Geopolitical shock reshapes Latin American economic outlook

The geopolitical conflict in the Middle East significantly reshaped Latin America's macro-financial landscape in the first half of 2026.

The outbreak triggered immediate reactions in financial markets, including currency depreciation, rising long-term yields, wider sovereign spreads, and falling equity indices, leading to a broad-based tightening of global financial conditions.

This market deterioration followed a period of marked resilience until February, when Latin America benefited from high commodity prices and exceptionally benign financial conditions.

The shock's impact is now feeding into macroeconomic variables and expectations for 2026.

Higher energy prices and currency depreciation have pushed up inflation forecasts for the year, with futures markets pricing in a more restrictive monetary policy stance in several major economies.

The balance of risks has shifted towards more persistent inflationary pressures and potential moderation in activity if the shock is prolonged.

This new scenario emerges after a stronger-than-expected 2025, with growth forecasts revised upwards amid reduced global uncertainty.

Latin America's banking system remains solid, with declining non-performing loans and robust balance sheets.

However, central bank reports highlight emerging structural risks from cybersecurity, digitalization, climate change, and credit concentration, now more prominent amid geopolitical uncertainty.

Commodity markets offer both opportunities and risks.

The Middle East energy shock raised oil and gas prices, benefiting net exporters via improved terms of trade and tax revenue.

For net importers, this fuels inflation and risks external balances.

Public finances are a key structural vulnerability, potentially limiting economic response capacity.

High public debt, moderate growth, and high interest rates in Brazil, Mexico, and Colombia increase debt trajectory risks, emphasizing the need for sound fiscal frameworks.