In the first quarter of 2014 we reduced our expectations for growth in Latin America this year from 2.9 per cent to just 2.2 per cent and this does not seem to be a temporary deceleration. With the likely exception of Mexico, Latin America may face tough years of reforms before it returns to increasing GDP growth.
In countries such as Argentina and Brazil this is mainly because of supply-side bottlenecks: consumption growth substantially outpaces investment growth. But in others, such as Chile or Peru, investment has been hit by the falling trend of most commodity prices since 2011.
The immediate reasons for the downgrades in growth expectations relate to country-specific unexpected events and policy decisions – for example, Brazil’s drought and the growing chances of some kind of electricity rationing, or the effects of the weakening of the Argentine peso. Venezuela’s growth prospects have plummeted because of the breadth of its political crisis.
Three countries account for the main cuts in growth expectations:
The immediate reasons for the downgrades in growth expectations relate to country-specific unexpected events and policy decisions
Argentina: With international reserves reaching dangerously low levels, Argentina took steps to improve its balance of payments. On the current-account side, there was a substantial discrete adjustment of the exchange rate in January while import controls have not relaxed. On the capital account, decisions were taken that pave the way for gradual improved relations with the International Monetary Fund, international institutions and foreign companies.
Yet, the currency depreciation means annual inflation has accelerated to more than 30 per cent. We now expect a recession this year, with the economy shrinking by 1 per cent.
Brazil: Facing persistent annual inflation around 6 per cent and a deteriorating fiscal balance, the central bank extended the monetary tightening cycle while the government revised the 2014 budget using realistic assumptions. This is welcome, but the short-term impact has led us to cut our 2014 growth forecast from 2.2 per cent to 1.7 per cent.
Venezuela: The situation here has deteriorated sharply over the last three months, with widespread anti-government protests. Inflation has spiralled to almost 60 per cent a year. The huge premium in the parallel currency market over the official exchange rate invites arbitrage that reinforces the problem of scarcities and inflation.
Falling copper prices have hit growth in Chile and Peru and may lead to lower potential GDP growth as consumption slows and investment is cut. That Colombia’s potential growth is holding up better reinforces the importance of the commodity connection: a significant part of its commodities exports is related to oil, the price of which has been largely stable, and we forecast 4.7 per cent GDP growth this year.
Mexico, whose disappointing 2013 growth of 1.1 per cent was substantially below the previous two years, should rebound strongly in 2014. Unhampered by current-account deficit pressures, with limited exposure to commodity prices and structural reforms that should increase productivity, a future rise of potential GDP growth is more probable here than elsewhere in the region. Yet for 2014 the main influences could be policy easing at home rather than modest growth in the neighbouring US.
This research was first published on 9 April 2014.