Tuesday, October 18, 2016

Latin America will resume GDP growth in 2017 after the recession of 2016

Latin America is projected to recover with 1.5% GDP growth in 2017 after the economic contraction of 0.9% in 2016, according to the 12 October report of ECLAC, the UN Commission for Latin America and Caribbean. 

The growth champion in 2016 is Dominican Republic with 6.5%, followed by Panama at 5.4%, Bolivia and Nicaragua at 4.5%, Costa Rica at 4.2% and Paraguay at 4%.  Central America is expected to grow at 3.5%, Mexico at 2.1%, Colombia 2.3% and Chile 1.6%.  Venezuela holds the top ranking for negative growth with –8%, followed by Brazil at –3.4%, Argentina at –1.8% and Ecuador at –2.5%.

In 2017, all the countries except Venezuela will show positive growth.  Brazil will recover to a positive growth of 0.5%, Argentina 2.5% and Ecuador 0.2%. Dominican Republic, Panama, Nicaragua, Costa Rica and Bolivia will continue to grow over 4%. The ten South American countries will grow at 1.1% in 2017 after a negative growth of 2.2% in 2016. Even Venezuela will half its GDP contraction rate to 4%.

The most significant turnaround in 2017 will be in the case of Brazil which now has a business-friendly government of President Temer since August 2016. The new regime has already started opening the economy and removing some of the restrictive and protectionist policies of  the PT government which was in power from 2002 to 2016. However there are many challenges ahead, given the paralysis of the infrastructure and construction industry as well as bank credit. The top company chiefs are in jail or under investigation following the "Car Wash" (Lava Jato) scandal involving Petrobras. The centre-right government of Macri in Argentina since December 2015 has been pursuing market reforms and business-friendly policies after the disastrous economic management by President Cristina Kirchner in the period 2007-15. However, Venezuela remains hopeless under President Maduro who has no clues to control the inflation raging at over 600% or stop the economic deterioration. Venezuela can hope for improvement only when the Chavista rule ends.

There is a tendency to blame the socialist policies of the Leftist governments in the region for the economic downturn since 2011. It is not a failure of the socialism. It is due to the abuse of power in the name of socialism by some crazy leaders. The Left in Latin America has become moderate and pragmatic moving towards a Brasilia Consensus with a balanced mix of pro-poor and business-friendly policies. President Lula of Brazil was the role model for this New Left. President Michelle Bachelet of Chile, President Ollanta Humala of Peru, Presidents Jose Mujica and Tabare Vasquez of Uruguay, President Evo Morales of Bolivia and President Ortega of Nicaragua have followed the Lula model in varying degrees. President Evo Morales, a staunch leftist has ensured the consistent growth of Bolivia at an annual average of 4.8% since his coming to power in 2006. Bolivia has remained among the highest growth countries in Latin America, although his rhetoric sometimes tends to get extreme. The GDP of the country has grown spectacularly from 9.54 billion dollars in 2005 to 34.68 billion in 2019. Even after the global financial crisis, Bolivia maintained its growth at 3.4% in 2009 and 4.1% in 2010. It is not only the absolute GDP but the per capita growth has also been impressive and consistent, making Bolivia as a successful example of poverty alleviation in the region. It is also true of Nicaragua under the leftist president Ortega, which has consistently grown at an average of 3.8% since his assumption of power in 2007. The GDP of the country has doubled from 6.78 billion dollars in 2006 to 13.26 billion in 2016. But Hugo Chavez, Dilma Rouseff and Cristina Kirchner had tried to control everything and refused to have dialogue with the private sector business. They lost the game playing it their own way. Chavez went out of his way to destroy the Venezuelan industry and business as a revenge against their support to the coup against him in 2002. 

The main reason for the downturn in South America is the drastic fall in demand and price of their commodities, caused mainly by the Chinese slow down. But now the global prices are recovering and the domestic demand is also picking up. It is to be noted that the region has adequate foreign exchange reserves (except Venezuela) and inflation under control in single digit, except for Venezuela and Argentina. No country is in any desperate need for IMF rescue. The region is set on a relatively stable course of growth in the coming years. This is evident form the large inflow of FDI into the region betting on its growth potential. They are, of course, also taking advantage of the lower prices of assets and favorable exchange rates.

Here are some positive stories to cheer up the Indian business who might feel discouraged by the negative news flowing out of Latin America: 

-UPL (United Phosporous Ltd), the number one Indian agrochemical company does more business in Brazil ( over 500 million dollars) than in India. They are not deterred by the so called 'crisis' in Brazil. They have invested over 300 million dollars and are upbeat about their growth prospects in Brazil, which has got solid growth fundamentals as an Agricultural Powerhouse in the world.

-Indian pharmaceutical companies operating in Brazil have an impressive combined annual turnover exceeding 500 million dollars. Torrent alone does a business of more than 100 million dollars.

-India's exports of vehicles to Mexico have increased by 41% in the first quarter of 2016 reaching 380 million dollars from 267 million in the first quarter of 2015. They have doubled from 665 million dollars in 2013 to 1175 million in 2015.

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