Latin America experienced the worst in 2015 in the last six years, suffering a GDP contraction of 0.4 percent, according to the December 2015 report of the Economic Commission for Latin America and Caribbean (ECLAC). After a peak growth of 6% in 2010, the regional GDP growth had steadily slowed down reaching 1.2% in 2014 and shrinking in 2015. However, the GDP contraction in 2015 is less than the 1.2 % suffered in 2009 in the wake of the global financial crisis. Venezuela had suffered the most with a GDP contraction of 7.1% followed by Brazil with 3.5% contraction. Brazil has lost its investment grade rating in December 2015. The ten countries of South America together had a GDP decline of 1.6% in 2015.
The main reasons for the cyclical economic downturn are the sharp fall in prices and commodities (oil, minerals and food products) exported by the region, the slowdown of the Chinese economy, sluggish global growth and the weak internal demand. Oil, Metal and agricultural commodity prices have declined by 57%, 50% and 30% respectively since 2011. Commodity prices are expected to fall further in 2016, although less steeply than in 2015. This will hurt South America which depends more on commodity exports and the Chinese market. Mexico and Central America which are aligned to the US market will be affected much less. It is worth noting here that Mexico has emerged as the 'manufacturing hub' of the Americas with the massive investments in production by foreign companies, its competitive wages and the major reforms undertaken by the government of President Penha Nieto in the last three years opening up the economy and stimulating investment.
In 2015, Dominican Republic would have the highest growth (6.6%) followed by Panama ( 5.9%) and Bolivia (4.5%). Mexico has increased its growth rate from 2.2% in 2014 to 2.5% in 2015 while Central American growth rate has gone up from 4.0% in 2014 to 4.4% in 2015.
ECLAC forecasts a GDP growth of 0.2% in 2016 for the region. Panama will have the highest growth of 6.2%, followed by Dominican Republic- 5.2% and Bolivia- 4.5%. Mexico's growth rate is projected at 2.6% and that of Central America at 4.3%. Venezuela will continue to be the black sheep in the region with a GDP contraction of 7% while the Brazilian GDP is expected to shrink by 2%. The two countries are dragging South America towards a 0.8% GDP contraction in 2016.
The good news is that the old curses of hyper inflation and excessive external debt will not come back. The average inflation of the region has gone up slightly to 6.6% in 2015 from 6.3% in 2014. Exceptions are the high inflation rates in Venezuela at 60% and Argentina around 20%. The external debt of Latin America and Caribbean is just 33% of the GDP, which is very good in comparison to many European and other developed countries which have high external borrowings. The international reserves of LAC region stands at a comfortable high level of 825 billion dollars in end 2015. So no country from the region needs any IMF rescue.
Many currencies of the region have depreciated in 2015. The Argentine peso, Brazilian Real and Colombian Peso have lost over 30% in value. These have made exports more competitive but imports more expensive.
Total imports of the region are projected to decline by 10.3% and exports by 14%, according to a December 2015 report published by the Inter American Development (IDB). Imports of the region have gone down to an estimated value of 932 billion dollars in 2015 from the trillion dollar plus levels of the previous four years. The exports are also down to 875 billion dollars in 2015 from over a trillion dollars each year since 2011.
Foreign direct investment (FDI) fell by around 22% in 2015 from its 2014 level and is expected to stand at around US$ 107 billion at the end of the year.
Although the economic growth is negative, there is positive news on the political side. In Argentina, the Peronists have lost the elections to pro-business Mauricio Macri who has taken over on 10 December 2015. He has already removed the currency controls and some export taxes imposed by the previous regime which had mismanaged the economy with its obsessive command and control policies. The Argentine economy is poised for better times in the four-year term of the new President. The Venezuelan voters have defeated the Chavista party in the Congressional elections in the December 2015 elections giving a majority to the opposition. This should shake up the Maduro administration towards more sensible policies and economic management. In any case, the Chavista regime is likely to be voted out in the next elections in 2018. This is the only hope for the country since the Chavistas have run out of ideas and are clueless to get out of the deep hole in which they have put the country. The thaw in the diplomatic relations with US has brought Cuba out of its isolation with bright prospects for economic improvement. The successful conclusion of the Colombian government's peace talks with the guerrillas should soon put an to end the civil war and open up the country for more agriculture, exploration for minerals and oil as well as for building better infrastructure.
The people of Guatemala created history in 2015 by forcing (through peaceful protests) President Otto Perez to resign and get him jailed on corruption charges. They punished the corrupt political oligarchy by voting a political outsider Jimmy Morales as president in the elections held in October 2015. In Brazil, several dozens of political and business leaders and top executives of Petrobras have been arrested and sentenced to imprisonment for their involvement in the Petrobras corruption scandal. In the Brazilian history, this is unprecedented and was unimaginable. These two examples as well as the mass protests against corruption in some other countries of the region have given a loud warning to the political and business elite that they cannot get away with impunity anymore and that they would be held accountable. Clearly, democracy has become stronger and more mature in the region.
The year 2016 promises to be a better year for Latin America with the exception of Brazil and Venezuela which will continue to suffer economic contraction and political instability.
Given the internal economic pains and political uncertainty, Brazil will not be able to focus on foreign policy and work actively with India for the revival of IBSA, permanent membership of UNSC and other such issues of Indian global agenda.
India's exports might not grow significantly in 2016, given the low growth and lower imports projected for the region in 2016. India's import figure will be less consequent to the lower prices of oil and minerals which constitute the bulk of India's imports from the region. It should, however, be emphasized that Latin America has become a regular and reliable source for India's crude oil requirements, accounting for about 20% of India's global imports and contributing to India's energy security.
It is an opportune time for Indian investment and acquisitions in the region, taking advantage of the lower prices of assets especially in oil and mineral sectors. The Indian investors need not be discouraged by the bankruptchy declared in 2015 by the Brazilian subsidiary of Renuka Sugar in which the parent company had invested about half a billion dollars. Renuka's business model was right but the timing was wrong. It had paid high price for its acquisition at the peak of the market boom and took too much of debt. While Renuka had excellent expertise on its sugar and ethanol business, it lacked understanding of the Brazilian culture.
After the Chinese slowdown, the Latin Americans have started focussing more on India which has exceeded the Chinese growth rate and has raised its global profile under the ambitious administration of Prime Minister Modi. It would be advisable for India to to have a long term perspective and and intensify engagement with Latin America, which will appreciate friends during bad weather.
India can learn from the successful example of Brazil's use of ethanol as vehicle fuel. Ethanol blending of petrol will reduce pollution, save foreign exchange and help the sugar cane farmers and industry to manage the cyclical crisis caused by low sugar prices. India can also study the smart city programme of Bogota which has made its roads more friendly for pedestrians and cyclists besides reducing pollution and improving the urban living conditions.
Sources ECLAC report http://repositorio.cepal.org/bitstream/handle/11362/39559/S1501289_en.pdf?sequence=1
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