Regional Review & Outlook

By: Roberto Eraña & Alexander P. Trueba

Latin America and the Caribbean’s regional economy grew an estimated 2.6% in 2013, down from 3.1% percent growth in 2012, according to the United Nations Economic Commission for Latin America and the Caribbean (ECLAC).  GDP is projected to grow 3.2% in 2014.

Disappointing growth in Brazil and Mexico, which combined accounted for 63% of the region’s GDP, was a significant contributor to LATAM’s performance in 2013. Political, social, and economic turmoil in Venezuela, coupled with slowed European and Chinese economies and the decline of the commodities boom have all negatively impacted growth in the region.  Countries such as Panama, Peru and Colombia, that continue to pursue prudent fiscal and monetary models, experienced the strongest growth.

With 2014 considered a bounce back year, several key issues will play prominent roles in determining economic growth, such as: How will new reforms in Mexico impact growth?  How will inflation and fiscal policies in Brazil and Argentina affect the region? Will the ongoing protests in Venezuela drive foreign investments to new lows?  Will Peru and Panama continue to be regional growth leaders in 2014?

Brazil

In 2013, Brazil’s economy grew 2.3%, driven by a 0.7% expansion in the fourth quarter.  Although growth figures outpaced 2012 (1.0%), Brazil’s performance was lower than economists’ projections for 2013, which had been expected to be between 3.0 – 4.0%.  Economists currently estimate between 1.7 – 2.6% growth for 2014.  Recently, the nation has been troubled by higher inflation rates, currency volatility, inadequate infrastructure and a slowed Chinese economy, all of which have contributed to an economic growth slowdown when compared to the previous decade.

Inflation has plagued Brazil recently, hitting a 2-year high of 6.7% in June 2013. During the Dilma Rousseff administration it has averaged 6.0%, compared to a 4.5% average rate during the last 4 years of the Luiz Inácio Lula da Silva presidency.  To offset inflationary pressures, the Central Bank raised its benchmark-lending rate to 10.75%, up from 10.5%.  This most recent raise comes on the heels of six consecutive half-point increases since April 2013.

On the bright side, wages are growing and unemployment has hit record lows (4.3% at the end of 2013).  Brazilian Finance Minister, Guido Mantega, has set policy measures in motion aimed at curbing inflation and reducing the current account deficit.  Recently, Brazil promised to cut US $18.5 billion in public spending from the 2014 budget.  As this election year looms, President Rousseff intends to keep pressure on inflation, improve infrastructure and help lure foreign investment through a variety of construction projects.

Mexico

Despite an initial growth projection of 3.5%, Mexico’s GDP was revised down three times throughout 2013, with final growth for 2013 of 1.1%.  The 2013 rate is a decline from the 3.9% and 3.8% growth rates in 2012 and 2011, respectively.  According to ECLAC, GDP is projected to grow 3.5% in 2014.  The country’s sluggish economic performance in 2013 was a result of a wide range of issues, including: the transition to a new administration, a slowing construction sector, and reduced U.S. demand for certain Mexican made goods.

The good news for Mexico in 2014 is that its largest trade partner, the United States, is projected to grow 2.8% after a weaker than expected 2013 (1.9%).  Accelerated growth in the US will help aid a manufacturing rebound, as demand for Mexican exports will rise.

President Enrique Peña Nieto’s economic reforms, approved by Congress last year, are expected to contribute to growth by stimulating the telecommunications, education, financial and energy sectors.  In particular, the energy reform, which opened up the energy sector to private investment, is expected to make a significant impact on the nation’s economic growth. By virtue of this legislation, private entities will be able to invest in the exploration of oil and gas.  Norwegian offshore drilling company, Seadrill Ltd. (controlled by billionaire John Fredriksen), has already finalized four (fifth in the works) drilling contracts with Petróleos Mexicanos (PEMEX) valued at US $1.8 billion.  The Peña Nieto administration predicts that once implemented in its full capacity, the new energy reform will increase GDP by a full percentage point by 2018 and increase FDI by as much as US $20 billion annually.

Peru

For nearly a decade, Peru has averaged an expansion rate between 6.0% and 6.5%. ECLAC estimates Peru’s economy will continue expanding by growing a projected 5.5% in 2014, slightly higher than the 5.0% growth it experienced in 2013.  Labeled as one of Latin America’s most stable performers by the International Monetary Fund (IMF), Peru is predicted to be Latin America’s second fastest-growing economy in 2014, behind Panama.  Low unemployment, increased foreign direct investment, construction activity and mining have accounted for Peru’s steady growth.

Historically, the mining sector has been a significant contributor to Peru’s economy, accounting for 14% of GDP this past year.  It ranks as the world’s sixth-largest gold producer and third-largest exporter of copper and silver. Peru has approximately US $55 billion worth of mining projects in its pipeline. In 2014, President Ollanta Humala predicts that mining investments will total US $14 billion, an annual record. After weakened metal prices drove down copper and gold exports in 2013, highly anticipated mining projects such as: Glencore Xstrata PLC’s US $6 billion Las Bambas copper deposit, HudBay Minerals Inc.’s US $1.8 billion Constancia project, and Sociedad Minera Cerro Verde SAA’s US $4.4 billion expansion, are expected to enhance the nation’s mineral output.  If approved by the Peruvian government, officials also hope work will resume on various outstanding projects later this year, such as Newmont Mining Corporation’s Minas Conga copper and gold project.

Colombia

Colombia’s economy grew 4.0% in 2013, on par with the 4.2% growth the nation experienced in 2012.  Projections for 2014, according to ECLAC, currently stand at 4.5%.  Although Colombia’s coal, gold, silver, and emerald production experienced drops due to strikes and logistical issues, the nation’s mining sector has traditionally served as a pillar of growth.  Colombia is the world’s No. 4 coal exporter and home to Latin America’s largest coal reserves.  For 2014, political stability, reduced crime levels and increased oil production continue to brighten the nation’s economic outlook. In April 2013, the nation passed a variety of stimulus measures to accelerate infrastructure spending and help the construction sector.  A study by the BBVA Research Center states that private consumption and construction will bolster Colombian GDP in 2014. As evidenced by reports by Bloomberg Markets and ECLAC, Colombia continues to benefit from solid levels of foreign direct investment (US $13.7 billion in 2013 per preliminary figures).

Panama

Panama, the fastest growing economy in Latin America and the Caribbean since 2011, grew 7.5% in 2013, and is projected to grow 7.0% in 2014.  The influx of private and public investment, stemming particularly from the country’s venture to expand the Panama Canal, are expected to keep the nation’s growth projections favorable.

However, Panama will face challenges as it attempts to maintain strong economic development and stability.  According to the IMF, delays in the Canal expansion and international financial volatility could jeopardize Panama’s growth.  In January 2014, work to expand the Panama Canal was suspended due to cost overrun disagreements between Grupo Unidos por el Canal (the global consortium in charge of construction) and the Panama Canal Authority.  After weeks of contract disputes, an agreement was reached to resume work on the waterway’s expansion.  When completed, the renovations will double the Canal’s capacity.

Panama’s Colon Free Trade Zone (CFZ), the world’s second busiest port, is falling victim to continued problems related to Venezuela’s political upheaval.  Venezuelan businesses (which account for 30% of the port’s commerce) owe between US $700 million and US $1.2 billion to Panamanian suppliers.  Venezuela recently broke ties with Panama, claiming the debt as fraudulent.  Amidst these destabilizing external factors, the Panamanian government will have to maintain sound fiscal policy to ensure that economic progress does not recede.

Venezuela

Growth forecasts for Venezuela have remained unfavorable as economic, social, and political turmoil continue to plague the country.  Recent reports have economists estimating 1.2% growth in 2013, and an equally disappointing 1.0% growth for 2014. Both rates are short of Latin America and the Caribbean’s growth average.  After several years of steep economic decline, high inflation, pervasive crime and widespread shortages of imports and consumer staples, Venezuela is at a crossroads.

A combination of high inflation and budget deficits made the Venezuelan bolívar the most devalued Latin American currency in 2013. For the past 11 years, the government’s tight currency controls have limited Venezuelans’ access to the U.S. dollar, forcing them to go to a parallel market where one dollar is worth around 80 bolívares.  However, Rafael Ramirez, the country’s Economy Vice President, recently announced a new foreign exchange system called Sicad 2 whose operations hope to ease Venezuela’s shortage of dollars.  Sicad 2, a Spanish acronym for the Complementary Administration System for Foreign Exchange, is expected to lighten currency controls and permit private companies and individuals to participate in hard currency transactions.

As the first quarter of 2014 comes to a close, political upheaval continues to be the nation’s most pressing concern.  Without a resolution, capital will continue to leave the country and fresh foreign investments will reach new lows.  Analysts also envision troubling prospects for Venezuelan oil production in 2014.  Petroleos de Venezuela SA (PDVSA) saw its production decline to 2.45 million barrels a day in December 2013, from a daily average of 2.9 million barrels reported in 2012. Coupled with this decline, fear of possible expropriation has western oil companies hesitant to invest in Venezuelan fields.

Argentina

Argentina grew 4.5% in 2013, outpacing both 2012 growth of 1.9% and the region’s two largest economies, Brazil and Mexico.  However, these growth rates are a far cry from those experienced between 2004-2010, when growth averaged close to 7.7%.  Currency woes, high inflation and distress of the oil industry will continue to persist in 2014, adding financial stress to the nation. GDP growth is projected at 3.2% thanks to a favorable trade environment, according to ECLAC.

Despite an allegedly strong growth rate in 2013, budget issues and limited availability to external credit are red flags heading into 2014, as is currency devaluation and inflation.  2013 was a rough year for the Argentinian peso.  It was the third-most devalued currency in the region (20%) versus the dollar and currently sits at an exchange rate of 7.88 pesos. It hit an all-time high of 8.02 in January 2014.  Inflation is also a major issue. After the crisis in 2002, government spending increased rapidly leading to a widening of Argentina’s deficit.  As a result, the government printed more cash, leading to higher inflation.  Inflation finished 2013 at a rate of 10.9%, although some economists insist that a rate of 28% is closer to the truth, an alarming statistic.

Puerto Rico

Current estimates report Puerto Rico’s GDP grew approximately 0.3% in 2013, a slight drop from the 0.5% growth rate in 2012.  The island nation’s economy is projected to contract 0.8% in 2014 according to the Puerto Rico Planning Board, marking the eighth consecutive year of minimal economic growth in Puerto Rico.

Since taking office in January of 2013, Governor Alejandro García Padilla’s administration has dealt with high debt levels, persistent budget deficits, unemployment concerns (15.4% in 2013), poor credit ratings, a declining population, and an underfunded pension system. These are persistent issues carrying on into 2014.

On the heels of a credit downgrade to “junk” by three U.S. rating agencies in February 2014, Puerto Rico sold approximately US $3.5 billion of additional debt, amidst concerns that it would have to restructure its approximately US $70 billion of existing debt. The island nation has another US $40 billion in unfunded liabilities. The sale will afford Puerto Rico much needed liquidity through June 2015.

Dominican Republic

The Dominican Republic’s GDP grew 3.0% in 2013, lower than the 4.0% expansion in 2012 based on estimates published by ECLAC. However, economists forecast a more robust 5.0% growth in 2014, on par with the nation’s average growth from 2001-2011.  Despite recent struggles in the Caribbean region’s tourism and financial services sectors, favorable growth figures in 2013 for the Dominican Republic were a result of a new fiscal amnesty law and the advancement of tax payments on financial assets. New tax measures implemented in November 2012 also helped narrow the budget deficit from 8% of GDP in 2012 to 3% in 2013. However, in order to sustain long-term economic growth, the Dominican Republic will have to address its high unemployment rate (15% as of Q3’13) and marked income inequality.

The opportunity for additional economic stimulation in 2014 presents itself in the form of an Inter-American Development Bank (IDB) US $350 million loan for the Dominican Republic. Approved in December 2013, the credit is expected to enhance the nation’s economic growth by improving fiscal management and driving up investment in health and education.  A growing gold mining industry could also bring good fortune to the D.R. in 2014.  The Pueblo Viejo gold mine (a joint venture between Barrick & Goldcorp), one of the largest of its kind in the world, achieved commercial production last year (812,000 ounces of gold).  The mine has 25+ years of life and has proven and probable gold reserves of 25.0 million ounces.

Sources: AMI, BBVA, Bloomberg, Caribbean Business, Dominican Today, ECLAC, Forbes, IB Times, IDB, IMF, NY Times, OECD, Reuters, The Economist, Trading Economic, WSJ