18 May Regional Review & Outlook
By: Raymond A. Perez
Latin America and the Caribbean’s regional economy grew an estimated 1.1% in 2014, its slowest rate of expansion since 2009 and down from 2013’s 2.7% growth, according to the United Nations Economic Commission for Latin America and the Caribbean (ECLAC). GDP is projected to grow 2.2% in 2015. The region’s sluggish performance was largely the result of declining global commodity prices, a sharp drop in the price of oil, and domestic tensions in Brazil, Argentina and Venezuela. Even so, Caribbean and Central American countries posted stronger growth than in previous years. The Dominican Republic and Panama were the region’s top performers. Rising demand from the United States, China’s decelerating growth, and financial market volatility linked to the decline in oil prices will play prominent roles in determining economic growth in 2015 and beyond.
In 2014, Brazil’s economy stalled, growing just 0.1%. Economists currently estimate the nation’s GDP will contract by at least 1% in 2015, before staging a modest recovery in 2016. The nation has been troubled by high inflation rates, currency volatility, and the broadening Petróleo Brasileiro SA (Petrobras) scandal.
Inflation hit 8.17% in the last twelve months through April 2015, its highest rate since December 2003 and well above the government’s 4.5% target. Latest forecasts predict inflation will rise to 8.3% by the end of the year. Monetary policy makers recently raised the benchmark interest rate for a fifth straight time to 13.25%. Meanwhile, the Brazilian real has depreciated by over 13% against the U.S. dollar since the beginning of 2015.
The Petrobras scandal continues to take a heavy toll on Brazil’s economy. The state-run oil giant wrote off US $17 billion due to losses from the corruption scandal and overvalued assets. The corruption probe puts significant pressure on President Dilma Rousseff, who is facing calls for her impeachment, nationwide anti-government demonstrations, and low approval ratings just four months into her second term. Though President Rousseff has not been directly implicated in the scandal, she chaired the Petrobras board during much of the decade when the alleged corruption took place (2003 – 2010).
Faced with shrinking growth, President Rousseff intends on getting Brazil’s finances in order via spending cuts and tax increases. The austerity measures are fundamental to balancing the government’s overdrawn accounts (current budget deficit US $23.1 billion), avoiding a credit downgrade (BBB-), and regaining investor confidence. Officials hope new investment prospects will recover the nation’s economy in the second half of the year. The government plans to auction four highways and at least three airport concessions in 2015, sure to aid the country’s aging infrastructure.
Mexico’s GDP grew by 2.1% in 2014, up from the 1.1% registered in 2013. According to ECLAC, GDP is projected to grow 3.2% in 2015 due to ongoing reforms (particularly the energy reforms) and the strength of the U.S. economy (Mexico’s largest trading and investment partner).
The opening of the Mexico’s energy sector to private and foreign investment is expected to make a significant impact on the nation’s economic growth despite low oil prices. Mexico is in the early stages of its first round of auctions for exploration and production in the shallow waters of the Gulf of Mexico, where national oil company Petróleos Mexicanos (Pemex) extracts most of its crude oil. The auctions will be held in July for the exploratory blocks. Interested parties include Chevron Corp., BP PLC, Colombia’s Ecopetrol SA, and Mexican upstart Sierra Oil & Gas. Tenders are planned later in the year for discovered offshore fields with extra-heavy oil, for deep waters where international oil majors are keen to participate, and for unconventional resources such as those in shale-rock formations.
However, risks of weaker economic activity remain a possibility for Mexico, as there is less fiscal stimulus due to the decline in global oil prices. With oil prices down by 50%, the government announced a series of budget cuts equivalent to 0.7% of GDP earlier this year. Mexico will reduce spending by another 0.7% of GDP in 2016. Oil output for 2015 is expected to reach 2.29 million barrels per day (bpd) before rising to 2.4 million bpd in 2016. While Mexico’s government has hedges in place allowing it to sell its 2015 oil exports at US $76.40 per barrel, it does not have any price protection for 2016.
Relative to 2013’s 5.8% expansion, Peru’s economy dragged in 2014, growing just 2.8%, its slowest pace since 2009 (1%). Peru’s mining-fueled economy slowed last year due to weak mineral prices and falling investment. Decreasing revenue from copper and gold exports continues to dampen growth in a number of industries from construction to retail. Peru’s exports fell 28% in February from 2014, the sharpest drop in nearly six years, after copper prices dropped to a five-year low in January.
However, economists predict that Peru’s GDP will rise in 2015, growing between 3.5 – 4.5%. President Ollanta Humala announced new stimulus measures valued at roughly US $1.6 billion, including import-duty cuts and an extension of consumer incentives. The move builds on previous government efforts that aimed to boost growth by cutting personal and corporate taxes. Peru’s government aims to post a structural budget deficit equal to 2% of GDP in 2015. President Humala also plans to encourage infrastructure investment by awarding at least US $10 billion of project licenses by mid-2016, after a record US $12 billion of contracts in 2014.
Colombia’s economy grew 4.8% in 2014, on par with the 4.7% growth in 2013. Projections for 2015 forecast an expansion of 3.5% or more. Although Colombia’s economy has grown at or above 4% since 2010, the halving in the price of oil has cut government income and led to extensive layoffs in the energy sector. Oil production dropped last year for the first time since 2005 to 988,100 bpd. State-run oil company Ecopetrol SA, Colombia’s principal taxpayer, reported a net loss of US $316 million in Q4 2014 amid rising costs and falling crude prices and output. Oil accounts for roughly half of the country’s exports and around 16% of government revenue. President Juan Manuel Santos’ administration already cut the 2015 national budget by 3% (US $2.44 billion) in February due to the drop in oil revenue. The cutbacks will affect infrastructure improvements and administrative spending.
Oil and mining GDP contracted 3.3% from a year earlier, while manufacturing output contracted 0.3%. Construction was the strongest-performing sector, expanding 5.9% over the same period. In 2014, President Santos’ government launched a US $25 billion highway-building program, dubbed 4G, to overhaul the country’s transport infrastructure. The 4G project is expected to add as much as 1.5% to economic growth. Colombia recently opened bidding on US $5.3 billion in road construction contracts for the second phase of 4G. Bidding on the second phase, which includes bridge and tunnel projects, will close on June 19th. Bidding for the first phase of 4G ended last year, with construction set to begin this summer.
Panama’s economy grew 6% in 2014, the most rapid rate of expansion in the region. Although high, the rate is a five-year low and down from 2013’s 8.4% growth. Even so, the country is projected to expand 7% in 2015. The US $5.25 billion expansion of the Panama Canal has been a main source of economic activity since works began in 2007. The Canal’s added capacity will bring more revenue for additional infrastructure projects throughout the country including, but not limited to, port and logistics projects, power generation and renewable energy.
The expansion was set to have been completed in October 2014, but delays including strikes, cost overruns totaling US $1.6 billion, and disputes between the Panama Canal Authority and Grupo Unidos por el Canal, S.A. (the international consortium in charge of construction) have pushed the scheduled completion date into 2016. Other infrastructure projects that have driven growth in recent years and solidified Panama’s position as a growing logistics hub include a new metrobus system, an improved highway network, the expansion of Tocumen International Airport, and Panama Metro’s Line 1. Lines 2 and 3 of the Panama Metro, yet to be completed, will extend to Panama City’s western outskirts and require an investment outlay of approx. US $5 billion.
Growth forecasts for Venezuela remain unfavorable as economic, social, and political turmoil continue to plague the country. Recent reports estimate the country’s GDP declined by 3% last year. Facing recession, high inflation, rising crime, and widespread shortages of imports and consumer staples, Venezuela’s outlook for 2015 looks grim and its economy could contract by as much as 7%.
The government’s finances are especially under pressure as a result of the drop in oil prices. Oil accounts for roughly 95% of Venezuela’s export earnings. President Nicolas Maduro is trying to improve the country’s finances to avoid default in the near future. The nation has a US $5.2 billion principal and interest payment due in October and November, including payments on state oil company Petróleos de Venezuela (PDVSA) bonds. Venezuela, which has just over US $20 billion in international reserves, also owes US $20.3 billion due in 2016 and 2017. The strain on its ability to pay its debts is clearly great.
Venezuela recently received US $5 billion of new development financing from China. President Maduro visited Beijing in January and said the Asian nation agreed to invest over US $20 billion in Venezuela. The recent funds are a boon for the financially pressed country, but relief may be tempered as the loans appear largely earmarked and will only go so far in countering Venezuela’s recession.
Argentina’s government reported economic growth of 0.5% in 2014; however, ECLAC and the IMF’s latest estimations for 2014’s GDP saw a 0.2% and 1.7% contraction, respectively. These rates are down from 2013’s 2.9% expansion and a far cry from those experienced between 2004-2010, when growth averaged close to 7.7%. Double-digit inflation, low foreign reserves, a weak investment environment, falling exports and a lack of dollars have contributed to the nation’s economic struggles and will continue to dim growth prospects this year. ECLAC downgraded its 2015 growth estimate to 0%, while the IMF and the World Bank said Argentina’s economy could contract 1.5% and 0.3%, respectively.
Argentina is actively involved in legal disputes with a group of U.S. hedge funds, which have prevented the country from borrowing money abroad at low rates. If the government does not resolve the issue, pressure on international reserves will increase and lead to further economic deterioration. Meanwhile, the IMF estimates that inflation will rise to 18.6% by year-end 2015 before climbing to 23.2% in 2016. With presidential elections set for October, the incoming government will inherit a host of domestic and international challenges.
Current estimates report Puerto Rico’s GDP contracted approximately 1.8% in 2014, versus a GDP growth rate of 0.3% in 2013. Puerto Rico has been in and out of recession since 2006. Governor Alejandro García Padilla’s administration faces double-digit unemployment (over 13%), an official public debt burden of over US $70 billion (including that of its agencies such as the Puerto Rico Electric Power Authority), and a credit rating downgraded to junk status.
Local authorities are wrestling with how to make politically unpopular budget cuts and tax increases without strangling already-weak economic growth. The commonwealth is also trying to reverse a federal judge’s ruling in February that declared a 2014 debt-restructuring law intended to allow public agencies to seek bankruptcy protection unconstitutional. U.S. Treasury officials have encouraged Puerto Rico to develop a long-term fiscal plan and maintain credibility with uneasy bond investors who are proposing increasingly rigorous demands before lending more money. The sense of urgency has intensified, especially after Puerto Rico’s Government Development Bank warned it and the U.S. territory’s government could run out of money in the first quarter of the fiscal year 2016 if new revenue is not generated.
Although the possibility of a government shutdown as soon as July is still a reality, Puerto Rico’s governing party reached a tentative agreement on new tax measures that could play an important role in ending the commonwealth’s fiscal crisis and paving the way for a bond deal that could raise up to US $2.95 billion. Under the agreement terms, which must be formally voted on in the legislature, Puerto Rico will increase its existing sales tax to 11.5% from 7%, while moving to a value added tax (VAT) within a year. According to Governor Padilla, the government would gain US $1.2 billion in tax revenues under the new measures. Governor Padilla has also pledged to submit one of the most austere budgets in Puerto Rico’s history, together with a five-year fiscal adjustment plan.
Based on estimates published by ECLAC, the Dominican Republic’s GDP grew an estimated 6% in 2014, its fastest growth rate in four years and up from the 4.6% expansion in 2013. Economists forecast an equally robust 5% growth for 2015. The Dominican Republic is well positioned to benefit from a strengthening U.S. economy, its main source for family remittances, exports and tourist arrivals. An increasingly diversified service-based economic structure and a competitive business climate will also support the country’s growth and investment prospects.
The tourism industry remains a key driver of economic growth. Last year, the country recorded over 5 million visitors and plans to double that figure to 10 million visitors annually by 2022. The Dominican Republic is progressively catching the attention of international property investors. In notable hospitality developments, JW Marriott Hotels & Resorts Brand was one of the leading hotel brands capitalizing on growth in the Dominican Republic’s capital, Santo Domingo. It opened the 150-room JW Marriott Santo Domingo in August 2014, its first hotel in the Caribbean. The 150-room Embassy Suites by Hilton Santo Domingo and the newly renovated Sheraton Santo Domingo also opened last year.
Fiscal consolidation remains on track in the third year of President Danilo Medina’s administration. Authorities brought the deficit down to 2.8% of GDP in 2013-2014 from 6.7% in the 2012, while honoring the legal mandate to allocate 4% of GDP to education spending. The 2015 budget calls for a further reduction in the deficit to 2.4% and a primary surplus of 0.5%.
Sources: BBC News, Bloomberg, Buenos Aires Herald, Business Insider, Business Wire, Caribbean Business, Caribbean Journal, CBS News, Citywire, CNN, Dominican Today, Dow Jones Business News, ECLAC, Focus Economics, Forbes, Fox News Latino, JOC, Marriott, MercoPress, NYT, OE Digital, Property Showrooms, Quartz, Reuters, Scotiabank, The New Yorker, The Tico Times, Travel Pulse, WSJ