Latin American currencies will extend their slump compared with the rest of emerging markets as growth undershoots already muted expectations, according to Morgan Stanley.
While the bank said Wednesday that Brazil’s real and the Colombian peso are the most vulnerable, Morgan Stanley is becoming increasingly concerned about the Mexican and Chilean pesos, which it previously expected to outperform. So far this year Latin American currencies have lost 10 percent, a Bloomberg index shows.
“Despite the underperformance in Latin America thus far, we believe that there is more to come,” strategists Felipe Hernandez, Dara Blume and Charles Rubenfeld wrote in a research note to clients. “Growth in the region continues to disappoint already low expectations.”
The real and the Colombian peso lost almost a third of their value in the past 12 months as Latin America’s biggest economy slumped toward recession and the decline in oil and coal prices pushed Colombia’s current-account deficit to the widest in 16 years. Chile’s slowing growth and rising inflation are toxic for the currency.
In Mexico, the outcome of the first sale of oil field blocks in 77 years will have an impact on the currency, Morgan Stanley said. Petroleos Mexicanos, the state-owned oil company, is skipping the auction as it seeks to conserve cash. While the sale is part of historic changes aimed at ending Pemex’s monopoly, the producer had planned to participate.
“The Finance Minister has expressed conservative expectations for the auctions, and disappointment of these would likely raise concerns about the country, weighing on the peso,” the Morgan Stanley analysts wrote.