A rebound in the big economies in Latin America and the Caribbean should propel the region to growth this year after “hitting bottom” in 2015, according to the head of the Inter-American Development Bank (IDB). The region, according to the World Bank, is forecast to expand by 1.5% this year, after shrinking by 1.4% in 2016. Among the big economies, Brazil is forecast to expand 0.5% in 2017 after shrinking 3.4% last year, while Argentina could grow by 2.7% after contracting 2.3% in 2016.
“We hit bottom last year and now we are going to start seeing a growth trajectory,” IDB president Luis Alberto Moreno told Global Markets in an exclusive interview ahead of the bank’s annual meeting in Asunción, Paraguay, this weekend.
“We are going to see Brazil start to grow after contracting by an annual average of 3.5% for the past few years,” he said.
Market analysts also expect a better year, but warn that the region is still working through problems. “I would say that Latin America is still in the middle of a storm,” said Joseph Bormann, managing director of Latin American corporate finance at Fitch Ratings. “If you stick with the weather analogy, it is partly cloudy to a little bit drizzly in many countries.”
Roberto Sifon, managing director of S&P Global Ratings, said things were looking up, but that it was still early in the year. “It is looking like it will be a better year, but it is still too early to say. I think we have to put in some caveats, because we have to see how things develop,” he said
Growth corrupted
Moreno said the region had to work through major challenges coming from corruption scandals, crime and low regional trade flows. Twelve countries in the region have been swept up by Brazil’s long-running corruption investigation, Lava Jato, particularly involving construction giant Odebrecht. The company admitted in a court case in the United States in December that it had paid bribes to secure contracts.
The scandal has tainted Colombian president Juan Manuel Santos, who acknowledged in March that his 2010 presidential campaign received money from Odebrecht. In Peru, prosecutors issued an arrest warrant for former president Alejandro Toledo (2001-2006) for allegedly receiving $20m from Odebrecht for a highway project.
Moreno said he was encouraged by actions taken by individual countries, but feared there would be a backlash against public-private partnership (PPPs).
“The biggest damage Odebrecht has done is heightening risk that public-private partnerships may be seen as bad. We need to crowd in the private sector for development. There is no way to double investment in infrastructure without PPPs,” he said.
Moreno also cited the huge drain the region’s problem with crime had on growth and investment. The bank released a report in February, estimating that the mean crime-related related cost is 3.55% of GDP, or a direct annual cost of $261bn.
“Think for a minute that if this 3.5% were invested in infrastructure we would close the infrastructure gap we have in the region, which would have a huge impact on competitiveness and productivity,” he said.
Trade winds
Crime is on top of the political agenda throughout the region. It has been the most pressing issue in all countries, with the exception of Brazil and Venezuela, in the most recent Latinobarometro surveys. In Peru, for example, in a late March survey by the National Statistics and Information Institute, 89% of respondents believed they could be victims of a crime in the coming 12 months.
Moreno said there were no easy answers, because dealing with crime meant reforming justice systems, improving the way crimes are prosecuted, dealing with overcrowded and crumbling prisons and improving police forces.
“It is not about adding more police officers, but how good the police force is,” he said.
Trade — or lack of it — in the region remains a major issue for the IDB and Moreno said it is a key issue for the annual meeting in Paraguay. It is another daunting issue. Exports from the region declined in 2016 for the fourth consecutive year, falling 6% to $850bn, a 23% drop from the record $1.1tr reached in 2012.
The IDB will stress the need to strengthen intra-regional trade. Moreno said that while trade between European countries was 60% of total exports and Asia was 50%, it was only 16% in Latin America and the Caribbean.
He said the solution was in “software”, working on trade facilitation though customs and single window systems, and “hardware”, building infrastructure that links countries.
“We have to look at ways we can deepen our own trade in Latin America and the Caribbean. I think in the region the winds are coming in the right direction. We need to fast track the things we should have done a long time ago,” he said.