China’s slowdown and trade uncertainties combine with domestic turbulence to make 2019 a year of low expectations for Latin America.
China’s slowdown and trade uncertainties combine with domestic turbulence to make 2019 a year of low expectations for Latin America.
Latin American economies face a tough year in 2019: a struggle to overcome hurdles created by China’s slowdown. Meanwhile, the region’s own social and fiscal issues are exacting a high price—most especially on Venezuela. Some governments promise bold responses—but along profoundly different lines.
GDP for all of Latin America should grow 2% this year and 2.5% in 2020, according to the latest projections from the International Monetary Fund (IMF). That would place performance below expected world growth of 3.5% and 3.6%, respectively. The region’s two biggest economies, Brazil and Mexico, are both wrestling with structural inbalances; and both have new governments moving in ideologically opposite directions from their predecessors. Argentina, the third major Latin American economy, is facing its second year of deep recession under a package of unpopular fiscal and monetary measures.
“Latin America is very sensitive to the world economy, whose slowdown this year will increase the volatility and the uncertainty in the financial sector,” says Daniel Titelman, chief of the economic development division of the UN Economic Commission for Latin America and the Caribbean (Ecalc).
Concerns over policy direction are adding to concerns. “The weakening of world activity and the uncertainty on economic policies are making their contributions to the slower pace of Latin American growth,” says Alejandro Werner, director of the Western Hemisphere department at the IMF. The crisis in Venezuela risks dragging other countries in the region into a protracted struggle over political and resource control.
A silver lining, thus far, has been the Andean economies, without which the whole region could look forward to an even slower pace of growth. Neither will they shine, however. Chile and Peru, both huge mineral commodities exporters, are expected to suffer directly from the Chinese slowdown. Peru’s economy should grow 4.1% this year, according to the IMF, with the same projected for 2020. Chile is expected to expand 3.4%, around 0.6 percentage points below the rate it registered last year. Even facing hard fiscal adjustments and battles against guerrillas, Colombia should produce higher growth—3.6% in 2019, up from 2.8% last year—due to a construction sector recovery and a tax cut in December.
Mexico: Apprehensions of AMLO
Moving north, Latin America’s second largest economy is embracing the nationalist and populist vision of its new, leftist president, Andrés Manuel López Obrador, known as AMLO. He is sticking with the antibusiness rhetoric he employed during his electoral campaign. He has promised to tear up the reforms enacted during the last administration, especially the opening of Mexico’s oil industry, and the old goal of fiscal primary result of 1% of the GDP in 2019.
Both initiatives are scaring investors. Given these uncertainties, the IMF has revised its estimate for Mexican GDP growthto 2%, from 2.1%, last October. Even that may be erring too far in a positive direction, some analysts say. “The services sector would be a huge source of growth, but it has reduced its pace during the last one and a half years,” says Marco Oviedo, head of Latin America economics research at Barclays, underlining the government’s lack of attention to segments with high growth potential. “The estimate of 2% GDP growth this year is optimistic. It is possible that the country will reach only 1.5%.”
An expected drop in oil production threatens additional downward pressure: a consequence of the government’s failure to invest in Pemex and uncertainty regarding approval of the United States-Mexico-Canada Agreement (USMCA), the rewrite of Nafta, by the US Congress. On the positive side, Mexico can profit from its openness to Chinese electronic investors, its automobile exports to Europe, and tourism, Oviedo adds.
Vigorous bank lending could spur faster growth; but to play that role, the banking system would require reform. Right now, Ovideo says, banks are reluctant to boost lending, having been spooked by the 1990s banking crisis. Total outstanding debt in Mexico corresponds to 25% of GDP, according to Oviedo, while in Chile it equals 50%. Mexico is open to the entrance of foreign banks, but the risk perception is still high. With the banks serving only a narrow customer base, most borrowers resort to the Sofomes, Mexico’s network of some 1,400 multipurpose, often unregulated financial lenders, which charge higher interest rates.
Yet, the new administration is showing no signs of pushing reforms that would give lower-income individuals and small businesses greater access to the mainstream banking system, Oviedo says.
Brazil: Focusing on Pension Reform
Under its new president, Jair Bolsonaro, the first far-right chief of state since the military dictatorship that ended in 1985, Brazil appears set for another year of low GDP growth. For 2019, both the IMF and Eclac estimate expansion of 2.5%: better than the 1.3% the country achieved in 2018, but still below potential. Titelman cites low inflation and rising public and private investments as key factors pointing to improvement in 2019.
Economists as well as investors are watching closely the progress of pension reform, which many regard as key to Brazil’s economic fortunes. Reducing pension payouts is an unpopular objective that one government after another has postponed for the last 20 years while public debt and deficits have increased. Bolsonaro has pledged to support pension reductions, but no one can be sure how the new Congress, fragmented into 27 political parties, will vote.
The IMF and Eclac growth estimates may come through even if pension austerity doesn’t, some argue. “It is not enough for huge optimism, but this 2% growth will happen even if pension reform is not approved,” says Titelman. “The pension reform implementation, market openness and a privatization plan, all promised by the government, can improve the growth rate even more this or next year. But they are not yet guaranteed.”
Sérgio Valle, chief-economist at MB Associados, anticipates that if pension reform is approved, Bolsonaro’s administration will have the chance to move on to tax reform, which is demanded by industry. Otherwise, this will be difficult.
“A GDP growth above 3% next year depends on pension reform approval. With no reform, the country is doomed to recession,” Valle says. “There is no Plan B. The cost of the pension system to the public account is the highest in the world.”
The new, market-oriented administration’s agenda has its troubling elements. Bolsonaro’s most radical ministers—those responsible for foreign affairs, education and human rights—are promoting policies that could raise uncertainties for powerful productive sectors, including agribusiness, and lower the country’s already poor educational standards.
Nevertheless, General Motors has announced 10 billion reais ($2.73 billion) in investments in Brazil from 2020 to 2024, to better position it to meet not only the growing demand in Brazil, but to better serve the entire Mercosur customs union.
Argentina: Wrenching Recession
Brazil’s Mercosur partner, Argentina, will endure negative growth of 1.6% this year, according to IMF and Eclac projections, following a 2.6% retraction in 2018. This second year of wrenching recession is the result in part of the fiscal and monetary austerity adopted under President Mauricio Macri.
“Argentina suffered a huge financial shock last year that has forced it to embrace macroeconomic changes and to ask the IMF for help”—specifically, a three-year, $57 billion bailout lending program, Titelman notes. “The country’s economic outcome will improve from the second quarter of 2019, when household income should rise, influenced by the agricultural harvest.”
Perhaps more important to investors concerned about Argentina’s future as a destination for capital, however, will be the results of the October presidential election, in which Macri is expected to face Senator Cristina Kirchner, a left-leaning former president. “Investor confidence in Argentina depends on the reduction of political risk,” says Oviedo.
