By Thierry Ogier
Ramon Aracena, chief Latin America economist at the Institute for International Finance, has warned that the region is languishing in “mediocrity” as the region faces an unholy trinity of low oil prices, a strengthening dollar and capital market volatility ahead of US interest rate rises.
“This is the year of reckoning because this year is bringing to the fore the importance of sound policymaking and discipline over time,” he said. The IIF has forecast negative growth of 0.2% for the region this year. The average growth last year for the eight largest Latin American economies was already weak at 0.5%, half of what the IIF had originally forecast.
The IADB will issue a preview of regional growth for the next five years on Saturday. In early January, it said that economic growth in Latin America and the Caribbean might “recover modestly” to 2.2% in 2015.
The regional performance will again be dragged down by the dismal performance of Brazil, Argentina and Venezuela, which together account for 60% of Latin America’s GDP. Those are expected to pay the price of “self-inflicted mistakes”, according to Aracena.
“Mediocrity is not a risk, it is a reality,” he said. “You see several countries contracting and inflation going up — this is not a good combination. The bad news is that mediocrity is in place. The good news is that it is not true for everybody, because [policy] discipline does pay off. Some have figured out what is the way forward,” he said.
While countries from the Pacific Alliance continue to build up strong foundations, the IIF expects Mexico, Colombia, Peru and Chile to register an average growth of 3.2% this year. Even though they are dependent on commodities, Colombia and Peru are expected to enjoy higher levels of economic growth.“We see a growing divergence between the Pacific Alliance countries and the others,” Aracena said.
Low savings rate
Most Latin American countries still need a clear national strategy for development, said Joydeep Mukherji, Standard & Poor’s managing director for Latin America. This is a lesson that they could learn from Asia especially regarding infrastructure development, he said.
Latin America still suffers from a very low savings rate of around 20%, which means it depends on external sources of financing. “Now that the external engine is weaker due to the decline in Chinese demand, it is the domestic engine that has to deliver, but it is still weak,” he said.
Aracena said the rebound in the US economy would eventually be positive for the region, even though there will be a lot of market volatility due to the looming Federal Reserve’s interest rate hike. “Do not expect any crisis in Mexico or Chile,” he says, as these countries are more resilient to external shocks.
But for the time being, low economic growth environment has also taken its toll on business confidence, which has reached a six-year low at the beginning of 2015, according to a survey conducted by the German Institute For Economic Research and the Brazilian Getulio Vargas Foundation.