Thursday, August 01, 2019

Latin America's modest economic growth in this year and decade

 Latin American GDP is forecast to grow by a modest 0.5% in 2019, according to a report released by UN ECLAC this week.

The decrease in growth is due to domestic reasons such as lesser investment, reduction in exports, fall in public spending and private consumption.  Growth was also affected by the global environment of fall in commodity prices, slow down by China which has reduced imports and trade wars unleashed by President trump.

Latin America started this decade with the highest growth rate of 6.2% in 2010. It came down since then and even went into negative 0.2% in 2015 and 1% in 2016. It recovered to positive 1.1% in 2017 and 0.9% in 2018.

The region will end this decade with a modest average growth rate of 1.9% as against 3.15% in the last decade.

Dominican Republic will have the highest growth in 2019 at 5.5%, followed by Panama 4.9% and Bolivia 4%. Brazil, the biggest economy will see a growth of 0.8% and Mexico, the second biggest 1%. Colombia, Peru and Chile will grow around 3%. 

Bolivia has a cumulative growth of 44.3% in the last nine years. With the prediction of 4% growth in 2019, Bolivia will end the decade with an impressive 4.83% average growth. The lowest growth in the decade was 4.1%.  

What is interesting is that this has been achieved by the Leftist government of Evo Morales. He has been in power for the last 14 years since January 2006. The cumulative GDP growth in this period is 67.2% at an average annual growth of 4.8%. This is not only a commendable achievement. This kind of sustained growth and stability for 14 years at a stretch should be a record in the history of Bolivia.

It is not just growth. It is an impressive Inclusive Growth. The socialist government of Morales has reduced poverty and inequality in the last 14 years much more than any other country in Latin America. This is a success story of Socialism in the contemporary democratic history of the world. Unfortunately Chavez and a few other Leftist have given a bad name to socialism with mismanagement of the economy. 

Unsurprisingly, Venezuela will suffer contraction of 23% in 2019. But surprisingly, Argentina too will face economic contraction of 1.8% ( although it is better than the 2.5% contraction in 2018) while Nicaragua’s GDP will shrink by 5% after the 3.8% drop in GDP in 2018.

The region’s average inflation is expected to climb to 8.1% in 2019 from 7 % in 2018 and 5.7% in 2017.  This is after excluding Venezuelan inflation which reached 280,000 percent in 2018. Again, Argentina has an unwelcome surprise. Its inflation reached 56.8 % in May 2019 from 26% in May 2018

On the positive side, FDI in Latin America went up in 2018 to 143 billion dollars from 119 bn in 2018. Brazil received the highest FDI amount of 74 bn, followed by Mexico 26 bn, Peru 6.5 bn, Colombia 6.2 bn, Panama 5.4 bn, Chile 4.1 bn and Dominican republic 2.5 bn.

The total exports of the region crossed a trillion dollars to 1.08 trn in 2018 from 995 billion in 2018. The imports also passed the trillion mark reaching 1.06 trn in 2019 from 961 bn.  The region maintained a marginal trade surplus in 2019, as in most of the years in the past.

The foreign exchange reserves of the region in May 2019 was 879 billion dollars, a comfortable figure. Venezuela’s reserves were just 7 billion dollars, not sufficient to cover even essential imports. 

Gross external debt of the region stood at 2 trillion dollars in 2018, which is just 40% of the total GDP. This ratio is reasonable and manageable.  The only exceptions are: again, Venezuela and Argentina. Venezuela has 151 bn external debt but does not have the capacity to pay even interest due to severe shortage of foreign exchange. The US sanctions on venezuela’s oil exports has the hit the country hard since oil export is the mainstay of the Venezuelan economy. Argentina has received 38 billion dollars of credit from IMF as part of the package of 57 billion dollars. Repayment of this large debt will force Argentina into austerity with public expenditure cuts in the coming years.

The Argentine economy which is precarious at this moment will know its direction in the elections in October. The centre-right President Macri is facing tough challenge from the leftist Peronist challenger ex-president Cristina Fernandez who has gained strength because of the poor economic performance of the Macri government.

In the October 2019 elections, President Morales will seek a fourth term, which is a violation of the limit on mandate according to the constituition framed by Morales himself. It would be better if he stands down and let somebody else take over this time. This will safeguard his glorious legacy. But he insists in continuing in power, following the disastrous example of Chavez and Ortega. Pity..

The Venezuelan economic situation is getting worse and becoming desperate after the US sanctions on oil exports. Although the threat of US military intervention is now ruled out, Venezulan political crisis might drag on and lead to further misery for the population.

If President Trump gets reelected in 2020, the region will continue to face challenges of growth.

But there is a surprising positive news. Bolsonaro, the extremist right President of Brazil started off with dangerously negative statements on Mercosur, China and globalization. But the neoliberalists in his government have stopped these pronouncements becoming policies. In a dramatic surprise, Mercosur has just concluded a Free Trade Agreement with European Union. The negotiations were going on for the last twenty years indifferently and it looked hopeless. Now the Brazilian government has shown interest in more Mercosur FTAs with Canada, Korea, EFTA and even USA. These FTAs will open up Brazil and Argentina which have remained as closed markets for a long time. 

Despite Latin America’s meagre economic growth in 2018-19, India’s exports have increased by 9.6% in the period April 2018-March 2019 reaching 13.16 billion dollars from 12 billion last year. UPL, the largest Indian agrochemical company, has increased its business to 1.2 billion dollars in Brazil and 1.6 billion in Latin America, overtaking their 0.9 billion Indian business. 

Of course, the US sanctions has forced Reliance and the public sector oil companies to stop oil imports from Venezuela. However some oil keeps coming through the Russian oil company Rosneft which has invested in Venezuelan oil production and acquired the Essar oil refinery in Gujarat. In any case, India can buy more oil from Brazil, Mexico, Ecuador and Colombia, the other oil exporters to offset the loss of Venezuelan oil.

The Latin American business is focusing on India more seriously after the Chinese slow down, Brexit uncertainty in Europe and the Trump trade wars. 

Although the region's economic growth in this decade is just 1.9%, India's exports have doubled from 6.2 billion dollars in 2009-10 to 13.16 bn in 2018-19. This could be doubled if India explores seriously and systematically the 5 trillion dollar market of Latin America with a middle income population of 600 million people. 

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