international analysis and commentary

A region that may take a path to growth – if all goes well


2018 was an eventful year for Latin America. Mexico and Brazil, the two biggest economies of the region, held high-stakes elections that radically overhauled the political orientation of the government in power. Meanwhile, Argentina struggled with its economic recovery, receiving the biggest-ever bailout package delivered by the International Monetary Fund (IMF). Venezuela’s crisis is far from over. A massive flow of Venezuelan refugees sought asylum in other Latin American countries, threatening to destabilize the entire region.

However, 2019 will be even more eventful. The region will need to face its unresolved challenges, as well as deal with new ones. Argentina, Bolivia and Uruguay will vote for their next presidents in October, redesigning the political equilibrium in the region.

From an economic point of view, despite increasing uncertainty, Latin America’s economy is likely to perform better than in 2018 – rising from a 1.7% average growth in 2018 to 2.3% in 2019. Nevertheless, the region will still be deeply exposed to risks arising from external factors such as growing interest rates in the US, trade tensions between the US and China and fluctuations in the global demand of commodities. Internally, risks will remain, especially those related to domestic policy uncertainty due to new governmental structures.

A view of the Panamerican road


Mexico: Obrador between Trump’s Great Wall and investors’ confidence

For several years, Mexico has recorded stable macro-economic indicators: public debt has not risen concerns, economic growth has been relatively positive and inflation has been manageable. Yet, last July, Mexicans elected a president who was not a candidate for the two traditional parties that have alternately ruled the country over the last one hundred years. Andrés Manuel López Obrador’s victory indeed embodies Mexicans’ disappointment with the neo-liberal economic development model that has been used in the country since the 1980s. Despite good economic performance, poverty and inequality in Mexico have not gone down. The number of poor people has increased from 50.5 million in 2008 to 55.6 million – for a population of 127 million – in 2016.

Investors and analysts have been concerned about whether Obrador’s administration will pursue non market-friendly policies, promoting nationalization of natural resources and increasing public expenditure. During his electoral campaign, Obrador promised larger social policies to support the poor – such as increasing the minimum retirement benefits, investing in public subsidies for farmers and improving financial support for students. However, to fund the promised reforms, the government would need to annually invest 2.5% of GDP. These policies – according to Obrador – will not be funded by an increase of taxation or public debt, rather the state will expand its public finance with a deeper fight against corruption which negatively affect the economy by 2% of its annual GDP.

In fact, Obrador’s first three-year budget presented in late December was positive, as it showed a more conservative fiscal management orientation, reducing public expenditure but, at the same time, allocating more funds for social benefits.

If Obrador retains his moderate approach, finding a compromise between macroeconomic equilibria and stronger social services without sparking a loss of confidence of international markets, Mexico may not suffer negative consequences for its medium-term growth. On the contrary, the country may surprise us.

Will Bolsonaro make Brazil great (again)?

In recent years, Brazil has experienced one of the worst recessions in its history. Between 2014 and 2016, the country lost 8% of its GDP, with a 9.2% decrease in per capita income. The unemployment rate reached 12.6% in 2016. Jair Messias Bolsonaro won the election promising to drastically reform Brazil’s economy and to properly tackle systemic corruption and violence.

Brazil desperately needs structural reforms. However, there is much uncertainty over which specific policies Bolsonaro will implement to pursue his economic platform, grounded on privatization, fiscal consolidation, pension reforms and slimming-down the state. As Bolsonaro’s party does not have a majority in the parliament, he will need to put extra effort into gaining support from other parties to pass his reforms.

The pension reform will be a crucial test and a priority for Bolsonaro’s new government. In 2017, the state pension system recorded a $84.173 billion deficit, which was around 4% of GDP. Without changing the rules, the federal pension bills will reach 19.5% of GDP in 2040. To approve a pension reform, Bolsonaro will need 60% of Congress’ vote or a constitutional amendment. Given how historically unpopular it was to raise retirement age requirements and cut benefits, it will be hard for the new President to pass such a reform. Also, his own electoral base in the military would not support any radical change of the current pension system, as it is one of the biggest beneficiaries.

Investors, who have cheered for Bolsonaro’s market-friendly orientation, will not be too patient. Market sentiments about Bolsonaro’s presidency could shift if he fails to deliver serious reforms in the first months of his mandate. Although privatization of state assets will attract foreign investments, if Bolsonaro raises barriers against Chinese goods and investments, one of the main trading partners of the country, markets may react badly.

Argentina and other stories to watch

When Mauricio Macri won the election in 2015, he promised to end the country’s volatility, correcting macroeconomic imbalances and, eventually, reaching stability. Yet the country is far from being safe and sound. The Argentine peso lost a third of its value in 2018, forcing the government to demand a $57 billion bailout from the IMF and implement new austerity measures.

Even though in 2019 the country will enjoy a competitive exchange rate, a better fiscal equilibrium and positive real interest rates, the IMF estimates that GDP will contract by 1.6%. In April 2016, the poverty rate increased to 32.6%, putting pressure on Macri’s plan to further reduce public spending. If the economy does not show any improvements before the coming election in October 2019, Macri will risk losing power, leading the country back to Peronism.

Colombia and Peru are expected to experience good growth in 2019. Bogota is estimated to increase its GDP by 3.5%, driven by firm oil prices and greater investments in the extractive industry. However, country exports remain highly vulnerable to external factors that could undermine its economic performance. On another note, Lima is likely to record the fastest rate of growth in the region at 4%. The country will benefit from large private mining investments, which are estimated to climb to $6 billion, recording an increase of 30% compared to 2018. Despite the increase, there are risks arising from political and social opposition to new mining projects, challenging investment developments.

Ecuador’s President Lenin Moreno, instead, is likely to slash public spending to improve his country’s fiscal account. Otherwise Ecuador will risk needing IMF assistance to achieve its 2019 financing plan. Quito will also need to improve its debt burden which is heavily reliant on external financing, especially on loans-for-oil deals with China.

Overall, risks due to adverse external circumstances will still heavily affect the region’s growth. While Argentina, Venezuela and Nicaragua are likely to remain in recession over the next twelve months, other countries are expected to grow – yet below their potential.

2019 may be the year in which the region takes a new path of growth. Pro-market governments in Brazil, Peru, Colombia and Chile could finally implement the structural reforms needed to boost investments and productivity and, eventually, to drive the region away from recession.