Latin America Advisor

A Daily Publication of The Dialogue

Will Latin America Be the Next Global Economic Crisis?

United Nations

Latin America, where every major economy is either shrinking or slowing down, could be the next trouble spot in the global economy after the Greece debt crisis and the China stock market crash, an article by CNN suggested earlier this month. Will Latin America be the next global crisis? What do countries in Latin America, where region-wide growth is expected to fall below 1 percent this year, need to do to get their economies back on track? Have we reached the bottom of the current cycle, and what is the economic outlook for the region in 2016?

Peter Hakim, member of the Advisor board and president emeritus of the Inter-American Dialogue: ”For sure, the bulk of Latin America’s economies are suffering from the downturn in the price of oil and other commodity prices, the decline in investment flows and the sluggish pace of growth in China. Still, there are huge differences in performance among the countries. Three of Latin America’s largest economies, Brazil, Argentina and Venezuela, which together account for some 55 percent of the region’s overall economy, are in particularly difficult straits. Their problems, however, are due only in part to the global challenges. Mostly, they the result from bad policy choices and economic mismanagement, compounded by corruption and political strife. Projections for 2015 are that average growth (weighted by GDP) of the three countries will be a negative 1.7 percent. What that means is that the remaining 17 Latin American countries will expand at an average of about 3.2 percent, not terribly robust but better than world average. And note that all 17 of these economies are forecast to grow at least two percent this year— and 11 of them by more than three percent. The nations of Latin America are not in the best economic health. Many are struggling, but few are anywhere near crisis. Policy and management matter, not just cycles.”

Alfredo Coutiño, director for Latin America at Moody’s Analytics: “Latin America is immersed in a strong deceleration cycle, after the post-recession rebound of 2010-2011, which was fueled by aggressive fiscal and monetary expansions. Obviously, the absence of reforms combined with the excess of global liquidity deteriorated Latin America’s production capacity since governments unproductively enjoyed the era of abundant and cheap money pumped by main central banks. The deceleration process has affected more those countries with a prolonged absence of structural changes and with no agenda for reforms as in the case of Brazil, Argentina and Venezuela. Mexico, Chile, Peru and Colombia are either in the process or have already embarked on new reforms. Hence, few countries will continue to fall, and others will advance slowly but steadily. The downturn cycle seems to be reaching the bottom as more countries have taken the bad weather as an opportunity to implement changes and overhaul their economies. This year will be a year of almost no growth for the region, but 2016 is expected to bring a mild recovery, particularly because of the effects of new reforms and the further advance of the U.S. economy. It will take some more years for the region to go back to potential because it will take time for reforms to increase the economy’s production capacity. What is Latin America not doing in these times of strong financial volatility? Most central banks, except Brazil and Colombia, continue to maintain expansionary policies, thus charging the full cost to their currencies. Those countries that have not normalized monetary conditions in anticipation of the global monetary reversal will be the ones more affected by the stronger incoming volatility and will be also the ones forced to implement more severe monetary adjustments—Chile, Mexico and Peru among them. The region can reinforce its protection by restoring macroeconomic discipline and deepening reforms.”

Joydeep Mukherji, senior director of Latin American Sovereign Ratings at Standard & Poor’s in New York: “The economic difficulties in Latin America reflect a mixture of largely domestic structural problems in some countries and global conditions in other countries. S&P expects the region to grow only 0.4 percent in 2015 but recover slowly to 1.9 percent growth in 2016. The poor outlook is driven by a recession in Brazil, a 6 percent contraction in Venezuela and next to no growth in Argentina. Domestic factors account for most of the poor performance in these countries. Brazil is likely to contract 2 percent in 2015, remain fl at in 2016 and recover only modestly in 2017. Brazil’s importance among emerging markets raises the risk that its poor performance could affect investor sentiment about other such markets. Panama is likely to be the fastest growing country in the region once again, with GDP expanding 6 percent in 2015, followed by over 4 percent growth in Bolivia. The Andean countries (Chile, Peru and Colombia) are likely to grow around 2.5 percent to 3.5 percent. External conditions, especially low commodity prices, play a larger role in the growth deceleration in these countries. Poor investor sentiment, along with delays in the government’s infrastructure program, will likely limit GDP growth to 2.5 percent in Mexico, the second-largest economy in the region. The weak recovery next year partly reflects the limited ability of the region to boost growth through fiscal and monetary policy without jeopardizing stability. Poor productivity, inadequate physical infrastructure and other micro-economic shortcomings limit the region’s capacity to grow, as has become more evident as the commodity boom becomes a memory.”

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