LATAM terms of trade.
The rollover and what comes after.

Latin America entered the 2020 to 2024 commodity cycle with a structural tailwind that most regional economies underutilised. The terms-of-trade improvement, driven by a combination of copper, iron ore, soy, and oil price recovery, provided windfall fiscal revenue that funded consumption-oriented transfers without requiring the domestic credit creation that had destabilised previous commodity cycles. Brazil's primary surplus recovery, Chile's copper revenue cushion, Peru's mining royalty expansion, and Colombia's oil fiscal linkage all benefited from terms-of-trade improvement that masked underlying fiscal fragility.

The rollover that the desk identifies beginning in H2 2025 is not a collapse. It is a deceleration from an abnormally high base. Copper prices have softened from above USD 10,000 per tonne to approximately USD 8,800 per tonne as Chinese property sector demand normalises from its 2023 recovery peak. Soy prices have compressed from USD 550 per bushel to approximately USD 430 per bushel as Brazilian and Argentine production recovers from drought-affected years. Iron ore is at approximately USD 105 per tonne, well below the USD 180 peak but above the long-run cost-support level of approximately USD 80 to 90.

The policy challenge created by the rollover is asymmetric across the region. Brazil has the largest and most diversified export base but also the largest structural fiscal deficit; a terms-of-trade deterioration that reduces commodity-linked revenue hits a government that is already running above 7% of GDP in nominal deficit. Chile has the most copper-concentrated export base but also the most credible fiscal framework; the sovereign wealth fund and the copper stabilisation fund provide automatic stabilisers. Peru has the highest GDP share of commodity exports but a compressed fiscal position following the Boluarte government's social spending commitments. Colombia is the most exposed: oil is approximately 45% of export revenues and the Petro government's fiscal stance has reduced the buffer available to absorb a commodity price deterioration.

The academic literature on commodity-exporting economies is clear that the exchange rate is the first-order adjustment mechanism for a terms-of-trade deterioration. When export revenues fall, the current account weakens, the currency depreciates, and import costs rise, partially offsetting the terms-of-trade improvement on the competitiveness side while creating inflation pressure on the domestic cost side. The policy question in each country is whether the central bank allows the FX adjustment to clear or attempts to manage it through intervention and rate changes.

The desk's FX transmission model separates the four major LATAM currencies by their current account sensitivity, their intervention history, and the available stock of FX reserves relative to short-term external debt. Brazil's BRL has the lowest current account sensitivity in the region because Brazil's export base is more diversified and less price-elastic than Chile or Peru. Chile's CLP has the highest current account sensitivity because copper is approximately 55% of exports and the CLP-copper correlation over rolling 12-month periods is above 0.75. Peru's SOL is managed more actively by the BCRP, which has a higher intervention-to-float ratio than its regional peers.

The risk scenario the desk assigns the highest probability weight is a Colombia-specific credit stress event. The Colombian peso has depreciated approximately 18% against the dollar since the Petro government's fiscal expansion began in 2022, and the current account deficit has widened to approximately 5% of GDP. A further oil price deterioration below USD 65 WTI would push the Colombian fiscal deficit above 5.5% of GDP, creating a threshold where the debt-GDP trajectory becomes inconsistent with Colombia's current BBB-range sovereign credit rating without corrective action that the current government has shown limited appetite to deliver.

The fiscal response score of 74 is the watch variable. It is the highest pressure reading and reflects the desk's view that fiscal credibility is the variable most likely to differentiate country outcomes over the next 12 months. Brazil and Chile have institutional frameworks (the fiscal framework law and the copper stabilisation fund respectively) that provide automatic fiscal response mechanisms. Peru and Colombia depend more heavily on political willingness to adjust, which is less reliable.