Bloomberg consensus. 

Stronger-than-expected activity has not translated into inflationary pressures. In fact, inflation has remained well-behaved, consistently below the central bank’s target range. The BCRP acknowledges the policy rate is already close to neutral and that any additional rate cuts will be dependent on activity/inflation trends. However, given the external shock, consensus anticipates one more rate cut in 2025. Our team of economists believes there is room for monetary expansion as a global shock absorber, underscoring the possibility of further rate cuts driving the reference rate to 4% by YE26.

Nonetheless, fiscal consolidation remains a challenge, with the street projecting a YE deficit of -2.6% of GDP, vs. -3.5% for 2024. Of concern, the government has introduced measures to increase public spending, which could impact medium-and long-term fiscal goals, especially as we approach next year’s presidential elections. While we are nearly a year away from the event, Peru’s history of political volatility make this the event to watch for 2H25 and early 2026. We don’t anticipate any major market disruption given stability provided by the BCRP, yet the return of Martin Vizcarra or Keiko Fujimori’s political lineage could challenge investor confidence. While it is too early to talk about frontrunners, of those who have expressed interest in running, we see less reason to foresee radical or controversial economic reforms that would derail the bright mid-term investment prospects leveraging on the country’s abundant natural resources.

Central America: Capitalizing on strategic positioning

Central America's economy has been resilient in the face of global trade tensions, with strong performance in sectors such as manufacturing and agriculture. However, a deteriorating outlook for US economy bodes negatively for all economies in the region, given their high reliance on remittances. Monetary policy expansion can help offset some of the pain, but our Investment Bank economies have generally slashed growth estimates for Central American countries, post “Liberation” Day.

Additionally, fiscal challenges remain, with rising debt levels and a pressing need for structural reforms, especially in Panama. The economy’s resiliency has allowed a temporary relief from credit agencies, yet what for others is a blessing, the chasm between US-Asia trades is in fact a curse for Panama, considering the importance of the US East Coast – Asia trade route for the Canal. The governments' focus on fiscal consolidation is crucial to maintaining economic stability, but political dynamics add complexity to the outlook.

Beyond Panama, Central America’s strategic position offers opportunities for nearshoring, as companies seek alternatives to Asian supply chains. The proximity to the U.S., coupled with competitive labor costs, positions the region as an attractive destination for manufacturing investments. Fiscal stability and infrastructure investments support economic growth, with countries like Costa Rica leading in sectors such as medical devices and semiconductors.

Conclusion: Look beyond 2025, stay constructive

As Latin America navigates the complexities of 2025, the region stands at a pivotal intersection of challenges and opportunities. While global trade tensions and domestic economic pressures have dampened growth prospects this year, the resilience of key financial institutions and strategic sectors offers a path forward. Central banks across the region are poised to leverage monetary policy to support economic stability, with inflation expected to align with target ranges by year-end. Political dynamics, particularly in Argentina and Brazil, will play a crucial role in shaping economic trajectories, with potential reforms offering both risks and rewards. As the region capitalizes on its natural resources and strategic positioning, Latin America is well-positioned to emerge stronger, provided it navigates the delicate balance between fiscal discipline and growth stimulation.

¹ Haver Analytics. Data as of May 30, 2025.

² World Bank. Data as of May 30, 2025.