Latin America Advisor

A Daily Publication of The Dialogue

How Will Latin American Economies Perform in 2014?

Economic growth in Latin America and the Caribbean has been in "low gear," the International Monetary Fund said in October in its Regional Economic Outlook report. While growth is expected to edge up slightly next year to 3 percent, regional economic activity will remain below the average expansion rate of the past decade, the IMF said. What will drive the region's economic growth in the coming year? Which countries will experience solid economic expansion in 2014, and which will struggle? Where have government policies done the most good or damage to growth?

Alicia Bárcena, executive secretary of the Economic Commission for Latin America and the Caribbean: "Expectations of a slackened global demand for commodities amid the anticipated monetary easing in the United States in 2014 would result in smaller inflows of portfolio investment and new external financial outflows. This could affect countries to varying degrees; economies with significant reserves, low external debt and broad access to international capital markets will fare better than those without such advantages. The partial upturn in the global economy could boost regional exports, as well as services (particularly tourism) and remittance receipts. Nevertheless, imports could expand faster than exports due to buoyant consumption and expectations of rising investment. Therefore, the region's balance-of-payments current account will continue to deteriorate, with a deficit costlier to finance. Given these assumptions, growth prospects look brighter for Mexico and some countries in Central America and the Caribbean as their trade is heavily connected with high income markets (especially the United States). Central America and the Caribbean will benefit from lower commodity prices. Some heavily indebted countries of the Caribbean could be a significant exclusion from this picture. Southern economies that are more reliant on high commodity prices and have China as an important trading partner face important challenges in the short-run as well as with long-term economic growth. However, the region also faces some opportunities. Currency depreciation could, if sustained, increase incentives for investment in nontraditional tradable sectors. Growth-supporting industrial, trade, environmental, social and labor policies that take into account the needs of SMEs would reduce the region's structural heterogeneity. This pathway of growth combined with greater equality would increase economic and social sustainability, and reduce reliance on external events."

Alfredo Coutiño, director for Latin America at Moody's Analytics: "After decelerating in the previous three years, Latin America will go back to higher growth in 2014. A better global environment and a wave of domestic structural reforms will create conditions for healthier and higher growth, with the region starting a new cycle of expansion in 2014. The global economy is expected to improve: Europe will leave the recession behind, and the United States will report a more defined advance. More stable growth in China will generate additional positive effects for Latin American commodity exports. The region has learned that the best way to put the economy on a sustainable growth path is through increasing investment in both capital and human resources in order to increase production capacity and productivity. Brazil, Peru, Mexico, Colombia and Chile are promoting public and private investments to modernize and create more productive infrastructure. Under these circumstances, Latin America is expected to report a higher growth rate in 2014, with South America leading the expansion again. The region's growth will increase to 3.4 percent in 2014, after 2.6 percent in 2013. Peru will lead the recovery with growth of 5.6 percent. Prospects look positive, but the region faces three main challenges. First, countries must strengthen the fundamental sources of permanent growth: saving/investment, productivity and technological change, which will increase potential capacity to grow in the medium term. Second, the region needs to reinforce macroeconomic discipline to keep its economies performing without imbalances. Third, governments need to implement policies with more social content in order to give back to the population part of the well-being lost in the past decade."

Erich Arispe, director in the sovereigns group of Fitch Ratings: "Latin America's growth could increase moderately from an estimated 2.6 percent in 2013 to 3.1 percent in 2014 driven by a recovery in the United States and Europe and the continuation of broadly accommodative macroeconomic policies in the region. Nevertheless, Latin America's 2013-2015 expected growth average of 3 percent will stay well below its performance over the past decade and surpass only emerging Europe when compared to other emerging markets. Among the largest economies, Brazil's growth (2.5 percent) will remain subdued in 2014 due to continued supply constraints, restrained business confidence and the delayed impact of a tighter monetary policy. Mexico (3.5 percent) could receive a bump from reversal of temporary factors in 2013, recovery in the United States and greater confidence stemming from reform momentum. Panama will continue to lead the region with 7 percent growth through public investment and the continuation of the canal expansion. Peru, Paraguay and Bolivia will likely surpass the 5 percent threshold supported by resilient consumer spending and investment as well as positive production dynamics in their commodity sectors. Limited sustainability and predictability in their respective policy frameworks and binding foreign exchange restrictions will likely weigh on growth in Argentina and Venezuela. In the absence of positive terms of trade shocks and favorable international financing conditions, Fitch considers that the challenge for Latin America is to implement policies and reforms to improve productivity, competitiveness and diversification, and thus regain growth momentum."