Latin American economic summary: 2018 (Part 1)

General Points

Across the region there has been a moderation of growth, with Argentina and Venezuela experiencing recessions. As an emerging market, Latin America is caught up in the US’s unstable trade conflict with China, and any tightening of US federal monetary policy could have a severe impact in 2019. However, Euler Hermes predicts that overall, Asia-Pacific trade will benefit from a stabilisation in China, with measures being put in place to counter any ramping up of US protectionism. Looking closer, the Latin American economic recovery of the last few years has slowed, with the recession in Argentina effecting growth rates across the region. The Andean region fared comparatively well, but there are three potentially vulnerable countries going into next year. Brazil, Colombia and Mexico are all potentially vulnerable to external developments, and are in a state of flux with their internal policies. 2019 may ultimately see a slight pickup in regional growth, with Pacific trade and many countries’ internal affairs stabilising. The effect of the US House of Representatives changing hands to the Democrats can also be seen as a stabilising factor in global trade that could heavily affect Latin America.

 

Argentina

Argentina’s economy remained in recession through 2018, and while growth is predicted by some for 2019, there is no certainty of this. The rate of recession in 2018 was around 3%, with its rate in 2019 predicted to be from 0.9%-2%. Inflation at the end of 2018 was at a rate of 40%. However, Argentina has turned to the IMF for aid, with a rumoured $50 billion financing deal, and is planning to put into place a series of deficit cutting measures in 2019. The recession was caused by a slump in farm output following a severe drought, and the currency crisis triggered by a selloff in emerging market assets combined with doubts about the government’s ability to reduce inflation. The trade balance is set to swing from deficit to surplus, thanks to higher agricultural exports and lower imports, while the fiscal deficit ought to narrow. Risks stem from possible capital flight following the Fed’s tightening cycle and the uncertain political outcome in next year’s elections. This can be seen to be a result of the development of external factor in 2018, with the US’s current instability and China’s move towards more stable trade with Latin America. Macri’s government has focused on cutting the budget deficit, approving an austerity budget in mid-November.  As part of the austerity measure, the government has delayed upcoming tax reform, but has pressed on with reducing soy export taxes.

A Bloomberg articles has highlighted that economist Michael Hasenstab has predicted that Argentina will bounce back due to its developing economy status. He has argued that resident Mauricio Macri will win re-election next year and continue to pursue policies aimed at limiting inflation, curbing the budget deficit, stabilizing the currency and stoking economic growth. Hasenstab has highlighted Macri’s stable popularity as a key factor in giving him the political power to carrying out such wide-ranging economic reforms, and so drastically change Argentina’s economic situation. The OECD Digital Government review of Argentina noted that Argentina defined a number of clear policy priorities, developed relevant initiatives, and delivered on specific policy commitments in the area of digitising government since December 2015. It highlights that the current government has focused on co-ordinating the digital initiatives of all government ministries together, resulting in a rapid increase of the Argentinian government’s digital capabilities.

 

 

Brazil

Brazil’s year was defined by the election of Jair Bolsonaro, signifying a significant right-wing shift politically. Economically, he campaigned on a pro-market basis, and with 55% of the vote has a clear mandate to reform. Moderate growth is predicted, and inflation is falling, but a complex system and left-wing opposition from unions may make deeper reform more difficult. Bolsonaro’s primary economic advisor is Paulo Guedes, known as an orthodox neoliberal economist. He has advocated selling all state-owned companies, setting an income tax rate of 20%, and aiming purely to achieve economic balance by drastically cutting state spending. In Brazil’s Congress, the new government is supported by the beef agri-business lobby. Brazil’s economic growth regained some momentum halfway through the year after being disrupted by the May-June truckers strike. GDP is seen growing 2.3% in 2019. Investment and import support for oil platforms have helped to drive this recovery, and in October unemployment dropped to a three-month low. Reform of the pension system is seen as key to stabilising Brazil’s public debt. In 2015, this pension system absorbed 11%of GDP, and reforming it sits with Bolsonaro’s pro-market ideology. It is, however too soon after the election to see what exact policy will be taken. As a result of the trucker’s strike earlier in the year, Brazil saw taxes lowered on diesel fuel, and greater price regulation of the cargo transport sector. These were a direct result of the strike, as diesel was already taxed less than petrol and went against the previous government’s policy of taxing fossil fuels where possible.

For Brazil, closer integration into the global economy would raise efficiency by exposing more firms to foreign competition and improving access to lower cost capital goods. Efficiency would also be increased by reducing domestic barriers to entry and implementing policies to reduce costs, such as easing tax compliance. A substantial overhaul of the fragmented indirect tax system, with a view towards a unified VAT, could raise the competitiveness of firms across the country. The OECD forecast for Brazil states that there will be a recovery of wage growth and banking activity, due to a new administration and a more stable labour market. This fails to take into account, however, the political uncertainty especially amongst unions Bolsonaro’s rightwards shift will bring, and while his reforms may increase competitiveness, he will not be sticking to an economic consensus. As such, reports which do not factor in the fractured political landscape are not reliable indicators. While Brazil’s external vulnerabilities are limited due to a low current account deficit and a low share of public debt denominated in foreign currency, spill-overs from a deterioration of the situation in Argentina are conceivable. Argentina accounts for around 7% of Brazil’s exports, but is a key destination for industrial exports. The possibility of rising trade tensions also bears risks for Brazil, as China and the United States are Brazil’s two major trading partners.

Mexico

The landslide victory of AMLO in the July election marked a distinct upswing in economic growth in Mexico, although his term has not been without controversy so far. His cancellation of the USD 13 billion New Mexico City International Airport (NAIM) in October via a disputed referendum spooked investors and sparked a selloff of the peso. The uncertainty created by the election, though slight in comparison to other Latin American countries this year, has lad to revised forecasts for growth. The latest, from Focus Economics, sees growth in 2019 predicted at 2.1%. inflation is however set to recede to a predicted 3.8% from the 4.8 it stood at in October 2018. AMLO’s election manifesto promise a reform of the pension system to better provide for the elderly and a huge new infrastructure plan, but may be hampered by the rising strength of the dollar, and as the burden of the foreign-currency denominated debt grows in pesos, more and more of the States’ limited financial resources must be used to service it. As Forbes notes, AMLO is no free trader, and as such his election could mark a move towards a more nationalistic stance towards oil, particularly with the growth of the above foreign debt.

He has planned to review all existing government contracts with private businesses in the energy sector, and has proposed a number of steps to wards re-nationalising oil and gas. At the end of 2018, this has not come in any concrete terms yet, as AMLO has focused more on reforming government bureaucracy, but it cannot be kept out of the equation for Mexico’s external economic relations in 2019. On a more positive note, the newly-minted United States-Mexico-Canada Agreement (USMCA) should support exports over the long-term. Analysts see growth at 2.2% in 2020. AMLO has also to a lesser extent pursued a protectionist line with regard to Mexico’s agricultural produce, a majority of which is exported under the terms of NAFTA. In March 2018, Mexico’s Congress passed a bill to regulate the fast-growing fintech market in the country, the first Latin American country to do so. The law will help prevent money laundering and corruption, and clear up uncertainties about cryptocurrencies and crowdfunding technologies. This bill is a sign that Mexico has fully embraced technology to revolutionize the local economy and solve entrenched problems like financial inclusion.