17 Feb Regional Review & Outlook
Latin America and the Caribbean’s regional economy contracted an estimated 0.3% in 2015, down from growth of 1.3% in 2014, according to the IMF. Regional GDP is projected to contract another 0.3% in 2016. Declining commodity prices, China’s slowdown, the collapse in the price of oil and political challenges weighed heavily on the region’s economic performance. These same themes remain in place for 2016, yet the pace and scope of their economic impact will vary from country to country.
Looking forward, the growth gap between Brazil and Mexico, Latin America’s two largest economies, will continue. Brazil is projected to contract 3.5% in 2016, while Mexico’s economy is expected to grow 2.6%. Growth in Colombia and Peru will remain stable (2.7% and 3.3% in 2016, respectively), yet somewhat held back by weak commodity and oil prices. Also, while Argentina and Venezuela are expected to experience contractions in 2016, both have potential for significant change, as major shifts in their political landscape took place at the end of 2015. Economic activity in Central America and the Caribbean is generally expected to continue benefiting from the strengthening United States economy, robust remittances and solid tourism activity. Central America is projected to grow 4.2% in 2016, up from 3.9% last year, while the Caribbean is slated to expand 3.9% in 2016, down from 4.3% in 2015.
In 2015, Brazil’s GDP contracted an estimated 3.8% due to high inflation (10.7%, more than double the Central Bank’s official 4.5% target), low commodity prices, political infighting, and large fiscal imbalances. The economy is expected to continue to contract as much as 3.5% in 2016. The real has fallen 29% in the past year and currently stands at 3.99 per dollar. In September 2015, the nation’s credit rating was downgraded to BB+ per S&P, a “junk” status. The downgrade and political gridlock continue to hamper efforts to pass much-needed fiscal tightening and economic-reform measures. Finance Minister Nelson Barbosa, who replaced Joaquim Levy in December 2015, acknowledges that fiscal improvement depends heavily on Congress, which has been hostile to President Dilma Rousseff’s administration. Although the momentum for President Rousseff’s impeachment has lost force, proceedings that began in December 2015 are likely to delay vital economic reforms.
Mexico is expected to grow 2.6% in 2016, up from 2.5% in 2015. Unlike Brazil, Mexico’s economy is experiencing signs of modest acceleration thanks to continued U.S. demand for its exports. The steady improvement in U.S. economic activity is a key factor shaping Mexico’s outlook. Improving private sector investment and consumption and historically low inflation (2.1% in 2015 – the lowest level in over four decades) remain key drivers of the nation’s economic activity. The peso’s performance is the most significant risk to inflation, which is forecast to end 2016 near the Central Bank’s 3.0% target. The peso reached a record low 19.44 per dollar in early February and has dropped nearly 10% this year, after falling almost 20% in the last 12 months. On the political front, President Enrique Peña Nieto’s administration remains committed to the implementation of structural reforms to boost competition and foster foreign investment, as demonstrated by the country’s historic energy reform. Even so, low oil prices will limit the upside from the opening of Mexico’s energy market and put pressure on the government’s ability to spend.
Argentina is projected to experience a mild recession in 2016, with the economy slated to contract 1.0%, down from a 1.5% expansion in 2015. However, prospects for growth in the medium term look bright as newly elected President Mauricio Macri moves quickly to reinsert the nation back into the global economy while undoing years of populist economic policies under his predecessor, Cristina Kirchner. Since taking office on December 10th 2015, President Macri has already delivered on some of his campaign promises, such as removing currency controls, slashing export taxes and overhauling Argentina’s discredited National Institute of Statistics and Censuses (INDEC), the government agency responsible for the collection and processing of statistical data. By 2019, the government intends to slow inflation to approximately 5.0% from an estimated 27% last year and to cut the fiscal deficit to 1.0% of GDP from an estimated 5.8% in 2015 (widest in 30 years). The nation’s success in correcting macroeconomic imbalances and microeconomic distortions will depend heavily on the new administration’s ability to resolve a decade-old creditor dispute with U.S. hedge funds, which would facilitate Argentina’s return to international financial markets. In mid-February, Argentina reached a settlement with lawyers pursuing a U.S. class action lawsuit over defaulted debt. The deal came after Argentina offered a US $6.5 billion cash payment to creditors in an effort to end the legal battle, its first formal offer to U.S. bondholder holdouts. Thus far, two of six leading bondholders have accepted the offer.
Colombia’s economy remains restricted by the declining price of oil, the nation’s main export. GDP is forecast to expand 2.7% in 2016, following 3.0% growth last year. The country faces a fiscal deficit this year of roughly 3.6% of GDP (US $9.3 billion). In order to meet the country’s fiscal deficit goal, Colombia’s Finance Minister, Mauricio Cardenas, cut the government’s oil price forecast and warned of austerity measures. The estimate for 2016’s average oil price was reduced to just over US $34 per barrel from an initial US $50. The forecast for the nation’s oil output was also cut to 944,000 barrels per day (bpd) from 955,000 bpd. With low oil prices weighing on government revenues, President Juan Manuel Santos’ administration recently sold its majority stake in national power generator Isagen SA for US $2.0 billion to Brookfield Colombia Investments LP, the subsidiary of Canadian asset manager Brookfield Asset Management. The Finance Ministry plans to use proceeds from the sale to fund important infrastructure modernization projects, specifically to upgrade and expand a network of highways in the less-connected areas of Colombia.
Peru’s economy was stable in 2015 with a 2.7% expansion. This year, it is expected to grow 3.3%, outperforming other countries in the region but still below rates experienced between 2010-2013, when growth averaged 6.7%. China’s slowdown and the drop in prices for metals that Peru exports have heavily impacted economic growth in the nation. These factors will continue to offset increased mining export volumes in the near-term. Of late, various new mining projects have fueled output and estimates suggest that copper production could increase over 60% in 2016 after Las Bambas (a long-life copper development project located in the Apurímac region and operated by MMG Limited) begins operations in the first quarter. The dominant political development of 2016 will be the presidential election, scheduled for April 10th. Thus far, Keiko Fujimori leads voting polls, although Julio Guzman (Everyone for Peru party) has risen rapidly to second place. That said, allegations that his party failed to comply with technical electoral rules in 2015 threaten to revoke his candidacy. The new administration will inherit a challenging external market environment characterized by plummeting commodity prices, excess capacity in global mining markets, and China’s economic growth deceleration.
Venezuela’s economy shrank by as much as 10% last year, and the IMF estimates an 8.0% contraction in 2016. The economy will struggle this year as triple digit inflation (slated to surpass 700% this year), the dramatic fall in oil prices, and acute shortages (particularly in food and medicine) continue to plague the country. Even with the newly elected opposition-controlled National Assembly in office, prospects of significant political and economic change remain uncertain, as President Nicolás Maduro has shown no desire to compromise. Moreover, Venezuela’s Supreme Court recently upheld President Maduro’s emergency decree, which gives him broad powers over the economy, overruling the Assembly’s rejection of the legislation last month. Given the situation, the opposition has vowed to find a legal means to remove President Maduro, via resignation or referendum, by mid-2016. Furthermore, with approx. US $10 billion in foreign debt due this year, markets are nervous about a possible default, particularly towards the end of the year when the heaviest payments are due.
Central American and the Caribbean
Growth in Central America’s GDP is projected to reach 4.2% in 2016, up from 3.9% last year. Meanwhile, the Caribbean is slated to grow 3.9% in 2016, down from 4.3% in 2015. Nations in the region with closer ties to the U.S., such as Panama and the Dominican Republic, are benefitting from the gradual recovery of the U.S. economy.
Panama is projected to lead regional growth in 2016 with an expansion of 6.2%. On-going strength in Panama’s diverse service-oriented sectors and substantial public investment will continue to drive growth going forward. The Dominican Republic remains close behind with an estimated 5.2% growth rate expected this year. Increasing tourist arrivals, rising remittances, foreign investment and low oil prices have fueled economic growth in the Caribbean nation. Conversely, Puerto Rico will be the region’s worst performer, as its economy is forecast to contract at least 0.7% in 2016. The island has been mired in economic stagnation for nearly a decade, and its $72 billion public debt crisis demands administrative action. Governor Alejandro García Padilla says Puerto Rico’s debt is unpayable and needs restructuring. Unless a debt restructuring deal with creditors is reached or the U.S. government intervenes, the crisis will escalate as more payments come due.
Authored by: Lorena Reategui
Sources: Bloomberg, Focus Economics, Forbes, Fox News Latino, Huffington Post, Nearshore Americas, NYT, Reuters, WSJ