Latin American Economic Outlook

Poll Suggests Growth Will Be Limited

Latin American Economic Outlook
February 20, 2015

The economic problems of Europe, Japan, and Russia have been well publicized – but what about the growth of other regions, such as Latin America? The latest Reuters poll and LatinFocus survey suggests that Latin America is in for a period of meager growth at best, and a joint report from several economic organizations including the Organisation for Economic Co-operation and Development (OECD) echoes this sentiment.

2014 did not provide positive economic momentum for Latin America. According to the OECD report, the GDP growth rate fell below 1.5% in 2014 as the area was pummeled by several economic downturns. The fall in oil prices has crippled oil-producing nations – especially Venezuela, which has the added burden of erratic economic policy – and plunging commodity markets in metals such as copper and iron ore are affecting most of the others.

LatinFocus surveys show that economists have cut growth expectations for Latin America in 2015 from 1.9% down to 1.5%, and the 2016 growth rate is projected at 2.8%. The growth prospects of individual countries were downgraded in 9 of 11 countries, with Paraguay remaining flat and Argentina as the lone country with increased economic prospects. That is damning with faint praise, as Argentina is still expected to be in recession – just not as bad as previously forecast.

As if slow growth wasn’t bad enough, LatinFocus projects inflation to hit 13.3%, fueled primarily by Argentina and Venezuela. Should this come to pass, it would represent the highest inflation rate in over twenty years.

What can Latin America do? The OECD report suggests that policies must address increased innovation and the educational skills required to innovate, thus producing better-paying jobs and reducing “socioeconomic inequalities.” (One could apply that to the U.S. as well.) The OECD makes a very valid point in its report – make your economies less dependent on commodity items.

For the long term, that is sound advice. In the short term, individual countries will have to deal with delicate balances of fiscal policy to get through this rough period, especially when Latin American politics is taken into account. Let’s consider a few of these situations.

  • Brazil – Both oil and commodities kept Brazil barely above contraction, with a 0.2% growth in 2014 and 0.5% expected in 2015. Tax hikes and spending cuts are being considered, but most spending is constitutionally mandated, thus this approach will have limited effect. The Brazilian real is expected to drop, so exports may potentially be a brighter spot as the year progresses.

  • Mexico – The Mexican economy may be in the best shape within the region, with 3.3-3.4% growth expected in 2015. Manufacturing output has contracted slightly, so the timing of the eventual rise in oil prices may dictate Mexico’s economic fortunes.

  • Venezuela – Barclays suggests that every $1 drop in crude oil prices costs Venezuela $700 million. This has led to shortages and rampant inflation – prices for staples are expected to potentially double in 2015. Economists expect a currency devaluation and a possible sale of assets in 2015 to blunt the effects on upcoming parliamentary elections. A 2% contraction is expected for 2015.

In short, oil and commodity prices should begin to improve, but it will take Latin America a considerably longer time to recover from the effects.

As with any struggling region, there are plenty of opportunities for savvy investors to make money – and far more pitfalls available to snag the unprepared. Feel free to pursue Latin American investments, but make sure you assess the risk properly and do so in keeping with the risk allocations in your portfolio.

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