Friday, August 04, 2017

Latin America is increasing its imports in 2017.

Latin America is projected to increase its imports by 6% in 2017, according to the 3 August report of the Economic Commission for Latin America and Caribbean ( ECLAC). This is welcome news coming after the decline of imports in the last four years since 2013.
The region is resuming GDP growth (1.1%) in 2017, after the contractions of 0.4% in 2015 and 1% in 2016.
Panama will have the highest growth rate of 5.6% followed by Dominican Republic – 5.3%, Nicaragua-4.7% and Costa Rica-4.1%. Brazil will have a modest growth of 0.4%, Mexico-2.2%, Argentina-2%, Colombia-2.1%, Peru-2.5% and Chile-1.4%. South America is expected to see growth of 0.6%; Central America and Mexico, 2.5%. Venezuela will suffer 7.2% GDP surprise. In the last three years, Venezuela has lost almost one third of its GDP.
The economic recovery of the region is being driven by the rise in domestic consumption and demand, the increase in global prices of commodities exported by the region and favourable global economic conditions. Commodity prices are expected to rise by 12% on average compared with 2016. In particular, energy prices are expected to increase by 19%, and metals and minerals by 16% and food prices by 3%.
The exports of the are projected to expand by 8%. Average inflation of the region has fallen from 7.3% in 2016 to 5.7% in May 2017. However, Argentina’s inflation stood at 24.7% while Venezuela’s rate has gone up over 600% and beyond control.
It is interesting to note that despite the recession in 2016, the region attracted 141 billion dollars of foreign direct investment (FDI), an increase from 2015. Brazil received 71 billion dollars, Mexico-28 bn, Colombia –9 bn, Peru- 6.6 bn, Chile –5.1 bn, Panama-5 bn, Costa Rica- 2.6 bn, Argentina-2.4 bn,  Dominican Republic- 2.4 bn and Guatemala- 1 bn.
Total External debt of the region has increased to 1.47 trillion dollars from 1.42 trillion in 2015 but the ratio of external debt to GDP is a manageable 35%.
Total international reserves of the region have increased to 831 billion dollars in May 2017 from 795 billion in December 2015. This is a comfortable level for the region except for Venezuela whose position has become insecure with just about 10 billion dollars but with some debt repayments due this year.
Venezuela has become the black sheep of the region with its political and economic crisis. It has buried itself in a deeper hall with the Constituent Assembly elections held this week. The election has been rejected by key Latin American countries besides US and EU. The Chavistas are moving the country to a Cuban model of dictatorship which is untenable in Venezuela and is bound to collapse. The economy  is in a free fall with total mismanagement, the world’s highest inflation, multiple exchange rates, large scale corruption, shortages of essential consumer items and the destruction of the domestic industry. Caracas has become the capital of crime and violence in the region. It is just a matter of time for the Chavista regime to collapse.
Brazil avoided another Presidential impeachment last week. Although the country will continue to suffer from political turbulence, it appears that the current President Temer is likely to stay till the elections due in 2018. He might take more initiatives to bring about some economic reforms in the coming months to show off his legitimacy. In any case, he is in a position to try the difficult and impossible since he has no future as President and nothing to lose. He has been disqualified to stand for Presidential elections as a conviction for his violation of electoral rules. The economy has started recovery and is set to grow. However investment, infrastructure and public spending will continue to be low key in the aftermath of the ongoing corruption scandals involving companies and politicians.
Mexico is heaving a sigh of relief seeing that Trump’s bite is less worse than his bark. During his campaign, he attacked NAFTA as the worst deal ever signed by US. But now he has realised the limitations and is talking about just a review of the Treaty. He has gone soft on the border wall and his capacity to hurt Mexico has diminished. So NAFTA is safe and the Mexican economy is not going to be disrupted by Trump.
India’s trade with the region should increase in 2017 from the 30 billion dollars in 2016, given the rise in commodity prices and the expected increase of global imports by the region. It is encouraging to note that India’s exports to Mexico had increased by over 20% in 2016. Vehicles have become the largest exports of India to the region at 3.4 billion dollars. The vehicle exports have been increasing significantly in recent years.
Indian investment in the region is coming down. Some companies such as Havells and Aegis have sold off their Latin Americans assets and operations. One of the sugar mills of Renuka in Brazil is being auctioned by the court in the first week of September. Renuka, which had invested about 500 million dollars in Brazil, has already declared bankruptcy. However, UPL, the largest Indian agrochemical company, is planning more acquisitions in Latin America. Its Brazilian turnover has overtaken its business in India.
The Indian business should get inspiration from China’s trade of 215 billion dollars with Latin America in 2016 and its investment of 110 billion dollars and credit of 141 billion dollars to the region. The Latin Americans want to reduce their over dependence on China and seek diversification and reach out to new markets such as India.  There is tremendous potential for Indian business in the large and growing market of Latin America with a combined GDP of five trillion dollars and a population of 620 million. 

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