Latam: the year of the slump
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Emerging Markets

Latam: the year of the slump

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Most analysts can agree the outlook for Latin America is gloomy. Few countries can afford countercyclical policies to boost their domestic economies.

By Thierry Ogier and Lucien Chauvin

Forecasters may often get it wrong but this time there is a broad consensus regarding the short term outlook in Latin America. Growth will be anaemic and as low as 1% this year, according to the IMF, the World Bank and the Institute of International Finance.

And while the Fund has called for countercyclical policies in various parts of the world to shore up feeble economies, the recommendation is hardly applicable to most of the countries of the region.

Arturo Porzecanski, professor of international economic relations at the American University, said regional averages did not tell the whole story. “You have several Latin Americas in Latin America.”

Augusto de la Torre, Latin America’s chief economist at the World Bank, said countries that had space for countercyclical policies tended to be the “inflation targeters that have a well behaved fiscal process, that are not facing inflationary pressures and that have room to borrow. That means Chile, Peru, Colombia and Mexico.”

Growth has slowed in those Andean countries due to the drop in commodity prices, but the impact may be smoothed over time because they may draw resources from their sovereign wealth funds.

Although some countries are recovering, the average is low because most of South America’s largest economies are in a slump. Brazil’s growth will be close to zero due to a “misalignment of fiscal and monetary policies” said Ramon Aracena, Latin America chief economist at the IIF.

Meanwhile, Argentina and Venezuela will be in recession. The reasons for the slump are well known. “Most of the pain is self-inflicted,” said Aracena. “Home grown policy mistakes have reduced appetite for investment.”

Lisa Schineller, managing director of Latin American sovereign ratings at Standard & Poor’s, said the slowdown was a combination of cyclical and structural.

She said that although there were differences from past cycles, with 80% of the region’s GDP under investment grade, there is a challenge for recuperating growth if reforms are not taken.

“Complacency on the reform agenda does place a constraint for the dynamic of the economies in a more challenging outlook. They face challenges for the growth trajectory if they do not do more,” she said.

US TAILWIND

Mexico is expected to bounce back after a low growth transition following the election of Henrique Peña Nieto in 2012 and the approval of structural reforms. “Mexico is showing the way forward,” said Aracena, adding that the North American country will also benefit from tailwind from the US.

“The worst is over for Mexico, as its economy is very tied to the US, which is gaining traction. The forecast for Mexico is looking better, they are fighting monopolies. It will not be immediate, but change is in the air,” said Porzecanski.

Meanwhile, countries in Central America and the Caribbean that were hit hard by high commodity prices in the past may find some relief following the recent slide in the price of their imports.

Jorge Familiar, the World Bank’s VP for Latin America, told Emerging Markets that four priority areas could help guarantee sustainable growth going forward, including productivity, logistics, education, and integration.

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