Friday, August 08, 2014

Latin American economic growth slowing down in 2014

Latin American economic growth has slowed down in 2014. But the region has relatively strong fundamentals to absorb external shocks and increase the growth in the coming years except for Argentina and Venezuela who face continuing uncertainty and deterioration.

Latin American economic growth slowing down in 2014

According to the Economic Survey issued by the UN Economic Commission for Latin America and Caribbean (ECLAC) on 4 August, the GDP growth of Latin America is likely to be 2.2 % declining from 2.6% in 2013, 3% in 2012, 4.4% in 2011 and 4.7% in 2010.

Brazil, the largest economy in the region is likely to grow by 1.4% in 2014 as against 2.5% in 2013.  Mexico, the second largest, is expected to grow by 2.5% increasing from 1.1% in 2013. Argentina, the third largest, is likely to face negative growth after the technical debt default caused on 31 July resulting from the the failure of talks between the Argentine government and the holdout funds.

Among the twenty countries of the region, Panama will have the highest growth at 6.7%, followed by Bolivia at 5.5%, Colombia, Ecuador, Dominican Republic and Nicaragua at 5% and Peru at 4.8%.  Venezuela will be the worst performer with an economic contraction of 0.5%.

South America's sub regional growth will be 1.8% while Central America's ( including Haiti and Dominican Republic) growth will be 4.4%.

The lower growth of Latin America in 2014 is due to the fall in domestic demand, decrease in the external demand for commodities especially from China and insufficient investment.

Exports of the the LAC region are projected to increase by 3.1% and imports by 3.8% in 2014.

Average inflation of the region increased slightly in the first half of 2014 reaching 8.7% in May from 7.6% in December 2013. Venezuela continues to have the highest inflation at 60.9% followed by Argentina with 21.3% in May 2014, while the rest of the region has single digit inflation. Brazil's inflation rate in May 2014 was 6.4% while Mexico's was 3.5%.

The currencies of the region have, in general, depreciated vis-a vis US dollar due to the monetary policies of US and other developed countries as well as due to changes in international interest rates and commodity prices.

Foreign exchange reserves are at historic high levels in most Latin American countries both in absolute terms as well as in relation to GDP, imports  and external debt, except for Argentina and Venezuela. The total reserves of the region stood at 834 billion dollars in May 2014 increasing from 814 billion in 2013. Brazil's reserves were 369 billion dollars and Mexico's 191 billion in May 2014. Argentina's reserves of 28 billion and Venezuela's 22 billion in May 2014 were much below the reserves of Peru, Colombia and Chile.

It is important to note that the total gross external debt of the region stood at 21 % of GDP in 2013 which is very much below the ratio in many developed countries. The region's external debt has remained below 20% of GDP from 2006 to 2011 and it was 20.6% in 2012. The total external debt of Latin America stood at 1.244 trillion dollars while the GDP of Latin America was 5.953 trillion dollars by the end of 2013. It may be recalled that Latin America had received a record 148.6 billion dollars of Foreign Direct Investment (FDI) in 2013 up from 128.9 billion in 2012.

It is also interesting to note that the open urban unemployment rate of LAC region was at its lowest at 6.2% in 2013 after having steadily declined from 8.6% in 2006.

Brazil continues to have the highest lending rate in Latin America with 45% followed by Argentina with 30% while Mexico had the lowest rate of 3.7% in the second quarter of 2014. Except for four countries all others have double digit rates.

Argentina, which was getting slightly better in the first half of 2014 has now been ambushed by the US district court judge Thomas Griesa who has blocked the Argentine government repayment of debt to 93% of the bond holders until payment is done to the vulture funds holding 7% of the bonds and who have refused to accept the terms already mutually agreed between the Argentine government and the 93% bondholders. This 'artificial default' caused by the 83-year old pro-vulture fund judge has compounded the problems of shortage of foreign exchange reserves, devaluation of the currency and access to the global financial market faced by Argentina. However, Argentina is expected to come out of this smaller debt crisis with its experience gained after having managed the crisis of the larger debt of 90 billion dollars in 2002 and swift recovery of growth in 2003. While the Argentine debt issue will have some marginal impact on its Mercosur partners, it will not derail the stability and growth of the Latin American region as a whole.

The economic situation of Venezuela continues to deteriorate hopelessly since the government itself has no clue or competence to find solutions. It is incredible that a country which gets over 80 billion dollars of oil export earnings every year is running short of foreign exchange and essential items in super markets and incapable of taking care of the basic needs of a small population of 30 million. It is pure and simple mismanagement.

The prospects of Mexico and Central America look brighter with the revival of growth in US, their main market for exports and source of workers' remittances. South America has to count on the growth rate of China which has emerged as a large trading partner for most countries of the subregion.

Although the growth of Latin America this year is the lowest in the last five years, it should be noted that Latin America (except for Argentina and Venezuela) has relatively strong fundamentals with high forex reserves, foreign direct investment and low external debt, inflation and unemployment.  The policy makers, having learnt from the past mistakes, are now pursuing more prudent and responsible monetary and fiscal policies. The economies of the region have developed the resilience to withstand external shocks and increase their growth rate in the coming years.