150508 latin america quarterly

Group Economics Emerging Markets

Latin America outlook What’s holding growth back?

Marijke Zewuster Tel: +31 20 3830518 marijke.zewuster@nl.abnamro.com

May 2015 The economic developments in the first months of the year were disappointing for most countries and the outlook for much of the continent remains sombre. Accordingly, we have revised our forecasts for 2015 further downwards in the past months.

With three of the region’s seven largest economies in recession, regional growth is set to fall to a new low this year. Due to weak economic conditions, most countries have limited scope for budgetary and monetary stimulus measures. However, as the problems are more on the supply than the demand side, structural reforms appear to be a more important concern. Failing such measures, the region is heading for a prolonged period of moderate growth.

Further downward revisions to our forecasts Internal circumstances remain an important factor in the growth deceleration. As a result, the negative impact of lower commodity prices and a diminishing risk aversion is having a stronger effect than the positive impact of improved growth prospects in the industrial countries.

This most definitely applies to Argentina, Brazil and Venezuela. All these three countries not only face a further weakening of growth, but are also expected to undergo contraction in 2015.

in growth weakening from 4.6% in 2014 to 3.5% in 2015, a level that is likely to be maintained in 2016.

Weak investments persist Low commodity prices are not only having a dampening effect on exports, but increasingly also on investments and consumer spending.

Falling investment ratio % GDP

27

Economic growth % y-o-y

24

Q2-14 Q3-14 Q4-14

2014

2015

2016

Brazil

-1.2

-0.6

-0.2

0.1

-1

2

Chile

2.1

1.0

1.8

1.9

3

3

Colombia

4.3

4.3

3.5

4.6

3.5

3.5

Mexico

1.6

2.2

2.6

2.1

3

3.5

Peru

1.8

1.8

1.0

2.4

4

5

Argentina

0.5

-0.5

1

Venezuela

-4.0

Average

0.9

-6 0.5

21 18 15 01 Brazil

03

05 Chile

07

09

Colombia

11 Mexico

13

15 Peru

-4 2.2

Source: EIU

Source: EIU, Bloomberg, ABN AMRO Group Economics

Another factor is that growth in the US is turning out to be less strong than we initially anticipated. Whereas we originally assumed 3.8% growth for 2015, we now expect 3.2%.

Colombia and Mexico will suffer the most from the lower-thanexpected US growth. The US is still the most important trading partner of both countries, accounting for about 30% (Colombia) and almost 80% (Mexico) of their total exports.

We still see Mexico as well as Chile and Peru staging a recovery after an extremely weak 2014, but the disappointing figures in the first quarter have prompted a slight downward adjustment to the forecasts. Colombia was the strongest grower in 2014, but the growth deceleration that started in the middle of last year looks set to persist this year. The country is contending with the low oil price and the resulting strong decline in investments in the country. We expect this to result

In its Regional Economic Outlook published in late April, the IMF devotes a separate chapter to the weak investments in Latin America and draws the not entirely surprising conclusion that, particularly in Brazil, Chile and Peru, the decline in the investment ratio since mid-2011 has a strong correlation with the fall in commodity prices since that time. Another contributing factor in Brazil and Chile is the political uncertainty, which caused investments to decrease even more strongly than was to be expected on the grounds of the development of commodity prices and other economic variables.

External position remains strong Despite all sorts of structural shortcomings, the region’s external position remains a clear strong point. While the investment ratio in the region decreased, the inflow of foreign capital remained remarkably strong. This is not only evident from the fact that foreign direct investments (FDI) expressed

2

What’s holding growth back? – May 2015

as a percentage of GDP remained around 3% in the past years, but also from the fact that the share of foreign investments in total investments increased from a low of 10% in 2009 to approximately 15% in 2014. This suggests that the availability of foreign capital played little or no role in the decline in investments.

rising interest rates in the United States also constrain the possibilities for monetary relaxation.

This, however, is not necessarily bad news. The problems in most countries are more on the supply than the demand side.

This is also evident from the fact that, notwithstanding the slowdown in growth, unemployment remains low in most countries and inflation relatively high.

Direct foreign investments still holding up Potential growth also falls further Now that commodity prices are no longer giving the regional economy an upward push, old imbalances are reasserting themselves with a vengeance. To ward off a protracted period of low growth, Latin America urgently needs to implement reforms that address its structural weaknesses, most notably a low savings ratio, low productivity and a poor infrastructure.

% GDP

6 4 2 0 -2 -4 90

93

96

99

02

05

Current Account

08

11

14

FDI

Besides influencing short-term growth, these dampening factors will also keep the regional’s potential growth for the coming years closer to the long-term average of just 3% rather than the 4-5% that was considered possible in the initial years after the financial crisis of 2009.

Source: EIU, regiomal aggregate

Growth periods compared The FDI are also still sufficient to fully offset the current account deficits which have increased for the region as a whole from 1% in 2010 to just under 3% in 2014. The foreign debt has also risen further, but the debt structure of most countries has continued to improve, which has translated into favourable interest rates and repayment amounts.

Due to the strong capital inflow, the level of the international reserves remains strong which, despite the weak growth rate, makes the region less vulnerable to an increased risk aversion due to, for instance, rising interest rates in the US.

% yoy

9

6

3

0 07

08

09

Brazil

10

11

Colombia

1981-2014

2004-08

2010-14

Brazil

2.5

4.8

3.2

Chile

5.0

5.5

4.6

Colombia

3.8

5.4

4.8

Mexico

2.5

3.3

3.3

Peru

3.2

7.3

5.8

Region

2.6

5.1

3.4

World

2.8

3.4

2.8

Source: EIU

The latter was mainly based on the robust growth achieved in the period between 2004 and 2009, when the commodities boom led to average growth of just over 5% in the region, and the initially rapid recovery after 2009. This strong rebound fed the belief that the region’s internal dynamics had significantly improved and that the region had also become much less sensitive to the peaks and troughs of the global economy.

In its publication, the IMF also highlights the problems on the supply side and their negative impact on the region’s long-term growth path.

Inflation remains on the high side

06

%

12

13

14

15

Mexico

Source: Bloomberg

Problems mainly on the supply side The lower commodity prices are also feeding through in lower public revenues, thereby reducing the scope for budgetary stimulus measures in many countries, while the prospects of

Alongside the factors already mentioned, the IMF notes that decreasing diversification of and the simplification of production since 2000 are also playing a role. The production of a limited number of commodities increasingly gained the upper hand, to the detriment of, for instance, the processing industry. The same commodities boom that fuelled strong growth thus also sowed the seeds of the strong weakening we are witnessing today.

3

What’s holding growth back? – May 2015

Main economic indicators/forecasts GDP growth (%) Emerging Asia Emerging Europe Latin America Middle East/North Africa Emerging markets total

2013 6.4 1.8 2.4 1.6 4.6

2014e 6.4 1.3 0.9 2.8 4.4

2015e 6.4 -0.6 0.5 2.5 4.0

2016e 6.4 2.1 2.2 3.5 4.8

-0.4 2.2 3.2

0.9 2.4 3.2

1.8 3.1 3.3

2.3 3.1 3.9

2013 -2.5 -1.5 -3.0 0.5

2014e -2.5 -1.5 -4.5 -1.5

2015e -3.0 -3.0 -5.5 -6.5

2016e -3.0 -2.0 -3.5 -4.0

Eurozone -2.9 -2.4 US -4.1 -2.8 Source: EIU, ABN AMRO Group Economics

-2.3 -2.5

-2.0 -2.2

Eurozone US World Budget balance (%GDP) Emerging Asia Emerging Europe Latin America Middle East/North Africa

Inflation (%) Emerging Asia Emerging Europe Latin America Middle East/North Africa Emerging markets total Eurozone US World Current account (% GDP) Emerging Asia Emerging Europe Latin America Middle East/North Africa Eurozone US

2013 4.6 5.3 9.0 13.6 6.4

2014e 3.6 6.2 12.7 7.3 5.8

2015e 3.1 10.4 13.1 6.9 6.1

2016e 3.4 5.3 10.3 6.8 5.1

1.3 1.5 4.3

0.5 1.6 4.0

0.4 0.2 3.7

1.7 2.5 3.8

2013 1.0 -1.5 -2.5 8.5

2014e 2.0 0.0 -2.5 6.0

2015e 2.0 0.0 -3.5 -1.5

2016e 1.5 0.5 -3.0 1.5

2.6 2.9 3.2 3.1 -2.4 -2.3 -2.6 -2.7 * figures Emerging Markets regions are rounded

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