Americas

Latin American economies continue to limp along

In this Sept. 24 ,2015 photo, a fruit vendor counts his Real bills at a street market in Rio de Janeiro, Brazil.
In this Sept. 24 ,2015 photo, a fruit vendor counts his Real bills at a street market in Rio de Janeiro, Brazil. AP

Victor Mora, a South Florida air conditioning executive, keeps his eye on economic growth and construction levels in Latin America and the Caribbean when trying to assess whether it will be a good year for his company.

“For us, if the GDP is growing, it’s good news,” he said. “When the economy starts growing, it means people have money to spend and they want to invest in comfort.”

But so far, 2016 is getting mixed reviews.

“This year we’ll focus on those markets that are doing well while still supporting those that are not. Their time will come,” said Mora, managing director of Kendall-based Lennox Global, part of air-conditioning and heating multinational Lennox International.

The U.N. Economic Commission for Latin American and Caribbean (ECLAC) estimates that economies in the Americas will grow a mere .2 percent this year — although growth will be stronger in Mexico, Central America and a handful of South American nations. Among the chief culprits pulling down South America’s growth rate are Brazil and Venezuela, both in severe recessions.

The reluctance to make economic changes during the salad days of high economic growth” also is hurting some countries, notably Brazil.

Eric Farnsworth, vice president of the Americas Society and Council of the Americas

ECLAC estimates that the Venezuelan economy will shrink by 7 percent this year and that there will be a 2 percent economic contraction in Brazil’s GDP, although some estimates predict even more severe economic decline.

Mora expects his top five markets for heating and cooling products will be the Dominican Republic, Panama, Mexico, Peru and Costa Rica, all of which are expected to achieve growth rates of more than 2.6 percent.

Economic prospects in the Americas are “varied and complicated and not at all where people hoped the region would be in 2016,” said Eric Farnsworth, vice president of the Americas Society and Council of the Americas. “There are some pretty strong headwinds for a lot of countries in Latin America.”

One of them is the China effect.

Mexico will outperform many of its Latin American neighbors with growth expected to fall in the 2 to 2.6 percent range this year.

Commodity-rich Latin American economies were among the chief beneficiaries when China’s economy was cruising along with an annual growth of around 10 percent for decades. But last year, the Chinese economy grew just 6.9 percent — the slowest growth rate in a quarter century — putting a damper on China’s appetite for Latin American commodities and depressing prices. This year, the Chinese economy is projected to grow 6.4 percent.

When the Chinese economy was booming, it pushed up the prices of commodities from soybeans to copper.

Mora, meanwhile, is feeling a China effect of his own. As the Chinese economy tightens, Chinese manufacturers that compete with Lennox are starting to engage in more “predatory pricing,” he said. “I don’t mind competition but this is not fair, real competition.”

Manuel Lasaga, an economist who is president of StratInfo — a business economics and finance consulting firm based in Miami — said that not only is slacking demand for commodities taking a toll, but so is excess supply as well. “There’s been a surge in production capacity for many commodities,” he said.

Among the keys to understanding the economic slowdown in the Americas are the fall in commodity prices, declining investment, a sluggish global economy that is expected to grow only 2.9 percent in 2016 and a deterioration in terms of trade, especially for petroleum and mineral exporters.

“The reluctance to make economic changes during the salad days of high economic growth” also is hurting some countries, notably Brazil, said Farnsworth, who is also an analyst for World Politics Review.

ECLAC said the rise in U.S. interest rates and the appreciation of the U.S. dollar also will have negative impacts on the countries of the Americas.

The tide also seems to have shifted politically as voters look for leaders they think can deliver economically. During years of brisk growth in Latin America, millions of people moved into the middle class. “Now the prospect of downward mobility is a really scary thing for them,” Farnsworth said.

Here’s a look at how the region’s major economies are expected to fare this year:

Argentina: Last week, President Barack Obama visited Argentina, where a change of government has brought a more pro-business president to office and one more disposed to friendlier relations with the United States.

President Mauricio Macri reached a preliminary agreement in late February with holders of defaulted debt. If approved, the deal will help Argentina return to the international financial fold. The debt question had smoldered throughout the presidency of Cristina Fernández, who had declared that her country would never pay the hedge funds — “vulture funds” as she called them — that had bought Argentina’s defaulted debt.

Argentina has agreed to pay $4.65 billion — 25 percent less than the holdout hedge funds were demanding. Before the deal can become final, Argentina’s Congress must repeal two laws that were enacted in 2005. The goal of those laws was to prevent Argentina from giving the holdouts better terms than those accepted by other holders of restructured bonds.

When you ask people what’s the reason for the crisis [in Ecuador], their first answer is ‘poor administration.’ That’s leading to lower and lower approval ratings for Correa, and that casts doubts on whether his party can remain in power.

José Hidalgo, the director of the CORDES think-tank in Quito

Since taking office in December, Macri also has relaxed exchange controls, removed taxes on some exports, and made other moves to get the economy going again. Inflation is running at about 30 percent, and Latin America’s third-largest economy had a large budget deficit last year.

“The first thing we have to do is recognize we are not doing well, even if it hurts,” Macri told Congress on March 1.

Beyond that, Macri will have to build confidence within the international financial community, try to get the economy back on track, and convince Argentines his reforms are the way to do it.

“This will be a tough year with overhangs from the past administration but in the next couple years we should be seeing Argentina in a more positive light,” Farnsworth said.

But Lasaga thinks that investor confidence in Argentina has become so tarnished that “if President Macri succeeds in putting more of the economy under greater business control and incentivizes investment, even his best attempts will probably have mediocre results. There will be a lot more caution going forward.

“Argentina is a market with potential but investors will be much more cautious and will want a significant return on investment,” he said.

Brazil: Rocked by multiple corruption scandals and with President Dilma Rousseff under threat of impeachment, Brazil’s economy has gone from bad to worse.

GDP figures show that the Brazilian economy, the largest in Latin America, contracted by -3.8 percent in 2015. The Central Bank actually was predicting an even more severe contraction, but 2015 still was the worst recession since 1990 when the GDP was -4.35 percent.

Last year, civil construction was down by a whopping 14.1 percent.

Unemployment also is increasing in a country that less than five years ago was at full employment. January unemployment was 7.6 percent, an increase from 6.9 percent in December. The January figure was the highest unemployment rate since January 2009.

And the bad news keeps on coming: Brazilian bonds have been downgraded even further into junk bond status, average salaries are falling, retail sales are down, inflation is running at about 12 percent, and auto sales were down by 27 percent last year.

The decline in automobile sales means Brazil has fallen from the fourth-largest auto market in the world to the seventh-largest.

Earlier this month, Marcelo Odebrecht, scion of one of Brazil’s most important industrial families and until recently head of the Odebrecht SA holding company, was sentenced to 19 years and four months in prison for corruption and money-laundering crimes related to the so-called car-wash investigation. Executives of other construction companies also have been netted in the probe, which focuses on insiders at Petrobras, the state-controlled oil company, who are in cahoots with contractors skimming huge amounts of money from inflated construction and service contracts.

Other state-owned companies also are being investigated and popular former President Luiz Inácio Lula da Silva, who remains the most significant political figure in the country, was detained for questioning recently in the Petrobras scandal. Rousseff recently named him her chief of staff, a move critics say is aimed at shielding him from potential prosecution.

Gabriel Kohlmann, director of Prospectiva Consultancy in Sao Paulo, is even more pessimistic about Brazil’s growth prospects than ECLAC is. He expects Brazil may finish the year with a 3.5 percent decline in GDP, but he said it is weathering the worst of its economic crisis now and that a recovery may begin by the end of the year.

Chile: For Chile, the story this year is high inflation and low growth. In February, core inflation increased .6 percent, pushing up the annual inflation rate to 4.86 percent.

Growth expectations have been adjusted downward in recent months from 2.7 percent a few months ago to the current 1.9 percent.

The key question is how the Central Bank of Chile “will respond to such a dilemma,” said Mario Castro, vice president of the Latin American Strategy/Economics group who is based in New York. Castro expects the bank will continue to prioritize the inflation flight despite the slowing economy.

“I’m not ready to throw in the towel on Chile,” Farnsworth said. Even though copper prices are low, he said, Chile follows counter-cyclical policies and is planning for a more favorable economic cycle. It also has moved beyond being just an exporter of raw materials and has a fairly strong value-added sector.

Among the keys to understanding the economic slowdown in the Americas are the fall in commodity prices, declining investment, a sluggish global economy that is expected to grow only 2.9 percent in 2016, and a deterioration in terms of trade, especially for petroleum and mineral exporters.

Colombia: On paper, Colombia is expected to have a spectacular year, with some of the strongest growth in South America at 3 percent. In addition, President Juan Manuel Santos is hoping a peace deal with the country’s largest guerrilla group will give GDP an additional kick as investors pour in and areas of the country — once considered no-go zones because of violence — become economically viable.

But on the streets, the mood is decidedly more sour. The peso has lost 20 percent of its value versus the U.S. dollar in the past year, and inflation of almost 7 percent is eating away at purchasing power.

Earlier this month, tens of thousands of people took to the streets demanding higher wages and protesting a series of tax increases the government has proposed to make up for the loss in commodity income.

To complicate matters, damage at a major power plant and the El Niño weather phenomenon are threatening the country with rolling blackouts. The government has said that if consumers don’t voluntarily lower power usage by 5 percent, the nation could see rolling blackouts that will slow economic growth.

Oil prices and El Niño have “absolutely torpedoed the government’s plans through no fault of their own,” Bancolombia wrote in a letter to subscribers. “Even though some are more than happy to try and pin all the troubles on Santos, the reality is, the fact that the good ship Colombia is leaking is not down to him.”

Even so, he’s paying the price. A recent poll found Santos’ approval ratings had hit 25 percent — the lowest level since he took office in 2010.

But if commodities start to inch back up, the peso claws back lost ground and, most important, if the country signs a convincing peace deal, Colombia could have a stellar year. And even if the mood remains sour at home, the country will remain a regional standout.

Ecuador: Just a few years ago President Rafael Correa boasted about the Ecuadorean “economic miracle,” as high crude prices kept GDP humming and allowed him to build roads, schools and hospitals. The largesse — after decades of economic mismanagement — made him one of the hemisphere’s most popular presidents.

But collapsing oil prices have laid bare just how tenuous the miracle was. While the U.N. sees the Andean nation eking out growth of 0.3 percent, some analysts think that’s optimistic.

José Hidalgo, the director of the CORDES think-tank in Quito, said that they’re expecting the economy to shrink by 2.9 percent this year. During Correa’s nine years in power, public spending has taken on a larger role in the economy, even as private investors have been neglected.

“That economic model also increased the economy’s vulnerability,” Hidalgo said. So when oil revenue evaporated it took a large chunk of the economy with it. In addition, the country is running out of financing options.

The malaise is already having knock-on effects. CORDES said the government is months behind on paying some contractors and private businesses, which has sparked layoffs. That’s likely to fuel the growing number of anti-government protests that have swamped the country in recent months.

Late last year, congress approved a Correa initiative allowing indefinite reelection with the caveat that he wouldn’t be a candidate in 2017. The thought was that Correa would step aside and have one of his lieutenants keep his seat warm until he could reclaim it.

But with an increasing number of people blaming the crisis on Correa and his administration, it’s far from clear whether he’ll be able to manage the transition.

“When you ask people what’s the reason for the crisis, their first answer is ‘poor administration,’” Hidalgo explained. “That’s leading to lower and lower approval ratings for Correa, and that casts doubts on whether his party can remain in power.”

Mexico: Mexico will outperform many of its Latin American neighbors with growth expected to fall in the 2 to 2.6 percent range this year.

“Mexico is pretty well-positioned even though energy investment has not materialized as it was envisioned,” Farnsworth said. “It also has a fairly robust manufacturing base that’s fully integrated with the United States and Canada.”

But low oil prices have hurt, and Pemex, the state oil company, posted its first ever loss before taxes in 2015.

Now that exchange rate volatility has been resolved, Mexico is shaping up as a good market, Mora said.

Peru: “Peru is well-positioned to take advantage of the global economy,” Farnsworth said.

ECLAC predicts the Peruvian economy will grow by 3.4 percent in 2016.

Peruvians will go to the polls on April 10 to elect a president to a five-year term, but Nomura’s Castro said the election “will be mostly a non-event from a market perspective” with little possibility of an economic downturn or upside regardless of the winner. All the candidates could be expected to pursue fairly conservative economic policies, but Castro said a “fresh face in the Government Palace could be a good catalyst for the start of a turnaround.”

Polls have tended to favor Keiko Fujimori, daughter of former President Alberto Fujimori, as the winner in a second round of voting.

Venezuela: The bridge that joins Venezuela and Colombia has sat mostly empty since August, when Caracas unilaterally shut it down to try to stem the flow of contraband. But people, on foot, have been straggling across. On a recent weekday, a woman dragging two pieces of luggage hollered at observers as she cleared the checkpoint.

“I’ve lived in Venezuela for 40 years, but I’m giving up,” she said, refusing to provide her name. “It’s a disaster over there, and I can’t take it anymore.”

As Latin America has been hit by falling crude prices, no country is suffering more than Venezuela.

The nation is expected to see its economy shrink by as much as 7 percent this year even as inflation continues to soar into the triple digits. The vice-grip has pummeled consumers, exacerbated crime and is fueling a push to cut President Nicolás Maduro’s term short of the 2019 election.

According to Latinvest, a Caracas-based financial consulting company, the country has been blowing through its reserves to keep up with its international debt obligations. According to the Central Bank, those reserves now stand at $13 billion — lower than when President Hugo Chávez first took office in 1999.

Venezuela is undergoing “a slow-motion economic collapse,” Farnsworth said. “The ongoing political crisis is preventing any meaningful policy change and they’re selling gold reserves to pay current debt. There’s speculation Venezuela will default on debt, possibly by autumn.”

According to Latinvest, a Caracas-based financial consulting company, the country has been blowing through its reserves to keep up with its international debt obligations. According to the Central Bank, those reserves now stand at $13 billion — lower than when President Hugo Chávez first took office in 1999.

To complicate matters, Maduro and the opposition-controlled congress are at loggerheads — just at the moment when the country needs cooperating branches of government to make tough decisions.

Rather than taking steps that economists have been calling for, such as doing away with a multi-tiered exchange rate system and eliminating price controls on basic goods, the government has taken largely symbolic steps like closing its border or blaming the problems on opposition “economic warfare.” Shortages of most basic goods often sweep through the market and foreign investment in the nation is anemic.

For many, the time for economic tweaking has come and gone, and the time for wholesale housecleaning has arrived.

“The most important word that Maduro isn’t providing is ‘trust,’” said Henrique Capriles, the governor of Miranda state and a former presidential candidate. “Nobody is going to invest with this government because they expropriate, confiscate and threaten business leaders. The next government of Venezuela needs to offer trust, because that’s the foundation of everything else.”

Latin American and Caribbean economic growth

This reflects the percentage increase in the Gross Domestic Product in 2015 and the projected growth for this year. (In 2014, the United States ranked first in the world, with a GDP of $17,419,000 million.)

Latin American country

World ranking (in 2014)

GDP 2014 (in millions of U.S. dollars)

2015 growth

Estimated growth in 2016

Argentina

24

537,660

2.0

0.8

Bolivia

98

32,996

4.5

4.5

Brazil

7

2,346,076

-3.5

-2

Chile

42

258,062

2

2.1

Colombia

32

377,740

3.1

3

Costa Rica

82

49,553

2.7

3.3

Ecuador

63

100,917

.4

.3

El Salvador

106

25,164

2.4

2.4

Guatemala

76

58,827

3.9

4

Honduras

110

19,385

3.4

3.3

Mexico

15

1,294,690

2.5

2.6

Nicaragua

135

11,806

4

4.3

Panama

88

46,213

5.9

6.2

Paraguay

101

30,881

2.9

3

Peru

52

202,596

2.8

3.4

Uruguay

77

57,471

1.5

1.5

Venezuela

31

381,286

-7.1

-7

Caribbean

World ranking (in 2014)

GDP 2014 in millions of U.S. dollars)

2015 growth

Estimated growth in 2016

Antigua and Barbuda

177

1,221

3.2

3.8

Bahamas

143

8,511

1.5

2.4

Barbados

160

4,355

.5

1

Belize

172

1,699

1.7

2.7

Cuba

67

77,150

4

4.2

Dominica

187

524

-2.7

5.2

Dominican Republic

73

64,138

6.6

5.2

Grenada

180

912

3.4

2.4

Guyana

163

3,097

2

3.4

Haiti

142

8,713

2

2.5

Jamaica

125

13,891

1

1.5

St. Kitts and Nevis

182

852

5.2

4.7

St. Vincent and the Grenadines

185

729

1

2.1

St. Lucia

176

1,404

1.3

1

Suriname

153

5,210

2.2

2.4

Trinidad and Tobago

102

28,883

.2

.6

Source: Economic Commission for Latin America and the Caribbean; World Bank

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