Latin America outlook: Brazil may rebound this year

The long-awaited rebound in Brazil may materialize this year, when the gap between the fast and slow growth countries could narrow

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In Latin America, a “two-speed region” developed last year, with countries on the Pacific shore such as Chile, Colombia, Mexico, Panama and Peru being “runners” in terms of growth while those on the Atlantic coast (Argentina, Brazil, Uruguay and Venezuela) were slow-growing “walkers,” according to HSBC analysts.

In their outlook for the first quarter, the analysts expect the growth gap between these groups to have peaked at 2.7% in the third quarter of last year and to narrow this year to 1.3% in the fourth quarter.

The main reason setting “walkers” and “runners” apart is investment, with Brazil and Argentina showing a “huge deceleration” in investment since 2011, even as investment is growing at above 10% year-on-year in the Andean region and remaining above the headline gross domestic product for Mexico.

The HSBC analysts said cost inflation, competitiveness, rising uncertainty on regulations and the degree of stability of policies were at the root of the different investment dynamics.

“In the case of Mexico, a virtuous cycle of initiatives by policymakers and investment decisions by firms appears to be emerging. In Brazil, we currently observe the opposite,” they wrote.

But despite “feeble competitiveness and the perception of increased regulatory and policy uncertainties” that have held back investment in Brazil, “a rebound is on its way,” according to the HSBC analysts.

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The government applied sector-specific tax relief in response to weak investment and proposed concessions and public private partnerships.

But while these measures should bear fruit in the medium term, the Brazilian government is likely to apply “a more pronounced fiscal stimulus, as well as allowing for some additional foreign exchange depreciation in 2013,” the analysts wrote.

“With these stimuli, we may see the ‘ever postponed’ rebound finally materializing,” they said, forecasting that GDP will advance by 3% in Brazil this year.


They expect Latin America’s second-largest economy, Mexico, to grow by 3.2% but add that this forecast may be exceeded if investment rises due to the recent approval of unpopular, but necessary labour reforms and if further reforms in fiscal, energy and education fields are pursued.

Growth in Chile, Peru and Colombia should be supported by commodity prices and strong domestic demand, said the HSBC analysts.

They forecast growth of 4.8% for Chile, 6.2% for Peru and 4.3% for Colombia.

Venezuela “is at a crossroads,” with the possibility that President Hugo Chavez might have to resign due to his health and fresh elections organized boosting uncertainty, and the analysts forecast a sharp slowdown of the economy to only 0.5% growth from 2012’s 5.1% expected GDP advance.

In Argentina, the slowdown “may have already bottomed” and the HSBC analysts expect growth at 2.5% this year compared with last year’s estimated 2% advance.