Saturday, September 01, 2018

Latin American economic growth is going to be more subdued in 2018

Latin America’s GDP growth rate is projected at 1.5% in 2018, according to the August 2018 economic survey of ECLAC (UN Economic Commission for Latin America and Caribbean). This is less than the growth of 2.2% predicted in April 2018. The region’s mild growth is being helped by the recovery in domestic demand and moderate increase in the prices of commodities.

South America’s growth rate would be 1.2% in 2018;  Central America’s 3.4%; and Mexico’s 2.2%. The only exception to regional growth is Venezuela whose GDP is expected to shrink by  10% in 2018 after the contraction of 12% in 2017. 

Total GDP of the region has come down from the peak of 6.25 trillion dollars in 2014 to 5.7 trillion in 2017.

Average inflation of the region which was 5.7% in 2017 is likely to go up marginally to around 6% in 2018. Exception is Argentina with a continuing high inflation rate of 29%.  Venezuela, has stopped publishing inflation figures. According to ECLAC the Venezuelan inflation has skyrocketed from 302% in 2016 to 2,582% in 2017 and more in 2018.  But IMF and others put the hyperinflation in five figures.

The average urban open unemployment rate of the region in 2018 is 9.2%, as against 9.3% in 2017.

Latin America’s exports have declined to 445 billion dollars in the first six months of 2018 from 573 billion in the same period in 2017. The imports have also decreased to 434 billion in the first six months in 2018 from 444 billion in the corresponding period last year.

Gross external debt of the region stood at 1.8 trillion in 2017. This means an external debt to GDP ratio of just 41% in 2017.  This is a healthy situation and in any case much better than many developed economies and some emerging markets in other regions. Most of the countries have comfortable foreign exchange reserves and the region’s total forex reserves was 852 billion dollars in June 2018. Again, Argentina and Venezuela are outliers. Argentina has just requested IMF to prepone the release of the second instalment of 50 billion rescue package. Venezuela’s reserves of 8.5 billion dollars is dangerously inadequate. 

The region had received 134 billion dollars of FDI in 2017. Almost half of it went to Brazil, followed by Mexico-26 billion, Argentina-10, Colombia-10 and Peru-6.5.

Colombia is the most promising market in the region upbeat with a new president who has a fresh start after the end of the FARC guerrilla war. About 40 percent of the country which was under FARC control at one time has now been liberated. This means new investment in agriculture, mineral exploration, industries and infrastructure.

Mexico has survived the threats and bullying of Trump. His administration has just concluded a FTA with Mexico which is a great relief for both the markets.

Brasil will hold elections amid continuing political uncertainties. The economy has tentatively recovered from the recession of 2015-16. In any case, the worst is over. 

Argentina, despite the market-friendly Macri is facing high inflation, rapid currency depreciation and low growth. The IMF rescue will give temporary relief but the country is in for some more pain.

Venezuela stands out as the hopeless one in the region with political turmoil, economic disaster, hyper inflation, shortage of essential items and breakdown in public services. Over a million Venezuelans have escaped the misery by emigrating to other countries in the region. It is ironical. In the past Venezuela had given asylum to exiles from other Latin American countries under repressive military dictatorship. More than a million Colombians as well as Peruvians and Bolivians used to emigrate to the then prosperous Venezuela for work. Now it is the other way. 

ECLAC is the knowledge partner of CII in the forthcoming India-Latin America Business Conclave to be held in Santiago, Chile on 1-2 October 2018

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