Latin America | Economic Laggards Recover to Slow And Steady Growth

As Latin America’s laggards recover, growth is trending toward a regional norm of slow but steady.

argentina macri supporters
Argentina: President Macri’s supporters waive flags at his inauguration day at the Plaza de Mayo.

Latin America’s various economies often march at different speeds: with some countries growing robustly while others seem to lag in the doldrums. After several years of turmoil, and one of the worst years for GDP growth, the region is now marching in sync—with growth, albeit slow, returning broadly across the continent.

MArcos Casarin, Oxford Economics
Casarin, Oxford Economics: We are not yet celebrating with fireworks, but we have seen some really good news.

p>Following a stagnant 2015, last year the region saw its third-worst GDP performance in 30 years: a contraction of 1%. Mexico, Chile and other Andean economies grew slightly but not enough to counteract pronounced recessions in Argentina and Brazil. That turned around in the first part of 2017, and the International Monetary Fund now forecasts an expansion of 1.2% in 2017 and 2% in 2018 for the region as a whole.

“In 2017, there has been a clear recovery that will gain strength next year, thanks to the recovery of Brazil and Argentina,” says Antonio Cortina, deputy director of Economic Research at Banco Santander.

With Brazil and Argentina on more-solid footing, the region is showing a new level of economic convergence, bringing analysts at Oxford Economics to cautious optimism. “I would not say that we are celebrating with fireworks yet, but in the last three months we have seen some really good news for most of the countries, with a synchronized activity in the business cycle which is really positive,” says Marcos Casarin, Oxford Economics’ head of Latin America Macro Research. “In Latin America growth never tended to be synchronized, so we welcome this moment in which Brazil, Colombia, Mexico (especially now with the reconstruction efforts [following two strong earthquakes]), Chile and Argentina will play a role as well. All the major economies are picking up at the same time, which is very good.”

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Convergence isn’t an entirely happy story, however. “We moved to a period of lower growth; and although the levels are different depending on which economy you are considering, this is true everywhere. It is true for high-growing economies like Panama or Peru as well as for not-so-fast-growing ones such as Mexico,” says Mauro Leos, head of Moody’s sovereign ratings team for Latin America. “For the whole region, economic expansion will be lower than it used to be. On average for the continent, we used to have a growth of around 4%, which is expected to be 2% this year and around 3% next year (2018). The time of fast—in some cases, boom—economies is past.”

Leos sees two factors that continue to dampen growth regionwide. One is higher levels of public debt, which accumulated via expansionary fiscal policies and/or lower revenues from commodities. Another is subdued optimism among Latin American investors, in no small part due to political caution.

“Across the region, domestic investors look at the economy with a half-empty-glass perspective. This is evident in Chile, in Brazil and in Colombia. It is a sentiment due to the economy but also due to political considerations,” says Leos. “Domestic investors are ambivalent: They see some recovery, like in Brazil, but they do not predict a full-fledged expansion. Likewise, for Argentina, they see some improvements but not a radical change.” He cites other factors tempering optimism, including political turmoil in Brazil and Colombia and the NAFTA renegotiations in Mexico.

Leos, Moody's: Domestic investors are ambivalent: They see some recovery but do not predict a full-fledged expansion
Leos, Moody’s: Domestic investors are ambivalent. They see some recovery but do not predict a full-fledged expansion.

Political considerations make investors wary about whether current improvements will last. “The rate of growth in the continent is probably heading toward 2.5% to 3% year-on-year, and this is the fastest rate in three years,” says Neil Shearing, Capital Economics’ chief emerging-markets economist. “The question is whether it is going to continue, and a big issue there is how this political uncertainty is going to be overcome.”

Over the next 12 months, some of the region’s biggest economies will have significant elections—for president and/or significant legislative posts in Argentina, Brazil, Chile, Colombia and Mexico. Some observers hold out hope that despite some disenchantment among voters, the results will more clearly signal a business-friendly mind-set. Argentine president Mauricio Macri is spearheading probusiness policies whose popularity was set to be tested in in congressional elections as Global Finance went to press. Chile votes in November.

Antonio Cortini banco santander
Cortini, Santander: In 2017, there has been a clear recovery that will gain strength next year.

One impact of regional turmoil has been a fall in foreign direct investment (FDI). The United Nations Economic Commission for Latin America and the Caribbean, known as ECLAC, estimates that FDI declined by 7.9% in 2016 to $168 billion, with a cumulative fall of 17% since the peak in 2011.

Alonso Cervera, chief economist for Latin America at Credit Suisse in Mexico, doesn’t expect the downward trend to continue. “A lot of the decline in FDI was a reaction to the overinvestments done in the past,” he says, pointing to the end of an investment boom in Chile. He also notes that rising commodity prices should help boost these economies. “FDI should now recover somewhat in 2018, because the cycle is going to help, and because some countries are opening up to foreign investors,” he explains. “The wild card is protectionism and trade policy.”

According to Consensus Economics, which each month surveys 120 economic and financial forecasters, FDI will recover across the region in 2018, with rates of GDP growth ranging from 1.6% in Argentina to 4.8% in Chile. (See table.)

Despite uncertainties, major players in the region maintain long-term enthusiasm for the continent. “The potential of trade and investment within Latin American has barely been tapped,” said Santander’s Cortina. “According to the Inter-American Development Bank, regional integration offers a $5 trillion-plus market opportunity.”