Citi Says LatAm "Poised For Take-Off" As Powerful Tailwinds Align. Here's Why

Our focus on South America's improving investment outlook, underpinned by a generational shift from left-wing governments to more business-friendly governments, gained support Thursday from Citi's report, "LatAm Poised for Take-Off: The Macro Cycle Turns Latin America's Way."Citi chief Latin America economist Ernesto Revilla wrote in a note earlier today that a right-wing political shift is serving as a tailwind alongside a weaker dollar, firm commodity prices, and global supply-chain realignment, while stressing that lasting gains depend on reforms and execution. Here is Revilla's take on improving LatAM markets: Latin America is entering one of its most favorable environments in years, with external and domestic conditions supporting a potential acceleration in growth. The global economy has remained resilient despite recent shocks, while a weaker U.S. dollar and firm commodity prices provide important tailwinds for the region. Latin America is also benefiting from shifting trade patterns, standing out as one of the few regions gaining import market share from both the U.S. and China. At the same time, stronger macroeconomic management, improving policy frameworks, and a more business-friendly political backdrop in several countries are strengthening the investment case. In this report, we examine whether these forces can translate into sustained growth and market outperformance. Our conclusion is clear: the opportunity is significant, but lasting success will depend on reforms, execution, and policy consistency.Latin America is poised for take-off. Or to be more precise: the conditions for Latin America to achieve a higher rate of growth are the best they have been in decades, and it is time to capitalize on the opportunity.The last time the region achieved a sustained acceleration in growth was from 2003-2008. Back then, a weak dollar (USD) and strong commodity prices combined to form the backdrop for growth. Those conditions, and more, are present again today.Still, the development misfortune of Latin America is how little (or no) convergence it has achieved toward higher income levels. Convergence is the expectation that an emerging market will achieve higher growth rates to catch up to developed markets. As a region, Latin America has achieved little sustained convergence over the past 120 years. Consider that in 1990, LatAm's GDP per capita as a share of the U.S. was 28%; in 2024, it was 26.4%. Other regions, particularly Emerging Asia, have achieved significant rates of growth and convergence.When looking at different eras of growth and development for Latin America, it is not easy to extract common characteristics of high growth episodes. Generally, one would expect that strong commodity prices, domestic political stability or at least policy continuity, and pragmatic governments are minimum conditions. Latin America has those again today. However, history shows that there were periods of strong growth without particularly strong commodity prices (1950 to 1973), or strong investment (the commodities boom of the 2000s).However, the common denominator across eras when Latin America has achieved high growth and convergence (an increase in its GDP per capita as a share of the U.S. GDP per capita) is when the USD has been weak. This is because a weak USD implies easier financial conditions for emerging markets: Capital flows increase searching for stronger currencies and returns, debt repayment is cheaper, and commodity prices move higher. Right now, the global economy is facing a weak(er) USD regime that has benefited Latin America, and that for various reasons might be expected to continue in the medium term.The region is enjoying many other tailwinds as well. Commodity prices, and hence terms of trade for the region, are the highest they have been since the supercycle of the 2000s. Latin America has benefited from the global trade reconfiguration as it has been one of the few places in the world that has gained market share both in China and in the U.S. since 2016 when trade tensions started. This is due in part to the extraordinary geographic advantage that Latin America enjoys, being far away from geopolitical conflict, and its possession of large reserves of the minerals and commodities that a world in flux demands. The nearshoring of manufacturing finds the region ideally positioned. Macro management in the region has matured as the successful fight against post-pandemic inflation demonstrates, even ahead of other developed and emerging markets.The political cycle is a tailwind as well with a turn towards governments that are more explicitly business-friendly and reform-oriented. The right-wing turn, additionally, better aligns the region with a U.S. that is more active in the region at a time when increased foreign investment and attention is being focused on the region.Despite the many tailwinds that are aligning in favor of the region, growth is not yet accelerating. Growth remains resilient but low, stuck around the 2% trend, below potential and what is needed to escape the non-convergence trap. That is why we see the current period as one of opportunity but not one of a guaranteed era of success. The bull case does not rest on current growth, but on valuation, level of currencies, carry, terms of trade, policy credibility, and the serendipitous combination of favorable factors not seen in more than a decade. Opportunity is there but needs to be captured through action and reforms.There are challenges of course. We discuss in depth the fiscal one, which in a number of countries requires forceful action amid political constraints and institutional rigidities. We do not discuss others, such as the complex security situation, which has been on top of mind for voters in the region.Not all favorable circumstances will be in place forever, and some of them are beyond LatAm's control. That is, some of the tailwinds are cyclical, not structural, and some depend on external circumstances, not internal ones. However, across modern Latin American history it is hard to find episodes when a set of positive factors combine serendipitously to set the stage for a higher level of growth and convergence. The stakes for 660 million people living in the region, for investors leveraged to the region's future, and for future generations are high. It also underpins the political stability of the western hemisphere.This Citi Research report digs deep into the current set of positive factors surrounding Latin America, discusses macro, trade, fiscal and productivity dimensions, and discusses investment implications across asset classes. We are proud to welcome the perspectives of the region's heads of Banking and Wealth as well to add to our view.Latin America is in the right place, at the right time.The MSCI Emerging Markets Latin America Index is testing a breakout above a price ceiling that has capped several rallies since roughly 2014. The red dashed line marks resistance near 3,000, where advances stalled around 2017-19. The circled area shows the latest rally pushing back above that level.The key question is whether 3,000 becomes a new support level, given the political tailwinds from recent elections that have shifted much of the continent to the right after years of failed progressive experiments.The next big election to watch is Brazil (read the latest report).