Cash & Investment Management

Latin America Update – Q2 2017

Tuesday 13th June 2017

After two consecutive years of negative annual GDP growth, prospects for Latin American economies appear to be picking up, with modest growth forecast for 2017 across the region. A more positive external environment for risk assets has helped to ease currency weakness in particular countries, with a subsequent reduction in inflationary pressures. This, combined with a general pick-up in commodity prices, has provided support for many of the region’s economies going forward.

Brazil’s likely emergence from a multi-year slump is welcome news for the region as it accounts for approximately one third of Latin American GDP. The country had been one of the biggest laggards with a contraction of 3.6% in 2016 (and a similarly dismal figure for 2015). Such a drag proved to be too much for growth in other countries to offset and the region as a whole experienced a contraction of around 1% in 2016.

The political leanings of the region appear to be at an inflexion point also, with voters increasingly rejecting left-wing leaders. Presidents who are politically right-of centre now lead two of the biggest countries in the block, Brazil and Argentina.

Mexico

The Mexican economy has largely shrugged off the external threats posed by the Trump administration’s trade policies to post quarter-on-quarter growth of 0.7%. The finance ministry subsequently raised its estimates of 2017 growth to 1.5-2.5% from 1.3-2.3%. Whilst the country is susceptible to further economic volatility, the signs are pointing to a moderation in the stance of its neighbor. Plans for a border wall were scaled back after budget negotiations; the border adjustment tax proposal – a plan to tax imports rather than exports – appears to be dead and the pledge by Mr. Trump to ‘tear up’ the current North American Free Trade Agreement has evolved into a renegotiation of current terms. However, there are still concerns surrounding the Mexican car manufacturing industry, with a number of big US carmakers cancelling investment in Mexican plants after fierce criticism from President Trump and pledging to return lost production to the US.

Brazil

After a promising start to his reform process, interim president Michael Temer became embroiled in a fresh corruption scandal amid claims that he approved a bribery payment. The reaction from the markets was severe with the Brazilian stock market falling 8.8% on the day. An initial fall of over 10% triggered circuit breakers that stopped trading just minutes into the trading day. The Brazilian currency, the Real, also suffered, with a fall of around 8% on the day. If confirmed to be true, the allegations raise the unpleasant prospect of back-to-back impeachments after the removal of Dilma Rousseff. The reaction of the markets suggests that the removal of Mr Temer is a distinct possibility and, more importantly, that crucial reform bills due to go before Parliament are in danger of stalling. Approval ratings in the 20% range imply significant levels of disillusionment with the current administration and the unemployment figures bear this out, recently hitting a record high of 13.6%, (approximately double pre-economic crisis levels).

Despite these latest events, Brazil’s longest recession in history may have ended in the first quarter, with the economy recording quarter-on-quarter growth of 1% (after eight successive quarters of negative growth). The IMF and the World Bank forecast modest expansion for 2017, with growth in the region of 0.25-0.5% expected.

Argentina

President Mauricio Macri’s Centre-right Republican Proposal Party was elected on a reformist mandate, charged with rehabilitating the Argentinian economy after many years of pariah status. Whilst their first year in office saw a continuation of negative growth, the central bank forecasts GDP growth of 2.7% in 2017. The market-friendly government is trying to re-attract foreign investors to the country and embark on infrastructure spending to maintain the economic revival. Macri’s reforms include gradually reducing the deficit, allowing the Peso to float, removing energy subsidies and the dismantling of protectionist policies such as taxes on some exports. These policies caused some short-term pain, cuts to the public sector caused a spike in unemployment and inflation rose after the removal of energy subsidies. However, the reforms have restored some credibility and this has allowed the government to re-access the international debt markets.

Venezuela

A country in the midst of an economic crisis. The IMF estimates that the economy shrank by 8% in 2016, inflation is circa 500% and climbing and unemployment is approaching 20%.  The current state of the economy stems from the country’s inability to wean itself off a dependency on oil, which accounts for 95% of exports and 50% of total GDP. A period of lower oil prices has hampered efforts to maintain a relatively generous social welfare programme and state subsidies, leading to an erosion of support in the government’s core supporter base and an increasingly authoritarian style as it attempts to cling on to power, predictably leading to protests and further economic paralysis.

Foreign companies have largely ceased operations in Venezuela for fear of expropriation. According to the Financial Times, US data show that in 2016 US net foreign direct investment in Venezuela turned negative for the first time since the series began in the early 1990s. Last year, Venezuela was the only country with which the US had negative net income flow among the 58 countries for which data are available.