18 Feb Regional Review & Outlook
Roberto Eraña & Alexander Trueba
Latin America and the Caribbean continue to prosper economically, evidenced by GDP growth of 3.1% in 2012, according to the United Nations Economic Commission for Latin America and the Caribbean (ECLAC). Overall, the region outperformed world growth of 2.2% in 2012. Regional economic expansion was fueled by strong demand for natural resources, the resurgence of manufacturing and an all-time high of $150 billion (Bn) in FDI.
Economists’ projections for 2013 remain bright, with growth expected to accelerate to 3.8% driven by Mexico and Peru, and an expected resurgence of the Brazilian economy. However, as is the case of all regional economic assessments, there are multiple uncertainties heading into 2013. Which country will become the next regional success story? How will political and economic turbulence in Argentina and Venezuela affect the region? Can Puerto Rico and the Dominican Republic revive themselves despite the U.S.’s slow recovery?
After a decade as the region’s most prosperous economy, Brazil suffered a setback in 2012. Due to the European crisis and China’s decreased growth, the Brazilian economy grew approximately 1.0% this past year, lower than the 3.3% originally predicted, and less than the 2.7% growth in 2011 and 7.5% in 2010. In the boom years, Brazil benefited from sale of commodities such as iron ore to China, large oil discoveries, and emergence of a large middle class. Now China has slowed, oil production does not appear as optimistic as once predicted and foreign direct investment has decelerated.
Brazil is looking at a number of stimulus measures to boost the stalling economy. To foster this bounce-back, Brazilian President Dilma Rousseff aided the passing of reforms related to tax and electricity price cuts, and is in the process of spearheading a bi- regional trade agreement between MERCOSUR and the European Union. Brazil is not only looking to bolster trade to Europe, but also within the Latin American region and will pursue more trading with its local MERCOSUR members. Economists currently forecast 2013 economic growth between 3.0 – 4.0%.
In 2013, Brazil will also need to balance stimulating growth while maintaining inflation in check. Over the previous 5 years Brazil has averaged an inflation rate of 5.2%. In January 2013 inflation rose at its highest monthly pace in over eight years, producing an annualized rate of 6.2%. Complicating this careful balance is the currency’s recent trend to weaken versus the US dollar, increasing inflationary pressures as prices on imported goods continue to rise. The central bank’s ability to fight inflation with higher interest rates is limited for fear of affecting the already weak economy. For now, the central bank is supporting a tight Dollar-Real trading range of 2.00 – 2.05, and is keeping interest rates steady at 7.25%.
Mexico’s GDP is projected to grow 3.3% in 2013, according to the Organization for Economic Co-operation and Development (OECD), a slight decline to the 3.8% growth achieved in 2012. Mexico’s 2012 economic results were achieved while maintaining a moderate debt level (low 40% debt/GDP), keeping inflation at bay around 3.5-4.0% and a peso trading between 12.6 – 14.4 range over the last twelve months, averaging 13.1 versus the dollar.
Part of Mexico’s success is attributed to the country’s resurgence in manufacturing. Mexico is benefiting from a reversal of outsourcing to China and Asia, where labor costs have skyrocketed and fuel prices have reduced the benefit of sending manufacturing to the Far East. Mexico’s competitive labor market, coupled with new labor reforms and its proximity to the U.S. have once again become an important asset. Mexican stock market also saw great success in 2012, reaching new highs and witnessing the birth of financing through public REITs (fibras) in the commercial real estate and hospitality sectors. This trend is expected to continue into 2013 given expansion into the industrial real estate.
These positive manufacturing trends and stock market evolution combined with the recent election of a pro-business president set the stage for Mexico to achieve its growth targets for the upcoming year, in spite of uncertainty in the world economy.
Peru is South America’s leading growth nation. The Andean state’s GDP grew 6.3% in 2012 and steady growth of 6.1% is projected for 2013. A rising domestic demand in connection with decreasing unemployment, which dropped to 5.6% this past December, and rising income levels is driving the Peruvian economy. Inflation has been restrained at 2.9%, borrowing costs have not been altered in the past 20 months, and the central bank intends to maintain its benchmark rate at 4.25% for the entirety of 2013.
In 2013, the country’s $177 Bn economy is getting a boost from its mining sector, which is stimulating construction and infrastructure projects. The nation is home to a myriad of mineral deposits, primarily copper and gold, but also substantial deposits of zinc and lead. Mining investment is predicted to grow to almost $10 Bn in 2013, compared to $7 Bn in 2012. All in all, the mining sector makes up 60% of Peru’s total exports and is a major driver of the Peruvian economy. Much of these exports go to its largest trading partners, the E.U., China and the United States. Recently, Peru and the E.U., where the country exports roughly 18% of its products, signed a trade agreement that will go into effect March 1, 2013 and could bolster Peruvian GDP as much as 1.0%.
Economists do see slight concerns for Peru when it pertains to their education system and political delicacy but overall growth in the next 5 years is projected to average anywhere from 4.0%-5.0%, out-producing many of its regional neighbors.
Colombia, the region’s 4th largest economy, grew at 4.5% rate in 2012, a slowdown from its 5.9% growth in 2011. The deceleration was partly due to due to tepid growth experienced by its two largest trading partners, the United States and Europe. In 2013 Colombia is forecasted to grow at the same rate as 2012, according to the International Monetary Fund (IMF). Colombia’s oil and mining exports are expected to support these growth projections, as are the recent Central Bank rate cuts, which now stand at 4.0%. The Central bank has made five rate reductions since July; cutting 125 basis points in attempts to further stimulate economic activity. The country also continues to benefit from an impeccable debt ratio (15% of GDP), political stability and growth in the oil and gas exploration industry.
In 2012 the Panamanian economy grew a region-leading 10.5%, slightly below the 10.8% expansion achieved in 2011, according to ECLAC. For 2013, Panama is projected to moderate growth to approximately 8.0%, yet still remain the fastest growing economy in the region. The main driver of this economic progress is public investment, and at the center of this investment, the expansion of the Panama Canal. Currently, approximately 4% of the world’s trade passes through the Canal, and after the $5.3 Bn expansion expected to be complete in 2014, that figure is anticipated to increase given a doubling of the canal’s capacity. In addition to the Panama Canal expansion, the country benefits from additional infrastructure investments such as the construction of the first line of a brand new Metro system throughout Panama City, slated to open in 2014, and an expansion of Tocumen International, Panama City’s principal airport.
Private investment directed to the country’s mining sector also plays a featured role in Panama’s economic development. This is due in large part to the discovery and construction of the Cobre Panama mine, Central America’s largest mining development.
The mine, owned by Inmet Mining Corporation, has an expected lifespan of over 31 years, contains an estimated 6.5 Bn tons of copper and is expected to generate more than $7.0 Bn in royalties and tax revenue for the Panamanian economy At full-scale production, it will turn Panama into one of the globe’s leading copper exporters.
However, the country faces several challenges in maintaining strong expansion, including a slowdown of Asian manufacturing (China ranks second in both origin and destination of goods passing through the canal), a tight labor market with unemployment under 5.0% and inflation of 4.6%. Further, the strong growth experienced over the last several years and a related real estate boom, have some worrying about a pullback. For now, however, the canal, recent infrastructure investments, the mining sector and regional banking and trade activity continue to drive the economy.
After six years of steep declines in economic activity, Puerto Rico is looking to break from this downward trend with estimated 0.4% growth in 2012. However, weak economic fundamentals persist and the government has already cut 2013 growth forecasts to 0.6% from 1.1%. The local economy is facing a wide range of issues including high debt levels, large unfunded public pension liabilities, tax noncompliance, unemployment above 13.5% and a declining population.
The high debt level of approximately $67 Bn, compared to a $64 Bn economy, and constant budget deficits led to a recent downgraded of Puerto Rico to Baa3, one rating above junk, by Moody’s, and caused S&P to issue a statement indicating a likely downgrade. These ratings are important given the large amount of US fund managers that invest in Puerto Rico debt due to its favorable tax treatment. A rating of “junk” would force a significant reduction in the ability of these managers to invest in the securities, driving up yields and future borrowing costs.
Looking to lead the turnaround is the newly elected governor, Alejandro Padilla, who announced a wide range of initiatives including reduction of bureaucracy and other incentives for creation of new businesses, and efforts to enhance exports by taking better advantage of Puerto Rico’s close legal and economic ties to the United States. While the administration believes this will create 50,000 in the next 18 months, no mention was made of how these programs will be financed. The administration’s ability to deliver economic growth will largely hinge on the success of these new programs, balanced with a credible plan to deal with the debt and budget deficits.
The Dominican Republic’s economy grew 4.0% in 2012 and is expected to grow 4.5% in 2013, based on estimates published by ECLAC and the IMF. This projected growth is the same as 2011, yet lower than the robust 7.8% growth in 2010.
Much like Puerto Rico, the Dominican Republic is highly reliant on the United States, the endpoint of over half the country’s exports. Traditionally an agriculture-based economy, the service sector has been growing and is now the islands leading employer due to the growth of tourism.
Economic growth in 2012 was supported by an expansion in government spending, while the private sector and private consumption pulled back. One IMF study cited government expenditures increased 40% in 2012 and the budget deficit expanded to 8.5% of GDP, almost double the level of 2011 (4.5% of GDP). 2013 budget deficits are projected to reduce to $1.5 Bn (2.7% GDP), though the government will continue to fund them by adding to the already heavy $23.6 Bn of debt (44% of GDP). The reduction in projected deficit for 2013 is expected via a series of tax law changes passed by congress last month, including an increase in the sales tax. The country will need to keep a close eye on the economy as these deficit reduction efforts many negatively affect them.
Long term, the nation will need to address its high unemployment rates, 14.6% in 2012, and considerable income inequality with roughly 40% of the population living in poverty. One area of opportunity is the mining sector, where one of the world’s largest gold mining operations, located in Pueblo Viejo, is expected to produce up to 1 million ounces in 2013 and considerable employment.
Sources: Wall Street Journal, Reuters, Financial Times, Merco Press, RTT News, Caribbean Business, News Room Panama, Vocero, NY Times, Dominican Today, Bloomberg, IMF , MSN, CNN, Huff Post, Hispanic Business