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Latin America heads into 2026 facing economic and political turbulence, where persistent uncertainty threatens to hold back growth—even as markets adapt. Senior Economist, Rafael Barisauskas explores the implications for commodity markets and what lies ahead for the region.
Key takeaways:
The Latin American economy is facing significant challenges as 2025 draws to a close, with the fourth quarter expected to bring further turbulence. External shocks combined with domestic political shifts are creating some of the most challenging conditions the region has faced in recent years. But what does this mean for commodity markets and end-users?
A temporary truce in the US-China trade war has eased some tensions, with Brazil actively engaging in tariff reduction talks with the US and pursuing broader trade diversification in the Asia-Pacific region. Brazil and Chile are positioning themselves as strategic alternatives to China in the rare earth market, with Brazil producing its first domestically sourced rare earth oxides and Chile expanding its heavy rare earth projects to support the clean energy and technology industries. However, tariffs remain high on raw minerals and many agricultural products, which is impacting trade dynamics.
Commodity and pulp producers in Brazil are showing resilience in the face of 50% US tariffs by redirecting exports to Asian and South American markets, but are having to settle for lower prices and squeezed margins. Mexican paper producers are gaining temporary relief from new anti-dumping tariffs on Chinese products, although weak domestic demand is limiting the benefits.
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Consumer demand across Latin America shows broad moderation, influenced by political uncertainty and high credit costs despite inflation declines in countries like Chile and Peru. In major markets, such as Brazil, Mexico and Colombia, demand growth is below potential due to accumulated cost-of-living increases and stagnant real wages, which has led to cautious consumer behavior and margin pressures for companies.
Responses by the various regional central banks differ based on inflation and growth, creating diverse monetary conditions. Brazil and Colombia maintain restrictive stances, prioritizing inflation over growth. Mexico, Chile, Peru and Uruguay are gradually lowering interest rates, though at different paces and endpoints. Argentina is keeping rates high rates to anchor expectations despite recent US financial support. These differences reflect varying inflation paths, output gaps and political factors, with hawkish banks sacrificing near-term growth to rebuild credibility after past inflation issues. Central banks’ different capital costs create a fragmented landscape: producers in Brazil and Colombia face high financing costs that hinder investments, while those in Chile, Peru and Uruguay are seeing some relief.
Latin America will begin 2026 with high uncertainty across the political and economic segments, following a year marked by unpredictability. Political instability is the primary risk, stemming from Peru’s fragility, Bolivia’s transition, Chile’s polarized election and Argentina’s austerity efforts. These issues lead to higher risk premiums, delayed investments and reduced policy flexibility, ultimately affecting growth even when fundamentals are strong. Only when stability returns can growth resume fully.
Finally, end-users face the worst of both worlds: reduced purchasing power due to record debt in Brazil, declining remittances in Mexico, persistent inflation in Colombia and Chile, and high borrowing costs amid slowing economies. Retail sales will stay weak until political stability and monetary easing improve, benefiting companies with strong balance sheets, adaptable operations and the ability to temporarily compress margins in the coming quarters. Paper prices may be flatlining for now, but capital costs and market-share battles on the retail side are adding more pressure to procurement teams, which are either moving away from paper back to plastic or increasing shrinkflation strategies, when not doing both at the same time.
Brazil presents perhaps the most intriguing paradox in the region today. Despite US tariffs reducing September exports to the country by more than 20%, total Brazilian exports reached an all-time high by successfully pivoting toward Asian and South American markets. What could be called resilience and flexibility from a value-chain perspective may mask a weak domestic market outlook for the present and concerns about its future.
China, Singapore, India and Argentina absorbed much of the redirected trade, demonstrating Brazil’s ability to adapt in a divided global economy and the strength of multilateral agreements and economic groups like BRICS+. However, this export success masks concerning domestic weaknesses. The economy is slowing as manufacturing stalls, even though agriculture remains strong thanks to record harvests that have helped keep food price inflation under control.
The Brazilian Central Bank kept interest rates at 15% due to unanchored inflation expectations for 2026 and a still strong labor market, despite signs of slowing growth. Unemployment remains near 6%, but early signs of weakness are appearing, especially in the industrial sector. In August, both formal and informal jobs declined for the first time since September 2023, with job creation falling below the neutral level required for stable unemployment. The declining participation rate may mask the softness that could lead policymakers to cut rates in early 2026.
The agricultural sector’s resilience faces challenges despite being a key driver of Brazil’s economy. The US imposed a 50% tariff on Brazilian animal protein in July, halting exports to a key market, which was attributed to an avian flu risk that emerged at the end of the second quarter. Although controlled, China only cleared Brazil to re-export in November. To maintain production and low costs amid squeezed margins, animal protein producers rerouted cargoes to other markets in both cases, as reducing exports was not economically feasible.
Brazilian consumers entered 2025 with record debt, which limited their spending and retail growth. Almost 80% of households have debts, with more than 25% of them unable to afford to pay the debts that are currently due, and delinquency rates have risen as high interest rates took effect. Retail sales are performing below market expectations, reflecting reduced purchasing power and reluctance to borrow at high rates, despite slower economic growth. This debt burden is hampering the consumption recovery, as households focus on debt repayment, forcing retailers to rely on promotions and margin cuts for minimal sales growth.
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Brazil heads toward the October 2026 elections amid deep political polarization, threatening economic stability. President Lula faces opposition with divergent views on spending, pension reforms, deregulation and privatization. Polls show a tight race, risking prolonged uncertainty. The electoral cycle influences fiscal decisions, balancing popular spending with credible market-driven fiscal policies to control inflation and interest rates. Rhetoric on fiscal discipline could upend inflation expectations, delay rate cuts and widen sovereign spreads when refinancing debt. Historically, assets have underperformed in election years, with real weakening and volatility rising as investors await clearer policies.
The timing is critical: with overleveraged consumers, stagnant manufacturing and tight monetary policy, political uncertainty may delay investment, hinder reforms and prolong high capital costs, constraining growth.
The Mexican economy remains stagnant due to economic uncertainty, lower remittances from the US and a weak outlook for exports to the US despite recent trade policy actions. The government recently proposed raising tariffs on nearly 1,500 product lines from countries without free trade agreements, mainly China. Tariffs would rise from 16% to nearly 34%, affecting auto parts, textiles, aluminum and steel. The aim is to increase tax revenue, protect domestic industries under Plan México and address US concerns about Asian goods being rerouted through Mexico ahead of the United States Mexico Canada Agreement (USMCA) renewal expected in July 2026. Additionally, new anti-dumping tariffs against China were introduced for certain paper grades in October, as local producers face competition from imported virgin Chinese volumes entering Mexico at prices 35-40% lower than those of local recycled products. However, Mexico already imposed tariffs of 25-35% on several products from non-trade partners (mainly China and Brazil) in May 2024, with similar goals but limited practical impact.
The human aspect of Mexico’s challenges become clear in the remittance data. For the first time in over 10 years, remittances declined, dropping more than 5.5% year to date through the third quarter. These transfers are 4.5% of GDP and mainly aid lower-income households, so the decline directly reduces purchasing power. Each dollar remitted to Mexico generates $1.50-2.50 in economic activity via the remittance multiplier, as recipients spend on essentials that support local businesses, create jobs and generate taxes. Tighter US immigration enforcement, proposed remittance taxes and a weaker labor market halted the upward trend. Core inflation remains above 4%, driven by service prices despite low agricultural costs. The resilient labor market continues to keep inflation high, even as economic growth slows, forcing policymakers to balance growth support with inflation control.
Argentina’s narrative shifted dramatically following the October 26 legislative elections, when President Javier Milei’s coalition, La Libertad Avanza, exceeded expectations by capturing over 40% of the vote. The result increased Milei’s congressional seats from 37 deputies to 93 deputies and from 9 senators to 19 senators, strengthening his ability to push for structural reforms, such as privatization, deregulation and fiscal consolidation. Markets responded with unbridled enthusiasm. The Buenos Aires Stock Exchange rose nearly 22%, the peso gained 10% and sovereign bonds increased as much as 23% in the days after the election.
Additionally, a $20-billion support package from the US Treasury, including currency swaps and sovereign bond purchases, seeks to strengthen reserves and keep peso depreciation within the managed float band.
Yet beneath this euphoria, significant challenges remain. Annual inflation hit nearly 32% in September, down from the triple-digit crisis of 2024 but still alarmingly high as consumers’ purchasing power continues to erode. Social resistance to austerity measures continues through strikes and protests, while upcoming energy tariff adjustments threaten to reignite inflation just as expectations were beginning to stabilize. The government needs to build coalitions to pass key legislation, and the sustainability of public support for tough reforms remains uncertain. Nevertheless, the election results have reduced political risk and created an opportunity for Argentina to pursue the deep structural changes it has been unable to achieve for decades.
Colombia’s central bank maintains a hawkish stance, which has disappointed those hoping for monetary relief, as inflation trends persistently remain concerning despite clear signs of economic recovery. Activity surged over 4% in July, with quarterly growth surpassing 3%, its fastest rate since mid-2021. The labor market remains tight, with unemployment at just 8%, well below the central bank’s estimated natural rate of 10.2%, alongside significant job creation.
However, September inflation exceeded expectations, while expectations for inflation one and two years out climbed to their highest levels in 2025, reinforcing the central bank’s cautious stance. The Board remains divided; some members ruled out rate hikes due to contractionary policy levels but stressed the need for caution, as expansionary fiscal policy continues to pressure domestic demand. Rate cuts are now expected only in the second half of 2026, disappointing those who anticipated relief sooner, which is likely to keep reducing economic growth in the short term.
Chile’s non-mining economy is growing near its potential, despite temporary disruptions in mining, with capital goods imports surging in September, which strengthens a positive investment outlook. However, sequential inflation pressures remain high.
The Central Bank’s September minutes reinforced a hawkish stance, ruling out rate cuts in October and leaning toward a higher neutral rate estimate in the upper part of the 3.5-4.5% range. In December, a presidential runoff is expected, with all polls indicating that opposition candidates will defeat the incumbent, Jeannette Jara. Political analysts increasingly anticipate an opposition sweep of the presidency, Senate and Lower House for the first time since Michelle Bachelet’s first term, which could lead to spending cuts, corporate tax reductions and quicker investment permits.
The Chilean peso remains weak despite high terms of trade and improving investment sentiment, as low carry and non-resident short positions worth around 4 billion dollars in peso derivatives limit appreciation prospects. Only progress through the political cycle and global monetary easing are likely to trigger a recovery in the Chilean currency.
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Peru shows a disconnect between solid economic fundamentals and weak institutions that can hinder a nation. Despite growth in 2025 from agriculture and mining, political turmoil dominates as Congress impeached President Dina Boluarte in October for “permanent moral incapacity,” due to rising crime and violence. The motion passed unanimously with 122 votes. José Jerí became interim president amid protests demanding reforms. Peru’s seven presidents in a decade foster deep instability that economic growth can’t fully offset.
The impeachment occurred after President Boluarte approved an eighth pension fund withdrawal, worth about 2.5% of GDP, which further hurt the pension system and local capital markets, while putting pressure on the medium-term fiscal outlook. With the April 2026 elections nearing and 47% of voters still undecided, uncertainty persists despite the return to a bicameral system aimed at boosting political stability. Inflation remains very low, and the Central Bank is keeping the policy rate close to its nominal neutral level of 4%, with little urgency for further cuts given the closed output gap.
The striking paradox is that the economy is operating at its potential, inflation remains controlled and exports are robust, all despite political chaos that could jeopardize progress at any moment.
Bolivia is experiencing one of its worst economic crises in decades, with annual inflation exceeding 23% and international reserves critically low, which limits imports and causes severe fuel shortages. The recent election marked a historical change, as for the first time in 20 years, the ruling party Movimiento al Socialismo was defeated. Newly elected President Rodrigo Paz promised to reduce subsidies, stabilize the economy and pursue regional cooperation with careful engagement with international organizations like the International Monetary Fund (IMF), although this political transition introduced additional short-term instability risks to an already fragile economic situation.
Venezuela adds another geopolitical flashpoint as tensions with the United States intensified following Washington’s deployment of military personnel to the Caribbean “to combat drug smuggling and ‘narco-terrorism’.” Venezuela responded with troop mobilizations, maximum alert declarations and suspension of energy agreements, raising the specter of renewed confrontation that could ripple through regional energy markets and migration flows.
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