Latin America: What happened in 2021 and significant events in 2022
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Economic prospects: In September 2021, the consumer price index registered a monthly increase of 3.5% and a year-on-year increase of 52.5%. This indicates that the year-on-year increase rate will remain around 50% for the rest of 2021 and will close with an approximate rise of 48% in 2021. Expected inflation for 2022 stands at 33%.
According to the 2022 national budget, Argentine GDP will grow 4% in 2022, although it will take the economy at least until 2023 to recover from the loss caused by the Covid-19 pandemic. While the restructuring of the sovereign debt is promising, the current administration must reach fiscal surplus sufficient for the purchase of the amounts in foreign currency needed to repay debt or roll-over such debt maturities in order to honor those commitments.
Mid-term legislative elections: Midterm legislative elections were held on November 14, 2021. The opposition party "Juntos por el Cambio" obtained 42.38% of the votes, while the ruling party front "Frente de Todos" obtained 32.93% of the votes. As a result, the ruling party lost its control of the Senate and of the first minority in the House of Representative. The elected deputies and senators will take office on December 10, 2021.
Hydrocarbons bill: In September 2021, President Alberto Fernandez submitted the Hydrocarbon Investment Promotion bill. The bill intends to promote hydrocarbon production and, ultimately, the flow of funds into the country. The bill takes into account the economic reality of each province and focuses on the development of small- and medium-sized businesses.
Food products price freeze: The Argentine Government has announced a price freeze on certain food products and other mass consumption items for 90 calendar days from October 27, 2021. This measure seeks to decelerate inflation but has met resistance from business sectors and the effects of this measure remain uncertain.
Overview: Despite the efforts to get the economy back on track, the lasting effects of the Covid-19 pandemic and the continuing rise of inflation are obstacles that will require constant focus from the Brazilian authorities. Currency depreciation, high unemployment rates and the surge in commodity prices are challenges the country is also facing. According to the IMF, the Brazilian economy is expected to expand by 1.5% in 2022.
General elections: The general elections are scheduled for October 2022. Brazil will elect the President, all members of the House of Representatives and one third of the members of the Senate. In addition, there will also be elections for State Governors and State Legislative Representatives in 2022.
Tax reform: The proposal for simplification of the federal tax system has been reviewed by the Federal Government. To expedite approval procedures, the tax reform has been divided into different projects, which shall be analyzed separately by the representatives. That said, despite these efforts, due to the upcoming 2022 general elections, the tax reform is not expected to be concluded or implemented in 2022.
M&A industry: The M&A industry shows no signs of slowing down in Brazil. The depreciation of the Brazilian Real continues to make deals attractive to international players despite the inflation, rising interest rates and the upcoming elections. Privatizations and infrastructure deals are expected to be the key drivers for the high volume of transactions.
Political developments A proposal for a new constitution is expected in 2022, which will be subject to a referendum. If rejected, the current text will remain unchanged. A pension reform is likely to be passed in 2022 as well. The extent of this reform may depend on the presidential election results. A significant increase in mandatory contributions and relevant changes to some of the current cornerstones of the system should be anticipated.
FinTech bill Congress will likely finalize the comprehensive legal framework for FinTech companies that the Government submitted in 2021. The bill aims to establish a regulatory perimeter for certain types of services such as crowdfunding platforms, alternative transaction systems, credit and investment advisory services, custody of financial instruments, and order routers and financial instrument intermediaries.
Political prospects: Presidential elections are scheduled for May for the 2022-2026 term. For the second half of 2022, the political, regulatory and commercial agenda will depend greatly on who is elected President.
Candidacy lists are incomplete and current voting intentions may be swayed by the results of the national vaccination plan and certain social movements in response to reforms coming into play. Economic reactivation or geopolitical events could shift security concerns or even sway political positions and affiliations of public figures.
Economic prospects: According to the World Bank, the Colombian economy is expected to grow next year at a rate of 4.2% and return to pre-pandemic levels. Household consumption, increasing employment rates and a higher rate of total investment will contribute to this growth.
On October 6, 2021, the World Bank recommended "urgent reforms" to overcome the crisis caused by the Covid-19 pandemic. Despite signs of recovery, the great challenges of poverty and inequality have increased in the past year.
Energy: In 2021, the President proposed a constitutional energy reform (as defined below) relating to the power and hydrocarbons industries. If approved in the proposed terms, the country’s electricity supply could increase in cost but decrease in quality which would affect the country’s economy, environment, existing investments, production chains, development of economic activities, exchange rates, creation of jobs and the international commitments assumed by Mexico in environmental and investment protection matters. This measure could affect the prestige and trust of Mexico as a trading partner as it could cause diplomatic tensions and economic claims under different trade and investment protection treaties exposing Mexico to owing billions of dollars in compensation for lost investments. As of December 2021, the legislative discussion of this energy reform has been postponed until, at least, June 2022.
Antitrust: Antitrust litigation, particularly in the energy industry as well as other regulated markets, is expected to continue insofar as the Federal Government continues to push for certain legal amendments and the relevant regulators continue cancelling or avoiding granting relevant permits and authorizations to private parties. The Federal Judiciary added one additional specialized court in antitrust matters to keep up with increasing demand. The Federal Competition Commission (COFECE) will likely continue not having quorum to make decisions since the Executive Branch has refrained from filling board member vacancies.
Labor and employment: In 2022, the labor, social security and tax authorities will inspect and audit companies from all industrial sectors to verify compliance with the Labor Subcontracting Reform (as defined below). Following recent court precedents in European and other Latin-American countries, Federal Labor law may be reformed to take into the account the specific needs of workers on digital platforms and apps.
International trade and customs: If the energy reform is approved in the proposed terms, it could trigger international trade sanctions against Mexico under the U.S.-Mexico-Canada Agreement and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, such as the loss of preferential trade tariffs on exported goods which could affect multiple sectors, including multiple supply chains. Mexico will join the World Logistics Passport program, facilitating the trade of goods and opening up the market for exporting Mexican goods to Asia, Africa and the Middle East.
Tax: From 1 January 2022, businesses will have to evidence their business substance in order to qualify for tax-exempt corporate reorganizations, mergers and spin-offs and back-to-back loans. Reduced withholding tax rates on interest paid on cross-border financing transactions between related parties or paid by multiple purpose financial entities (SOFOMEs) will also be restricted and more stringent requirements will apply to the deductibility of bad debt. The tax reform will also introduce a simplified individual and corporate tax scheme.
Banking and finance: Development banks are expected to have an active role in the financing of strategic industries and government sponsored projects. Additional regulation and supervision by financial authorities could result in an increase in regulatory audit procedures and economic sanctions for financial entities. M&A activity by financial entities could take place following the consolidation trend. We will continue to see debt restructurings, particularly in the industries most affected by the Covid-19 pandemic.
Health: The National Health System in Mexico is expected to continue struggling to supply the basic healthcare needs for the population, including chemotherapies for kids and important medication for chronic diseases.
Political and economic prospects: The current Government is not likely to be able to implement the populist policies integral to President Castillo’s campaign platform, such as strengthening the role of the State in the economy and the nationalization of certain natural resources.
The tensions between the Executive and Legislative Branches and the weakened position and diminished approval of President Castillo’s Government indicate that political instability will continue throughout 2022. Moreover, in October 2021, Congress enacted a law limiting the power of the President to dissolve Congress in certain circumstances. Due to the current instability and the position of the Peruvian Government, it will be difficult to implement any material or radical legal reforms in 2022. Regional and municipal elections for the 2023-2026 term are scheduled for October 2022.
It is expected that Peru’s economy will return to pre-pandemic levels by the end of 2021. This year’s GDP growth forecast is 10%. This gradual recovery of the Peruvian economy is expected to continue in 2022.
Taxes: The Government has announced potential amendments to the current tax regime applicable to certain industries, such as the mining industry, with the intention of increasing the tax burden on such industries. The amendments have not yet been presented to Congress.
Concession agreements and legal stability agreements: The Government plans to review and renegotiate concession and legal stability agreements with foreign investors, in order to better position the Peruvian State. The Executive Branch has not yet submitted specific proposals on the matter.