07 Feb Latin America 2017 Outlook
Latin America’s economies are hoping 2017 will be a year of recovery from weak commodity prices, declining exports, as well as a fall in consumption and investment by public and private sectors. The economic recovery will be fragile given global political and economic uncertainties, in addition to recent protectionist trends.
The region’s leaders will be keenly focused on U.S. President Donald Trump’s policies and their impact on Latin America in 2017. Trump has already withdrawn the U.S. from the Trans-Pacific Partnership (TPP), a deal that would have created a trade group among the U.S., Mexico, Canada, Chile, and Peru with several Asian nations led by Japan and Singapore. Additionally, he is likely to move aggressively to renegotiate the North American Free Trade Agreement (NAFTA) whereby a favorable outcome for Mexico is uncertain at best. Trump has also outlined significant deviations from previous policies, which include imposing protectionist barriers on imports from Latin America, as well as levying taxes on remittances. Such policies will have an immediate impact on Mexico, Central America and the Caribbean, and, in a broader context, on the rest of Latin America.
Mexico’s GDP is expected to slow down in 2017 due to the aforementioned policy uncertainty in the U.S. To mitigate potential risk, Mexico has moved swiftly to expand free trade negotiations with the European Union, Turkey and Asia. Peru and Colombia, part of the Pacific Alliance with Mexico and Chile, have already made announcements of interest in increasing trade with Mexico. Separately, the Mexican government’s decision in January 2017 to eliminate state oil subsidies resulted in a 20% gas price hike, which will put downward pressure on the economy.
Meanwhile, growth in Peru, Chile and Colombia is expected to continue to outpace its neighbors. Colombia’s outlook is particularly favorable following the approval in December 2016 of a revised peace agreement between the government and the Revolutionary Armed Forces of Colombia (FARC) to end a 52-year conflict. Brazil and Argentina are likely to return to growth, though Brazil’s recovery still looks set to be modest. In Argentina, President Mauricio Macri is counting on public works spending and free-market measures to help the country exit recession ahead of legislative elections in October 2017. In Brazil, fiscal reforms are allowing for lower interest rates at a time when companies are already deleveraging and an inventory-shedding cycle is coming to an end. Additionally, Argentina and Brazil, feeling heat from Trump’s protectionist talk, have accelerated discussions to remove some of their own trade barriers within Mercosur.
Infrastructure is slated to be the most promising sector in the region this year. Governments are encouraging private sector participation in large projects through public private partnerships (PPPs). Electric power will also experience growth as government-sponsored power auctions roll on and consolidation continues.
Latin America’s attempts to access freer markets and foreign capital will impact how industries are regulated in 2017. Changes in Brazil’s scandal-plagued oil sector, for instance, are underway. In Mexico, a wide-ranging energy reform, which began in 2013, has implemented a system that is attracting investment. The nation conducted its first competitive deep-water oil auction in December 2016, and is counting on the influx of foreign investment and participation to reverse 12 years of oil production declines.
Although developing stronger trade links with the U.S. appears more difficult, Europe and China have emerged as key trading and investment partners for the region. State visits in late 2016 by Chinese President Xi Jinping to Chile, Ecuador and Peru highlight the possibility of deepening its free trade agreements in Latin America, among other things. As for Europe, Mexico is hoping to modernize an existing free trade pact with the EU in which US $57 billion in goods were exchanged in 2015.
Overall, the theme for Latin America in 2017 is change. Over the past two years, citizens have voted out the populist leaders that presided over the commodities boom in favor of business-oriented leaders prepared with market-friendly reforms (i.e. Peru and Argentina). With Ecuador and Chile’s general elections scheduled for February and November 2017, respectively, it would not be surprising to see this trend continue.
Authored by: Lorena Reategui