There are reasons to be optimistic about Latin America this year – but temper that optimism.
As we approach mid-year, it is a good time to take stock of how the economies of Latin America and the Caribbean (LAC) are faring, especially since expectations in late 2013 were that 2014 would be a “Year of Recovery.
For those who believed in January that LAC would witness accelerated growth this year, results to date have been disappointing. In fact, the region has experienced much slower growth than the past two years. Nevertheless, it would be fair to call Latin America’s economic performance a mixed bag, with notable winners and losers and a lot of countries in between.
According to the latest IMF report on the Western Hemisphere, GDP growth last year dropped from 3 percent to 2.75 percent and will slip further this year to 2.5 percent. Weaker domestic demand, lower commodity prices, tighter financial conditions, and supply constraints will slow recovery. While external demand will pick up, investment growth will slow and political uncertainty (especially in the largest nations of the Hemisphere) will hamper growth despite a faster recovery in the advanced industrialized nations.
How the region fares for the rest of the year will be influenced heavily by the “market makers,” so to speak: Brazil, Mexico, Colombia, and Peru.
In the case of Brazil, most economists have cut their 2014 growth forecast to 2 percent, as the central bank raises interest rates to tame inflation. Low productivity, declines in investment and business confidence, a high debt-to-GDP ratio, falling competitiveness, and high borrowing costs do not bode well for Brazil. The government has spent heavily preparing for the Olympics and World Cup; these costly "beauty contests" will produce little lasting economic impact on the nation. A severe recession (post-2016) could lead to a major fall in the real and, therefore, Brazilian tourism to Miami and a sell-off of Brazilian-owned condos in South Florida.
Mexico, on the other hand, is and will be the bright light among the big market economies, expecting to rebound to 3 percent growth this year propelled by loose fiscal policy, the U.S. economic recovery, and new investments due to reforms of the energy and telecom sectors.
Three other nations that have excellent prospects are Colombia, Peru, and Panama. Among the first two, private consumption-led growth, low unemployment, and continuing demand for commodities, albeit at lower levels than previously, are driving growth. In the case of Panama, financial services, the canal expansion project, and construction and real estate are fueling that economy. As for the Caribbean, the region is and will continue to be dependent on tourism, remittances, natural resources, and agriculture, not to mention the drug trade in certain countries.
Looking beyond the macroeconomic numbers, there are other forces and drivers that are shaping the outlook for the region. One vitally important one is the tapering of U.S. Federal Reserve policy which will channel more money into U.S. treasuries. Commodity producing nations with high public debt will be seriously affected, prompting them to raise interest rates. This situation has been brought about by the economic slowdown in China and will impact Argentina, Brazil, Chile, Peru, Ecuador, and Venezuela. This situation will not be remedied anytime soon as China is faced with an increasingly serious debt problem. At the municipal level $3 trillion (30 percent of GDP), at the federal level 53 percent of GDP -- and corporate debt is twice that amount. Wealthy Chinese have sent billions of dollars offshore, a sign of their waning confidence in their country's economy.
In the social and political spheres, urban crime and violence as well as political instability will continue to drive capital flight (human as well as physical) from Venezuela and Argentina. South Florida will be the primary beneficiary of these unfortunate circumstances. On the positive side for the region, poverty is declining, standards of living are improving, and explosive growth among the middle class, upper middle class, and increased middle-class purchasing power of the lower classes, combined with greater access to credit, have created a consumer "fiesta". Travel and tourism, within and outside the region, have made big gains, and business and consumers are optimistic about the future.
World Bank chief economist for Latin America and the Caribbean, Augusto de la Torre, speaking at the University of Miami’s Ninth Annual Latin American Symposium, asserted that the region is at a crossroads but that its political economy has a better immune system than in the past. The message? Accelerate, broaden and deepen institutional reforms—economic, political, social, and legal—so that 2015 can actually become the “Year of Recovery.”
Jerry Haar is a professor of management and international business at Florida International University and a senior research fellow at Georgetown University's McDonough School of Business.