Latin America in 2016:
will weak Exports and Instability slow Growth?
Only a few years ago, commodity exports from Latin America were booming, as
analysts heralded the arrival of the region’s major economies – including
Brazil, Chile, Colombia and Mexico – into the narrow circle of leading emerging
nations.
No longer. On the whole, Latin America suffered a 14% decline in exports
last year, as the nations of South America, in particular, suffered an even
more precipitous 21% drop in their collective exports. 2015 marked the
third-straight year for such a decline, with the fall-off intensifying and
spreading to virtually all nations in the region, according to the
Inter-American Development Bank (IDB).
In response, Barcelona, Spain-based LatinFocus Consensus Forecasts has
slashed the region’s GDP growth forecast to only 0.6% in 2016. “There are no signs
of change in price trends for commodities markets, and a slowdown in economic
activity is expected to continue in China and in Latin America,” according to
the IDB. The only bright spot is Mexico and Central America, where stronger
demand from the United States “could lend dynamism to exports” adds the IDB.
“This trade contraction, which is the worst since the 2009 collapse, is a
wake-up call on the need to implement export diversification policies,” says
Paolo Giordano, principal economist of the Bank’s Integration and Trade Sector
and coordinator of the report.
Obviously, for the countries that depend so much on commodities, the
decline in commodity prices is worrisome, says Wharton management professor
Mauro Guillen. “For Mexico and Colombia, the situation is much better because
they have a more diversified export structure by product and they depend more
on the United States or Europe for export markets…. The United States, within
the global context, is not doing that bad [economically].”
A Double Whammy
Felipe Monteiro, senior fellow at Wharton’s Mack Institute for Innovation
Management, explains that the commodity-based growth that Latin America has
experienced provides a double whammy to the region. “It is not a balanced trade
and it is also very volatile, since it relies so much on commodity prices
[which are volatile]. You benefit from those years of growth, but you also have
those big moments of depression. When you have trade relationships which are
not so heavily dependent on commodities, those prices vary in a much more
limited way. Commodity prices move so quickly — one way or another.”
Oil-exporting countries have been affected the most by the sharp drop in
petroleum prices. According to the IDB, Venezuela (minus 49%) and Colombia
(minus 35%) posted the biggest contraction rates in their overall exports in
2015, measured in dollar volumes, followed by Bolivia, Ecuador, and Trinidad
and Tobago. El Salvador and Guatemala were the only two countries where exports
rose, due to a strong increase in their sugar shipments to China. Latin
America’s overall exports to China plunged 14%, while expectations of a rebound
of exports to the United States were neutralized mostly by a drop in the value
of oil, which resulted in sales to the U.S. shrinking by 7%.
Walter Kemmsies, senior economist at Moffatt & Nichol, an
infrastructure development consultancy, distinguishes between demand trends for
industrial commodities and agricultural commodities. On the one hand,
industrial commodity exports include energy commodities, metals and aggregates.
Agricultural exports include everything from grains, sugars and seeds to
protein.
With respect to industrial commodity exports, demand for Latin American
iron ore in China has lately been growing more slowly than mining companies in
such countries as Brazil, Chile and Peru had expected a few years ago. Kemmsies
notes, “Globally, about $4.5 trillion in debt has been issued during the last
three or four years to build new mines and connections between mines and ports,
railroads — a lot of investment [in] producing things [using] iron ore. Four or
five years ago, in Brazil there was enough port export capacity developed that
could handle tonnage that was four or five times greater than the total amount
of tonnage handled around the world [before then]. That’s when [the mining and
energy firms owned by Brazilian billionaire] Eike Batista blew up — and he
turned out to be the canary in the mine, literally.”
Global mining giants such as Rio Tinto and BHP “were overextended in
investment capacity — and the consumption growth just wasn’t there to absorb
that,” Kemmsies adds. “We have a supply-demand imbalance in iron ore. We also
have one in copper and many metals. So with the dollar getting stronger, and
China’s demand for industrial metals getting weaker, the prices collapsed.”
On the other hand, he notes, “Agricultural trade has held up decently.
Those parts of Latin America that are dependent on agricultural exports are
doing okay. But those parts that are dependent on industrial raw materials and
energy are not okay.”
He adds, “Agricultural prices have also come down, but not to the extent
that industrial prices have come down. Before China exploded on the scene, the
average price of soy beans was $2 to $4 a bushel; but the price spiked [at $17
a bushel] in 2012 and has now declined to between $8.75 to $9.50. [However,] if
you compare soy with where it was 10 to 15 years ago, it is still two to three
times higher. Oil today is back to where it was in 2004-2005.”
Brazil: Multiple Uncertainties
For Brazil, by far the region’s most populous nation and largest economy,
the new year brings both economic uncertainty and political instability. On the
one hand, the Brazilian economy contracted a whopping 4.5% in the third quarter
of 2015 from a year earlier. The International Monetary Fund forecasts that for
2015, Brazil’s gross domestic product will have shrunk by 3% followed by
another 1% in 2016. “[Brazil starts] the year with a lot of uncertainty,” says
Monteiro. “There are a lot of question marks.”
Late in 2015, finance minister Joaquim Levy resigned, replaced by planning
minister Nelson Barbosa. Levy, who served less than one year as finance
minister, favored fiscal austerity and other reforms designed to make Brazil’s
economy more competitive. Levy’s tenure was marked by constant conflict within
the administration’s economic team. In 2015, Brazil’s economy plunged into a
recession. Meanwhile, inflation soared to over 10%, and the country was
downgraded to speculative credit status by two major ratings agencies,
Fitch and Standard & Poor’s. Levy pushed for a bigger surplus while Barbosa
argued for a smaller margin of savings for the next year.
President Dilma Rousseff favored Barbosa’s position, asking Congress to
trim the expected surplus from the equivalent of 0.7% of gross domestic product
to 0.5%. Meanwhile, Rousseff has faced charges of massive corruption as more
information surfaces about the connections between state-owned oil giant
Petrobras and politicians during her time chairing the board of directors. Last
December, the country’s supreme court ruled that Rousseff cannot be impeached
under current proceedings aimed to remove her from office. The judges decided
that a new vote on impeachment must be held, with the Senate taking the final
decision this year.
Brazil has a lot of problems, Guillen notes, “but the immediate problem is
inflation getting out of control. With the economy in a deep recession, there
is no clear way out. Commodity prices are flat or, in some cases, continue to
go down.” In Brazil, as in most of these other economies, he says, “the problem
is that they didn’t make the investments they should have made in the boom
years when things were going well; when they were flush with commodity money.
That is the tragedy in all of this.”
Monteiro adds, “When you look at 2016, it is clear that a lot of those
things that would hopefully have been [solved by now] are still pressures that
are ongoing. And there is no clarity in terms of the time horizon [for concluding]
the political gridlock — despite the fact that the impeachment process has
formally started. There is no clear indication of what the final outcome will
be, or how long it will take.”
Despite such uncertainties, Monteiro cautions against viewing Brazil’s
troubled economy as the twin brother of neighboring Argentina. While both
countries have suffered from the decline in global commodity prices, Monteiro
notes that Brazil’s “industry and business sector are much more diversified,
and on a different scale.” He adds that “while Argentina had so many years of
deterioration, the good news is that we have some clarity in terms of the new
government [in that country]. And it is promising that [newly elected Argentine
president Mauricio Macri] is a pro-business guy, and we have hope in that
sense. But the Argentine economy has deteriorated much more [than Brazil has].
Comparing Argentina with Brazil — yes, Brazil has deteriorated, but it is on a
different level. It is not a country that has been suffering so much as
Argentina, which has been kept out of financial markets and has had high
restrictions for imports.”
Monteiro continues, “I see a different bright side for both of them. On the
one hand, Argentina has … some new hopes and new government, but the situation
has deteriorated much more. In Brazil, you don’t have that hope yet; people
don’t know exactly what’s going to happen.” However, in terms of fundamentals,
Brazil is a much stronger economy, he adds.
For Brazil, 2016 will also offer a bittersweet opportunity to host the
Summer Olympic Games in Rio, which will take place at a juncture when Brazil’s
economic stature and political stability are both at risk. Even the economic
impact of the 2016 Olympics has been widely called into question of late, given
the downturn in the country’s economy.
Guillen agrees with that view, noting that the current mood in Brazil is
“very pessimistic” because inflation is out of control, and the President has
very little margin to persuade people to be involved with reforms because her
approval rating is extremely low; less than 10% percent. “The dire
economic situation is, for the most part, driven by the strong dollar and the
problems in China,” he notes. “Then, you [also] have the domestic political
situation.”
Kemmsies notes that the funds used for constructing Olympic facilities
would have been much better spent to construct infrastructure for roads,
railroads, ports and so forth. According to Monteiro, the Games “will have only
a very limited impact” on the country’s lagging economy. “We will have some
positives, but it will be more for Rio [de Janeiro]. [Unlike the World Cup of
2012], the Olympics are in a single city, so they are very concentrated. The
hope is twofold: On the one hand, in terms of the infrastructure that is going
to be there after the games, Rio is going to benefit. And for Brazil, which is
in the middle of so much bad news, I’m sure it is going to be a moment when the
country is going to [pull] together. Hopefully by then, we will have more clarity
[on the political situation]. But I wouldn’t put too much weight on the idea
that the Olympics will somehow offset the negative effects” of the current
crisis.
Even Chile, another rising star among emerging nations during the boom
years, is no longer facing smooth sailing, notes Guillen. “Chile used to be a
country that was performing relatively well, but again, it was an illusion to a
certain extent. They were relying on very high commodity prices. Chile is not
much better off,” he said, despite its diversification into producing the
high-quality wines and fruits that it ships to the United States and other
foreign markets.
Source: KNOWLEDGE@WHARTON
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