Impact of Lower Commodity Prices on Latin American Growth

Latin America has been hard hit by the recent decline in commodity prices. At a breakfast meeting with members of the Inter-American Dialogue’s Energy & Resources Committee, former Colombia finance and mines & energy minister Guillermo Perry discussed his views on the impact of the commodity slowdown on Latin America and why some countries have fared better than others.

For Dr. Perry, the decline in commodity prices has affected Latin America’s largest economies in five key ways:

  1. The direct income loss from the reduction in terms of trade. After years of historically strong terms of trade, Latin America’s net oil exporters have witnessed a precipitous drop in export revenues over the past year.
  2. Terms of Train Gains and DropA major drop in investment in primary sectors, particularly oil and mining exploration and related service sectors. Perry noted that the oil sector is more vulnerable than mining as oil exploration investment can be withdrawn more quickly than longer-term mining investment projects.
  3. A general decline in investment and capital flow reversals due to lower growth prospects and higher country risk. Colombia has seen a particularly sharp drop in foreign direct investment. And Venezuela has suffered by far the largest increase country risk as measured by its spread in the J.P. Morgan Emerging Bond Index.
  4. A slow reaction of other tradable sectors to currency depreciation in countries that had significant “Dutch Disease” effects during the boom.  With the exception of Mexico, all major Latin American economies export significantly more primary goods than manufactured goods.

Dutch Disease Symptoms during the Boom

  1. The effects of fiscal contraction in countries with high fiscal dependence on commodities and fiscal fragility. Even countries like Colombia and Brazil, where oil and mining exports do not make up an outsized share of exports, a lack of fiscal discipline in boom times has forced a significant contraction now that oil export revenues are down. Chile and Peru are the major outliers, where pro-cyclical spending in recent years has avoided a need for fiscal austerity measures today.

We are grateful to Holland & Knight for hosting the breakfast and to the members of the Energy & Resources Committee for their support for the Energy, Climate Change and Extractive Industries program.

See the full presentation below.


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