- Political unrest has the region in its grip
- Income inequality, weak growth and corruption fatigue are key drivers of protests
- Economic growth finally seems to be picking up, but remains modest
- Slight acceleration in growth in Brazil and Mexico, but Argentina remains in recession
- Despite unrest, Chile, Colombia and Peru still have the most favourable growth outlook
- Pressure on exchange rates could limit scope for monetary easing and constrain recovery
- Downward risks remain considerable
Recovery stuttering again in 2019
As 2019 began, we thought growth in Latin America would finally pick up again, after a number of disappointing years. The region now looks to be heading for a contraction of 0.4%. The main factor behind the disappointing growth in 2018 was the increased risk aversion towards emerging markets in the light of the many global uncertainties. This in turn prompted a sharp depreciation of many currencies and a tightening of the monetary reins. Political uncertainty was also a factor in 2018, with elections in Brazil, Colombia and Mexico. Contrary to expectations, the risk aversion ultimately increased further in 2019.
Sentiment in Argentina, for example, completely reversed in the run-up to the elections, as it became ever more clear that the Peronists were about to take over the baton from President Macri. The political crisis in Peru dragged on, with numerous clashes between President Vizcarra and the Peruvian parliament. This culminated in a constitutional crisis in September, with parliament being dissolved in anticipation of new elections in January 2020. In Venezuela, at the beginning of this year, the population seemed to be massively supporting the opposition leader and self-appointed interim president Guaidó. In Bolivia, President Morales had to flee the country in November after fierce protests against his re-election, and in Ecuador reforms were reversed under pressure from protests.
Chile and Colombia were also hit by intense political and social unrest in the last months of 2019. The political and social unrest which tormented the Andes countries in the fourth quarter of this year led to a slowdown in growth and currencies across the region weakened against the USD. In addition to the political developments, the continuing uncertainty regarding global developments, such as the trade conflict with the US and the associated increase in risk aversion, also kept business and consumer confidence in the region at low levels. This combination of external and internal factors prompted us to reduce our growth forecasts for 2019 several times for many Latin American countries.
Leaving aside Venezuela, the picture looks slightly better
As in recent years, the numbers are distorted by the rapidly escalating crisis in Venezuela. The fourth largest country in the region saw its economy contract for the sixth year in succession. According to figures from the EU, the Venezuelan economy has shrunk by almost 10% over the last decade, with GDP per capita falling from over USD 10,000 in 2010 to less than USD 2,000 today. If Venezuela is left out of the picture, growth in the region slowed from 1.3% in 2018 to 0.8% in 2019.
Cautious optimism for 2020 and 2021
Based on our moderately positive growth scenario for the global economy, a concomitant slight increase in commodity prices and a further easing of the monetary reins in the developed economies (see also: Global outlook – Initially weak, then better), we expect growth in Latin America to improve from -0.4% in 2019 to 1.3% in 2020 and 2.3% in 2021. Leaving out Venezuela, our growth forecast for 2020 is 1.5%. Consumption is expected to be the biggest driver of growth in most countries. Investments will also pick up slightly in several countries, including Brazil, but not enough to lead to a genuine improvement in the low investment ratios.
The slowdown in growth over the last year had a positive impact on inflation in many countries and also reduced the current account deficits. This created scope for many countries to push ahead with interest-rate cuts, in line with the lower interest rates in the developed economies. Brazil, in particular, benefited from this, with its key rate now having reached a historical low of 4.5%. While the end of the interest-rate cuts appears to be coming into view in most countries, the further easing of monetary policy that is on the cards in the developed economies means that in most cases there will in any event be no need for interest rate hikes and that monetary policy can remain accommodative. However, there is no immediate prospect of a strong acceleration in growth, and growing structural problems, such as the poor state of the infrastructure, the low savings and investment ratios and the low labour productivity due to poor training, will also continue to temper growth in the medium term.
Considerable downward risks remain
The downward risks remain considerable in 2020. For most countries in the region, the risk of major exchange rate falls driven by the increased risk aversion will continue to cast a shadow over the market in the near term. This limits the scope for (further) interest-rate cuts and could even force countries to raise rates. Political risks also remain; although calm appears to have been restored in most countries thanks to government promises on issues such as reversing austerity measures and agreeing to meet political demands, the underlying causes of the unrest, such as the widespread income inequality and poor government provisions, have not been resolved overnight. Consumer and producer confidence are still low in most countries and could be dented further going forward.
Slight narrowing of differences across the region
We think that Colombia and Peru will continue to deliver the strongest growth in the region, with projected GDP growth of 3% in 2020, followed by Chile with growth of 2.5%. However, these forecasts are hedged in with great uncertainty. Chile went through a very strong third quarter, but the fourth quarter is likely to be much weaker. Still the healthy state of the public finances means that Chile has scope for fiscal stimulus measures. Assuming that calm is restored next year, we are therefore projecting an acceleration in GDP growth. Colombia and Peru also enjoyed a strong third quarter, and the influence of the political unrest on the economy appears to be much more modest here. We accordingly think this trend will continue next year.
There was a particularly marked slowdown in the first half of the year in Peru, but year-on-year growth bounced back in the third quarter to 3%, and the indicators for the fourth quarter are also positive. Strong investments in the mining sector should provide a further boost for growth. With growth expected to accelerate from 1% to 2%, the Brazilian economy is expected to show the strongest recovery. The approval of the long-anticipated pension reforms has led to a marked improvement in business confidence. As a result, the influence of the lower interest rates will not only be felt in the form of growing consumer lending next year, but will also contribute to an increase in corporate investment.
The outlook for Mexico is once again uncertain. Economic growth stagnated in the last three quarters of 2019. Business confidence was low owing to the persistent uncertainty surrounding the trade relations with the US, but also the more centralised control of the economy by the left-wing president López Obrador. However, López Obrador remains popular and social unrest has thus far been limited. We accordingly expect the securing of a new trade agreement between the US, Canada and Mexico to provide a boost for economic growth in 2020, after the sharp fall in 2019 to 0.5%, to a still modest 1.5%. Brazil is the most likely of the five countries mentioned above to deliver positive growth surprises. Since the recession in 2015/16, there has been virtually no genuine recovery, and the level of underspend in the economy remains high.
Argentina to remain in recession in 2020
Among the ‘big six’, Argentina is the only country which looks to be heading for a further contraction in 2020. The electoral victory by the left-wing Peronist presidential candidate Fernandez at the end of October delivered an even greater blow to the already low consumer and producer confidence. The new Minister of Economy Martin Guzman has announced that he is in negotiations with the IMF and intends to talk to bondholders with a view to agreeing a restructuring of foreign debt.
Whether these negotiations will be successful is highly uncertain, however, and there are major fears that the result will be a chaotic debt restructuring process with the potential for considerable debt cancellation. Although capital controls have done something to halt the slide in the currency in the recent period, the CDS spreads are still above 10,000 and credit rating agencies have assigned the lowest possible rating to the country. Accordingly, the economic outlook is highly uncertain; at this point in time, we are forecasting a 2% contraction in GDP in both 2019 and 2020, with a slight recovery in 2021.
Not overtly poor on average, but great inequality
Although there are some country-specific elements in the protests that have broken out in many Latin American countries, one common denominator that appears to underlie the protests is public anger about aspects such as income inequality, corruption, the poor state of education and healthcare. The worrying state of most of the regional economies, coupled with reform fatigue, is probably also a trigger.
As regards income inequality, although GDP per capita in Latin America is a good deal higher than in Asia and Africa, measured using the Gini Index Latin America is one of the most unequal regions in the world. The Gini Index (1 = total inequality, 0 = total equality) has generally fallen over recent years, though remains high at 0.47. Among the six large countries, Brazil, Colombia and Mexico are above this average while Argentina, Chile and Peru are just below it.
The recently published annual report on social conditions in the region by the UN Economic Commission for Latin America and the Caribbean (ECLAC) is also interesting. The report shows that the social progress made on a number of fronts in the first decade of this century appears to have been partially reversed since 2015. For example, the share of people in the region living below the poverty line fell from 45% to 28% between 2002 and 2014, but increased again to 30% in 2018. Most of this increase was caused by Venezuela however and, to a lesser extent, also by Brazil and Argentina; in the other major countries, the reduction in the poverty rate continued. The ECLAC data also show that, despite the substantial growth in the share of middle incomes between 2002 and 2017, more than half the population (56%) are still on low incomes (ranging from extremely poor (11%), poor (20%) and low income but not poor (26%)). Half of the more than 40% who are classed as being in the middle-income group fall into what ECLAC describes as the lower-middle income category. These are the people who are at greatest risk of dropping out of the middle-income group. An additional issue is that those wanting good education and good healthcare have to pay a very high price for it, which means the ultimate cost of living is extremely high, especially for those on middle incomes. The report also shows that greater inequality is generally accompanied by lower labour productivity. From this perspective alone, continuing the downward trend in the Gini Index could be a positive development for the countries in the region.