Favorable Shocks For Bram And Brazil Case Study - 712 Words

Favorable shocks for LatAm and Brazil The high correlation between commodity price change and asset prices in Latin America is a well-documented fact. Against this backdrop, the recent upturn in the terms of trade for primary products following four years of sharp decline speaks of an increasingly constructive stance of international investors towards the region (Chart I). Getting the causation right, however, is a more daunting task. Conventional wisdom would posit that primary products are a material factor in the value-added creation process in Latin America, hence better terms of trade signify increased corporate earnings, higher ROICs, increased income, stronger GDP performance and a cascade of benign outcomes that increase asset†¦show more content†¦Commodity price shocks account for 77% of the real income variance in Chile.2 Domestic productivity shifts seem to be the most relevant factor causing real income shifts in Peru and Colombia (52% on average), although commodity price changes come at a respectable second place (42% on average). Brazil is an outlier, for the key drivers are local interest rates, domestic productivity and changes in global interest rates (U.S. Treasury bills), which explain 30%, 22% and 20% of real income variance, respectively. Intriguingly, world demand shocks that are not captured by the aforementioned variab les appears to be irrelevant in Latin America and that hints at the region showing asynchrony with global business cycles. Against this backdrop, the recent upturn in global commodity prices is good news for Latin American countries and should lead to an upward revision of expected economic growth. Presently, market consensus foresees a somewhat lackluster 2.5% average real GDP growth for the region from 2018 to 2022. Brazil warrants a more comprehensive review, though. Commodity price changes account for 27% of reported real income variance and improved terms of trade are surely a tail-wind. However, a much larger favorable shock has occurred. The Central Bank’s policy rate (Selic) fell 675 bps over the past 12 months and the impact of the monetary easing is still propagating through the