Tuesday, August 02, 2016

2016 is turning out to be worse than 2015 for some South American economies

Latin America will suffer a GDP contraction of 0.8% in 2016, according to the 26 July report* of ECLAC, the UN Commission for Latin America and Caribbean. In December 2015, ECLAC had predicted decline of 0.6%. But the year 2016 is turning out to be worse than 2015 when the region's GDP shrank by 0.5%. The total GDP of the region has come down from 6.13 trillion dollars in 2013 to 4.88 trillion in 2015.

The deterioration is due mainly to low global prices and demand of Latin American commodities and weak domestic consumption. Global prices of crude are expected to be lower in 2016 by 21%, iron ore-23%, soybean flour-14% and copper-13%. But the fall in prices are good for India, though..India's import of crude oil from Latin America halved to 10 billion dollars in 2015-16 from 20 billion in 2014-15, although the the volume of crude imports have gone up. Crude oil is the largest export item for Latin America and the largest import for India.

While four countries face GDP contraction, the remaining fifteen economies will continue to grow.

Dominican Republic is 'the star of 2016' with the top GDP growth rate of 6%, followed by Panama-5.9%, Bolivia-4.5%, Nicaragua-4.5%, Costa Rica-4.3%, Peru-3.9%. Mexico, the second largest economy of the region is expected to grow by 2.3% and Colombia, the fourth largest, by 2.7%. Central America is likely to grow by 3.8%.

South America, dependent more on commodities and China for exports, faces GDP contraction of 2.1%. But Mexico and Central America aligned to the US market will grow by 2.6%.

Venezuela is projected to end up with a GDP contraction of 8%, followed by Brazil 3.5%, Ecuador 2.5% and Argentina 1.5%. Venezuela is, of course, hopeless and could get worse. The other countries would recover next year. Brasil is already showing signs of turnaround. Argentina should resume growth sooner with the business-friendly and pragmatic Macri government which took over in December 2015. But the Argentines could not avoid the cold when Brazilians sneez. Brazil is their largest trading partner.

The unemployment rate of the region is expected to go up to 8.1% in 2016 from 7.4% in 2015. Major currencies of the region have depreciated significantly against the dollar. Total imports of the region which fell by 15% in 2015 is projected to decrease by 7% in 2016. The region's exports are also expected to decline by 3% in 2016, after the 11% fall in 2015. 

Here are some positive statistics. The average inflation (cumulative for the 12 months from May 2015) of the region was just 6.1% in April 2016. Exceptions:  Venezuela's inflation stood at the world's highest figure of 181% ( IMF estimate is much higher); Argentina's, despite the best efforts by Macri administration stood at 43% in May 2016. The external debt of the region in December 2015 was 1443 billion dollars which was a mere 29% of the total GDP. No country in the region needs any IMF rescue or likely to default on its external debt. The total foreign exchange reserves of the region are over 800 billion dollars, which are adequate to face any unexpected external shocks. 

This is a good time for acquisitions in countries like Brazil and Argentina where the asset prices are lower due to local currency depreciation and other such issues. This explains the FDI of 129 billion dollars received by the region in 2015. Brazil received the maximum FDI of 62 billion dollars in 2015. The Wall Street Journal trashes Brazil with negative stories and brings down the value of Brazilian stocks and bonds. The Wall Street funds go in and quietly acquire Brazilian assets. 

The Indian business need not be unduly deterred by the negative numbers. It is just a cyclical downturn. Except for the man-made disaster of Venezuela, all the other economies have stronger macroeconomic fundamentals and have built up the capacity for resilience. During this time of austerity, Latin Americans import more generic medicines from India than the patented ones from the developed countries and look for more such affordable products from India. 

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