Friday, December 16, 2016

Latin America outlook for 2017

Latin America is projected to grow by 1.3% in 2017, according to the 14 December report of the UN Economic Commission for the region (ECLAC). This comes as a relief after the economic contraction of the region in the last two years, by 1.1% in 2016 and 0.5% in 2015. 
South America is expected to grow by 0.9%, Mexico by 1.9% (down from 2% in 2016) and Central America at 3.7% (up from 3.6%). Brazil, the largest economy of the region should see a growth of 0.4% (after the negative growth of 3.6% in 2016), Argentina 2.3% ( from –2% in 2016), Colombia 2.7%, Peru 4% ( highest in South America) and Chile 2%. Venezuela's contraction in 2017 will be 4.7%, better than the 9.7% in 2015. Dominican Republic will be the region's growth champion with 6.2%, followed by Panama- 5.9% and Nicaragua - 4.7%.
The main reason for optimism is the expectation of rise in commodity prices by 8% in 2017, which had declined by 6% in 2016. 
The slowdown in the region’s economic activity in 2016 was essentially due to lower investment and consumption as well the fall in demand and prices of commodities and the Chinese slowdown. 
Total imports of the region are estimated to have fallen by 21% from 984 billion dollars in 2015 to 774 billion in 2016 while exports have come down by 6.3% to 866 billion dollars in 2016 from 925 billion in 2015.
The sovereign risk of the region which peaked at 677 basis points in January 2016 has come down to 500 basis points in late October 2016.
Average inflation in the region has increased to 8.4% in September 2016 from 6.9% in Sept 2015. While Venezuela has maintained the world's highest inflation (over 600%) Argentina's inflation has surprisingly doubled to 42.4 % in 2016 from 21.9% in 2015. Brazilian inflation has come down to 8.5% from 9.5% last year.
The total external debt of the region has reached 1.52 trillion dollars in 2016 from 1.44 trillion in 2015. However, the ratio of external debt to GDP  at 36.4% is not high and is very much under control. Foreign exchange reserves have increased (surprisingly) to 812 billion dollars in 2016 from 795 billion in 2015.
Unemployment rate has risen sharply from 7.4% in 2015 to 9.0% in 2016. 
Currencies of many countries of the region have depreciated vis-a-vis dollar in 2016.
The new year brings a new worry for the region. Trump threatens to dissolve NAFTA and other Free Trade Agreements and pursue protectionist policies. Mexico, which is overwhelmingly dependent upon US for over 75 % of its exports, will be in the direct firing line of Trump. He has already arm twisted a few American companies such as Ford to stop their plans for shifting of some manufacturing to Mexico. This will hurt Mexico which has been booming in recent years as the 'manufacturing hub of Americas'. Mexico along with Central America will  be hurt by the fall in remittances from their emigrants in US. The only hope is that as President, Trump is likely to tone down his rhetoric and be more pragmatic. The US will be hit as badly as Mexico if he does all that he says.   
Brazil's political crisis has deepened after the plea-bargain revelations of Odebrecht according to which about 150 political leaders including President Temer and the speakers of the lower and upper houses of the congress as well as Lula had received bribes and illegal campaign funds. The scandal has paralyzed the ongoing infrastructure projects and investments and frozen bank lending to companies. The Temer government and the corrupt Congress have passed a law freezing the spending limits for the next twenty years. This will hit the country's education and health care among other development sectors. It is a reversal of the pro-poor policies adopted by the Workers Party government which had helped millions of people to come out of the poverty line. 
Argentina has surprised everyone with a very high inflation and by its economic contraction in 2016, despite the centre-right President Macri's proactive stimulus measures for the last one year. But it is going to get better in 2017.
Venezuela remains hopeless and continues to worsen. The Chavista regime is still clueless about how to arrest the deterioration. While the Venezuelan people suffer from shortages of food and other essential items, the Wall Street is feasting on the ultra high yield of the Venezuelan bonds.
India can hope to increase its exports to Latin America which will resume growth in 2017. India's car exports to Mexico have increased by 38% in the first eight months of 2016, reaching 1.077 billion dollars as against 728 million in the same period last year. The car exports to Mexico has been steadily going up in the last three years.
India will continue to increase its large imports of petroleum crude, vegetable oils and minerals from Latin America. While the volume of these exports continue to increase, the import bill has sharply declined in 2015 and 2016 thanks to the lower prices of commodities. For example, the oil imports have come down from 20 billion dollars in 2014-15 to 10 billion in 2015-16. This will go up slightly next year. However, the total Indo-Latin American trade in 2016-17 will be much less than the peak of 43 billion dollars in 2014-15 due to the lower value of imports. 
There was no major Indian investment in Latin America in 2016. The Indian companies operating in the region will face less pressure in 2017 after the difficult conditions in 2016. Renuka Sugar, which had invested half a billion dollars in the Brazilian sugar mills, declared bankruptchy in 2016, unable repay the debts. Some other Indian investors including Havells are selling off their assets in Latin America. On the other hand, UPL's (United Phosphorous) agrochemical business has been booming in Brazil. Their Brazilian turnover has now overtaken their Indian business. This should encourage other Indian companies who might be interested in acquisition of assets in Latin America at this time when the prices are low.
Latin American democracies which have matured over the years, cannot believe that the Caudillo (strong man) has reappeared in the north. Trump's bullying and offensive discourses and his protectionist policies are forcing the Latin Americans to look for other markets. This comes on top of their frustration with the protectionist trends in Europe. They are also actively trying to reduce over dependence on China, which has hurt their domestic manufacturing and has been pursuing non-transparent policies in the region.  So the Latin Americans are now looking at India even more seriously as an economic partner in the long term. This is an opportune time for India to formulate a strategic policy and intensify its engagement with Latin America which is contributing to India's energy and food security and is offering a large market for its exports.

No comments: