LatAm Outlook 2026: Mexico stays steady. Colombia feels the strain

Transcript

• [00:00] Ana: Hi and welcome to Emerging Markets Today. My name is Ana Paula Picasso and this episode will be about Latin America and we picked two different countries, Mexico and Colombia and the reason why
• [00:21] Ana: We chose these two. We’re going to tell you in a bit. And just a quick reminder, you can also watch this episode on video and is available on Spotify and in the Emerging Markets Today sub-stack newsletter. You can also watch this episode on video and is available on Spotify and in the Emerging Markets Today sub-stack newsletter.
• [00:49] Ana: All the links are in the description. And I’m joined by not one but two guests today. The first one is Elijah Oliveros-Rosen. He’s the Chief Economist for Emerging Markets. And Harumi Hasegawa Sanchez, Latin America Economist at S&P Global Ratings, a leading…
• [01:14] Ana: provider of independent credit ratings for global markets. Hi, Elijah. Hi, Harumi.
• [01:20] Elijah: Hello. Thanks for having us.
• [01:24] Harumi: Welcome. Welcome to Emerging Markets today.
• [01:42] Ana: And I want to start with you, Elijah, because I feel I haven’t talked much about Latin America, the Spanish-speaking countries. The latest episode was about Brazil.
• [02:12] Ana: And I just want you to start giving an overview about what’s happening in the region and also why we chose Mexico, you know, and Colombia.
• [02:22] Elijah: Thanks, Ana Paula. Yeah, so let me start by, as you mentioned, giving you a broad overview of where Latin America is, where it’s going in terms of how we’re seeing a growth, how we’re seeing the credit picture.
• [02:42] Elijah: One thing that is clear is that both from a macro perspective and from a credit perspective, things have been better than most expected this year. If you look at where we were at the beginning of the year in our expectations and where we are today, things have evolved in a more positive way. Whether you’re looking at the GDP growth projections, which have been revised up, whether you look at credit markets, which have performed quite well.
• [03:27] Elijah: indicator of how good the performance in credit markets has been is looking at spreads. Credit spreads are the lowest they’ve been in over a decade. And consequently, issuance of credit has been quite high this year. So why is this performance been better than most expected? I’m going to give you three factors for this. And understanding these three factors will be crucial to see just how much longer things can stay relatively positive.
• [03:57] Elijah: The first one has to do with trade and tariffs. We started the year most thinking that that would be the biggest risk to growth, the biggest risk to credit. And as the year evolved, we noticed that the impact of tariffs, of U.S. tariffs on the region was much less than expected. There’s several reasons for this. One is because, of course, tariffs were not as high as many anticipated. They were, you know, they were increased during the liberation day and then they were decreased after that. So the direct impact was much lower than expected.
• [04:20] Elijah: In fact, the region has a relatively low exposure to U.S. tariffs because U.S. exports to the U.S. outside of, say, Mexico or Central America is actually quite low. Just to give you an example, in Brazil, it’s 2% of GDP. It’s not very large. In most of South America, it’s 5% of GDP or lower. So it’s really just, you know.
• [05:07] Elijah: Mexico and Central America that’s heavily exposed. In the rest of the region, even with higher tariffs, the impact on growth has been smaller than most anticipated. And the other one is that we have to think about tariffs in a relative position. So how are tariffs towards Latin America versus the rest of the world? And the reality is that tariffs were increased more to the rest of the world than they were increased to Latin America. So in a way, they’ve increased their competitiveness in the U.S. market.
• [05:36] Ana: Just once you go back to what you said, so why were the tariffs lower relatively to the other markets?
• [06:01] Elijah: Right. So, you know, the approach for the U.S. administration was to lower… trade deficits with other countries, right? And many will argue this is not the way to do it. This is not effective. But that was how they decided which countries which have higher tariffs and which countries which have lower tariffs. Now, the U.S. has actually very low trade deficits or even trade surpluses with many South American countries and very high trade deficits with virtually every emerging market in Asia. So that’s why the tariffs were higher.
• [06:23] Elijah: towards Asia than towards Latin America.
• [06:28] Ana: I see, I see. And the third factor you mentioned.
• [06:47] Elijah: Well, the second one. So that was the first one. The second one has to do with the Fed and the US dollar. So we’ve seen obviously the Fed starting to cut rates, which makes investing in Latin American credit more attractive.
• [07:15] Elijah: And the U.S. dollar has remained weak, which also makes having exposure to Latin American currencies more attractive. And that has led to a very large inflow of capital into the region, which has lowered financing costs because you have more capital competing there and allowed for places where they have.
• [07:44] Elijah: CapEx plans to finance themselves at lower borrowing rates. And then the third one, and this is one that’s nuanced because there’s a risk that it will end up being more negative than positive, depending on how things evolve in Latin America. But this one has to do with AI. And we clearly have seen AI.
• [08:13] Elijah: turbocharged asset prices. So AI has been very important in elevating asset prices. And this has elevated not only AI-related assets, but non-AI-related assets have also increased, including those in Latin America, which obviously has been good for growth.
• [08:38] Ana: Can you give us an example of a non-AI-related asset?
• [09:00] Elijah: Yeah, if you look at credit, for example, if you look at equities around the world… equities around Latin America that have nothing to do with AI, they have also increased in price because higher tech stocks have improved risk sentiment. So they’ve lowered risk aversion towards other assets. And that’s why we’ve seen flows going not only to tech stocks, but to also other higher yielding assets. Many of them are in Latin America.
• [09:28] Elijah: Now, yeah, the question here is, is the region falling behind in AI? And you can think about it one way being AI adoption. It is quite possible that AI adoption is lower in Latin America than in other emerging markets. And it’s certainly lower than in the U.S. So we know we could be going for a…
• [09:53] Ana: towards a larger AI gap. Why would AI adoption be lower in Latin America?
• [10:22] Elijah: I think there could be many reasons. One could be just the technological infrastructure in many cases is better outside of Latin America. But it is increasing. It’s certainly increasing. It’s just that the pace…
• [10:50] Elijah: I think it may not be as fast as it is in other parts of the world.
• [11:00] Ana: Yeah, yeah, definitely. Infrastructure is one part of it. Even in, let’s say, even in Brazil, if you come out of, like, the south and southeast, you see all the regions still lack infrastructure and all that. And…
• [11:14] Ana: Is there anything else you want to add for the general overview, or do you want to jump into Mexico that we chose and tell us why you chose to talk about Mexico, why there is this optimistic view for 2026?
• [11:42] Elijah: Yeah, so let me just give you one last point on AI that I think is very important, and I’m going to jump straight to Mexico after that. One other area that the region is currently missing out on is data centers.
• [12:07] Elijah: We’ve seen a huge amount of investment in data centers globally, which has been a big driver of growth this year in places like the U.S., in places like China. However, we have not seen a lot of that being captured in Latin America. And one of the key reasons has to do with power and water availability. So we need power and water.
• [12:29] Elijah: to energize these data centers and water to cool the data centers. And that’s one thing that the region has been lacking and by consequence has not been benefiting from this very large investment in data centers globally.
• [12:57] Elijah: Now, moving to the countries, and right, we picked Mexico and Colombia because Mexico has generally performed better than expected. In Colombia, I think there’s a lot of question marks around the trajectory of growth.
• [13:24] Elijah: given everything that’s going on on the fiscal side. But let me just talk about Mexico. So on paper, if you look at the growth numbers, we have Mexico growing 0.5% this year and 1.4% next year. It doesn’t look spectacular by any means. But the point here is, if we are in a world where we’re concerned about trade, Mexico will be the number one candidate in the region to be the most affected because it has very…
• [13:47] Elijah: a very large exposure to trade flows, just to give you a number, almost 30% of its GDP is exported to the US. So we would think that they would be one of the most affected. However, from the beginning of the year to now, GDP projections have only been revised up.
• [14:13] Elijah: Again, very low growth. It’s not a stellar growth story, but it’s certainly one that has shown incredible resilience to what’s going on on trade. If we look at the actual main drivers of low growth, they have to do more with the fiscal side. So the government is currently undergoing a very large adjustment in public investment to consolidate the fiscal account to make healthier.
• [14:45] Elijah: fiscal accounts. So we’ve seen public investment fall about 20% or so. And that alone subtracts about half a percentage point to GDP growth. So that’s been the main driver of slow growth. The uncertainty around trade certainly has played a toll. But generally speaking, the economy has done better than most expected. Next year will be challenging. We have better growth, but we still have one.
• [15:13] Elijah: sort of key dynamic that we are we’re all waiting on and that is the negotiation of the trade agreement between us mexico and canada so the usmca is scheduled to be reviewed in the summer of 2026 so there’s a lot of you know uncertainty of how that’s going to evolve we generally assume that regardless of
• [15:40] Elijah: the end product of this negotiation, it will maintain very strong trade relationships between US and Mexico. So in the long term, it shouldn’t have a major impact.
• [15:54] Ana: Okay, okay. I think this is a good time for me to ask about Colombia, Harumi. So we live in Mexico now, we’re going to Colombia, a little bit more mistakes there. And the reason why you chose Colombia is…
• [16:05] Ana: Let’s say we’re not so much optimistic for 2026. Am I right to say that?
• [16:31] Harumi: Yeah, we’re not so optimistic about Colombia. Mainly Colombia is facing three key economic challenges. I would say the first one is weak economic growth. The second one, it’s about financial conditions remaining tight. And the third one is what mentioned, Elaya, is the fragile fiscal position.
• [16:57] Harumi: So if we go for the first one, economic growth. Yeah, just tell me, go back a little bit. Why is the growth slowing down in Colombia? Yeah, so economic growth has been actually improving, but it’s still modest and it’s below potential. So that means that it’s under using its capacity.
• [17:34] Harumi: And it’s growing below what we consider a normal sustainable growth speed. So the main engine for this growth that we’ve been seeing is domestic demand, which has been growing faster than the GDP, more specifically household consumption. We expect it to remain resilient, mainly supported by minimum wage increases and real wage gains.
• [18:02] Harumi: and favorable labor market dynamics. Also, in contracts, fixed investment has been soft, but we expect it to very gradually be improving, specifically in infrastructure and energy projects.
• [18:28] Harumi: If we go to the second challenge that I mentioned, which is financial conditions being tight, this is very close to what we’ve seen in inflation. So inflation has been coming down from the peak that they reached in 2023.
• [18:57] Harumi: And this has allowed the central bank to cut rates. But in the last month, the central bank has been unable to keep cutting the rates and has kept the monetary rate around 9%. This is because the inflation rate has been proven to be stickier than initially expected. So now it’s around 5%, but the central bank target is 3%. So it’s still like…
• [19:25] Harumi: a way to go. So we expect it to very gradually converge in the next two years and kept the interest rate high for longer.
• [19:54] Harumi: The third one, which is, I would say, the sum up for the first and the second challenge as well, is the fragile fiscal position. So in a nutshell, the problem for Colombia is that the government is spending more than it collects. This just makes deficit wider.
• [20:24] Harumi: And additionally, we have that the government suspended the fiscal rule for the next three years and raised the 2025 deficit target. So we have bigger deficits and looser rules. This just creates uncertainty. So uncertainty makes the investor ask for higher returns, what we call the risk premium. So as I mentioned before, we have already high rates.
• [20:45] Harumi: And if we, on top of that high, the risk premia, this just increases the cost of the debt for Colombia and reduces the space that Colombia has for spending in other priorities. So as we approach the 2026 election cycle, I would say the debt stabilization is one of the key challenges that the next administration would face.
• [21:14] Harumi: So let’s see how this goes.
• [21:36] Ana: Yeah, yeah. Actually, that brings me to my next question. You mentioned the inflation is coming down from the highest from 2023. So what do you think that should happen in terms of making, in terms of changing this overview of a little bit?
• [22:12] Ana: pessimistic to start to become a little bit optimistic about Colombia for inflation and for growth
• [22:39] Harumi: oh for growth it’s just like to continue reducing like continue imposing growth first and then reducing the making more credible the fiscal side so once we make the more credible fiscal side the risk premium will come down and the debt will be easier to deal with and uh and then the inflation is stickier that that’s something that is the process that will take longer so
• [23:07] Harumi: It’s just to deal with that. And the next administration will have these tricky challenges to face.
• [23:34] Ana: Yeah, especially because you mentioned you’ll be election year next year. So it’s always tricky. It’s always a tricky time, like you said. And yeah, that was an excellent overview. We have a little bit of time, Elijah. So I want to go back to ask you about AI.
• [24:04] Ana: Because I’m trying to, it’s something I really like to talk about and is very current, obviously. And can you tell us a little bit more about AI assets? What you see there is, especially in Latin America, what you see, obviously, is not an investment advice. So just a quick disclaimer here before we talk about this.
• [24:25] Ana: Can you just give us a quick overview of AI assets in Latin America? What do you think, what do you feel that’s more optimistic for next year?
• [24:49] Elijah: Yeah. So if you look at where they are globally and where they are in Latin America, it’s obvious that the biggest ones, so the hyperscalers are based in the US or in China. So the big ones are outside of Latin America. Now, I think…
• [25:30] Elijah: The opportunity has more to do with the data centers. And let me separate those in two, and then we can establish where they can or cannot be in the region. So when you think about data centers, there’s two types. There’s the cloud computing related, and then there’s a physical data centers related. When it comes to cloud computing, it really matters how close you are to the end product, which is the US.
• [26:00] Elijah: For cloud computing, there are some assets in Mexico, which is very close to the U.S. In the northern part of the country, we have some cloud computing companies. And then from the physical data centers, the key thing is that there needs to be a very stable source of energy. And we haven’t seen that happen in Mexico at scale. We have seen some pockets of that happening in Chile.
• [26:30] Elijah: recently. But again, I think this is an area that the region is sort of not filling the gap yet. Not super optimistic yet. We can change in the next years, do you reckon? Yeah, I mean, I think we have to overcome these challenges and overcoming a scarcity or an insufficient supply of energy is something that takes time.
• [27:00] Elijah: So, yeah, I think especially, you know, places like Brazil, for example, that have a lot of renewables, have, you know, rising generation potential of energy. You know, those are good candidates for having bigger investment in data centers.
• [27:20] Ana: Yeah, definitely, definitely. Something is all happening so fast. you know, six months, a year from now, we might be talking again and things will be changed. And so thank you very much, Elijah and Harumi. Do you guys want to talk about S&P and plug anything if anyone wants to get in touch with you guys?
• [27:45] Elijah: Yeah, we, you know, our research is, if you go to spglobal.com, you can find a section for economic research. Our research is there. You can also follow us on LinkedIn, Harumi and myself. We have a newsletter by our chief economist, Paul Grunwald. You can follow his newsletter. So many ways for you to get access to our thinking.
• [28:10] Ana: Yes, I’ll make sure I’ll put all the links in the description and also the link for the Substack newsletter.
• [28:20] Ana: is in the description as well. So if you guys haven’t yet subscribed to the newsletter, just go there. You know, you can have all the episodes delivered to your inbox and also some extra materials, some extra articles. So thank you guys and see you next time. Thank you, Elijah. Thank you, Harumi. Bye.