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 increasing 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 bac ck? – May 2015 5
as a percentage o of GDP remain ned around 3% in the past yea ars, but also fro om the fact that the share of foreign f investments in tottal investmentss increased from a low of 10% % in 2009 2 to approxximately 15% in n 2014. This su uggests that the e ava ailability of fore eign capital playyed little or no role in the dec cline in investm ments.
ris sing interest rates in the Uniteed States also constrain the po ossibilities for monetary m relaxa xation. Th his, however, is s not necessarrily bad news. The T problems in i most countries are a more on thee supply than the t demand sid de. his is also evident from the faact that, notwith hstanding the Th slo owdown in growth, unemployyment remains low in most co ountries and infflation relativelyy high.
Direct foreign iinvestments still holding up otential growtth also falls fu urther Po No ow that commo odity prices aree no longer giving the regiona al ec conomy an upw ward push, old imbalances arre reasserting themselves with a vengeance. To ward off a protracted periiod atin America urrgently needs to t implement off low growth, La re eforms that add dress its structuural weaknesse es, most notably a low savings ratio o, low productivvity and a poorr infrastructure..
% GDP G
6 4 2 0 -2 -4 90
93
96
99
02
Current Acccount
05
0 08
11
14 4
FDI
esides influenc cing short-term growth, these dampening Be factors will also keep the regionnal’s potential growth for the co oming years clo oser to the longg-term average e of just 3% ratther than the 4-5% th hat was consideered possible in i the initial yea ars al crisis of 20099. affter the financia
Sou urce: EIU, regioma al aggregate
Growth G period ds compared d The e FDI are also still sufficient to fully offset th he current acc count deficits w which have incrreased for the region r as a who ole from 1% in 2010 to just under 3% in 201 14. The foreign n deb bt has also rise en further, but the t debt structu ure of most cou untries has con ntinued to impro ove, which has s translated into o favourable interesst rates and rep payment amou unts. Due to the strong capital inflow, the level of the e international res serves remains strong which, despite the we eak growth rate e, ma akes the region less vulnerablle to an increas sed risk aversio on due e to, for instancce, rising intere est rates in the US.
% yoy y
9
6
3
0 07
08 8
09
Brazil
10
11
Co olombia
1981-20144
2004-08
2010-14
Brrazil
2.5
4.8
3.2
Ch hile
5.0
5.5
4.6
Co olombia
3.8
5.4
4.8
Me exico
2.5
3.3
3.3
Pe eru
3.2
7.3
5.8
Re egion
2.6
5.1
3.4
World W
2.8
3.4
2.8
So ource: EIU
he latter was mainly m based onn the robust growth achieved in Th the period betwe een 2004 and 22009, when the e commodities oom led to average growth off just over 5% in the region, and a bo the initially rapid recovery afterr 2009. This strrong rebound fed f the belief that the region’s interrnal dynamics had significanttly mproved and that the region hhad also becom me much less im se ensitive to the peaks p and trouughs of the glob bal economy. In its publication, the IMF also highlights the problems on th he upply side and their negative impact on the region’s long-term su grrowth path.
Infflation remain ns on the hig gh side
06
%
12
13
14
15 5
Mexico
Sou urce: Bloomberg
Pro oblems mainly y on the supply side The e lower commo odity prices are e also feeding through t in lowe er pub blic revenues, tthereby reducin ng the scope fo or budgetary stim mulus measure es in many countries, while th he prospects off
mentioned, the IMF notes tha at Allongside the factors already m de ecreasing diverrsification of annd the simplific cation of prroduction since e 2000 are alsoo playing a role e. The productio on off a limited number of commoddities increasingly gained the up pper hand, to th he detriment off, for instance, the processing g industry. The same commoditiees boom that fu uelled strong o sowed the seeeds of the strong weakening we grrowth thus also arre witnessing to oday.
3
What’s holding growth bac ck? – May 2015 5
Ma ain economic ind dicators/forecas sts GD DP growth (%) Em merging Asia Em merging Europe Lattin America Mid ddle East/North Affrica Em merging markets s total
2013 6..4 1..8 2..4 1..6 4..6
2014e 6.4 1.3 0.9 2.8 4.4
2015e 2 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 2 -3.0 -3.0 -5.5 -6.5
2016e -3.0 -2.0 -3.5 -4.0
Eurrozone -2..9 -2.4 US -4..1 -2.8 urce: EIU, ABN AM MRO Group Econ nomics Sou
-2.3 -2.5
-2.0 -2.2
Eurrozone US orld Wo Bu dget balance (% % GDP) Em merging Asia Em merging Europe Lattin America Mid ddle East/North Affrica
Inflation (% %) Emerging Assia Emerging Eu urope Latin Americca Middle East//North Africa Emerging markets m total Eurozone US World count (% GDP) Current acc Emerging Assia Emerging Eu urope Latin Americca Middle East//North Africa Eurozone US
2013 4.6 5.3 9.0 13.6 6.4
201 14e 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
14e 201 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
2.9 3.2 2.6 3.1 -2.6 -2.4 -2.3 -2.7 es Emerging Markkets regions are rrounded * figure
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