Inflation and war drives economic growth outlook lower
Although the economy grew at a good pace in January and February, the persistence of inflation is worrying in a context of oil prices above $100 per barrel, and the uncertainty generated by the Russia-Ukraine war. Cumulative January-February GDP growth was 6% y/y, and inflation reached 8.98% in March, compared to the same period in 2021, placing it practically 3 percentage points above the inflation target range. In light of this situation, the Central Bank decided to increase the monetary policy rate for the fourth time, to 6% per year.
The exchange rate remains stable, and international reserves continue high, at above $14 billion. The robust performance of exports and the flow of foreign direct investment are financing the strong increase in imports. The higher spending on subsidies by the central government has been partially financed by revenues higher than originally expected. In Q1 2022 the central government deficit represented 6.6% of the total budgeted deficit for 2022.
Our macroeconomic projections have grown more pessimistic, given the uncertainty created by the Russia-Ukraine war, higher international prices of raw materials and the effect of inflation control policies globally. For 2022, economic growth is projected at 5.1%, lower than the 6.5% projection at the beginning of the year. Inflation remains above the target in 2022 (5.9% y/y) and will return to its target range in 2023. Unemployment would only manage to recover its pre-pandemic level at the end of 2023.
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