Latin America is projected to face a GDP contraction of 0.6 percent in 2016, after having suffered a decline of 0.4 in 2015, according to the 8 April 2016 report of ECLAC, the UN Commission for Latin America and Caribbean. The region has been sliding downwards in this decade, after reaching a peak GDP growth of 6% in 2010. The only consolation is that the economic contraction in 2016 is half of what the region had suffered in 2009, in the wake of the financial crisis. But then the region bounced back to a spectacular growth of 6% in 2010. Can the region repeat this magic in 2017? It does not look so. The forecast for the next year and in the coming 2-3 years is only modest growth.
The main contributors to the fall in growth of the region are Venezuela and Brazil whose GDP are expected to shrink by 6.9% and 3.5% respectively in 2016. Argentine GDP is forecast to decline by 0.8% and Ecuadorean one by 0.1%. With four countries in the negative growth zone, South America as a whole is set to suffer a GDP decline of –1.9 % in 2016.
On the other hand, the Pacific Alliance members will enjoy some growth: Mexico- 2.3%, Colombia-2.9%, Chile-1.6% and Peru-3.8%. Central America will have a better growth in the region with 3.9%. Panama will have the highest growth rate of 6.2%, followed by Dominican Republic- 5.5% , Nicaragua- 4.6% and Bolivia-4.5%.
The reasons for the poor performance of the economies of the region are the same ones which had caused the decline last year: fall in the global demand and prices of commodities, the sluggish global growth, the weak domestic consumer demand and most importantly, the slow down of the Chinese economy. According to the April 2016 annual report of the Inter American Development Bank, every one percent fall in Chinese growth, brings down the growth rate of Latin America by 0.6%.
Mexico and Central America, whose markets are oriented towards the US, have been somewhat insulated from the Chinese slowdown and benefited from the stronger US growth. In fact, Mexico has become more competitive after the rise in Chinese wages. Manufactured goods account for over 75% of Mexico's exports. A number of foreign and domestic companies are increasing their Investment in Mexico to sell their products to its NAFTA partners US and Canada as well as to the 40 plus countries with whom Mexico has Free Trade Agreements. Ninety percent of Mexico's trade is with its FTA partners.
In the case of Brazil and Venezuela, the economic problems have been aggravated by the ongoing political crisis which has paralyzed economic policy making and stopped reforms and bold policy initiatives needed at this time. The political situation in both the countries could get much worse in the coming months and add to the economic problems.
There is a possibility of impeachment of the Brazilian President Dilma Rouseff. More business and political leaders could be convicted in the Petrobras corruption scandal. This has already affected seriously the ongoing projects and has dried up credit for companies under investigation. The firms involved in the scandal are downsizing their operations and selling assets to stop the bleeding caused by the free fall of their share values and to repay debts. Petrobras, which had the largest corporate investment plan in the world in 2010 with over 220 billion dollars has drastically cut its investment budget. The multinational oil companies are already salivating to feast on the carcass of Petrobras, which was a pride of Brazil and a global leader in deep sea exploration and production.
The Venezuelan President Nicholas Maduro is absolutely clueless to stop the deterioration of the economy. He has no control over his own ministers, military officials and party leaders who are trying to make as much money as they could make before the ship sinks. Maduro faces aggressive confrontation at every step from the Congress controlled by the opposition which is pulling out all the stops to overthrow his government. The fall in oil prices has handicapped him from resorting to any more populist polices to please the poor, who are angry like the rest of the population with the empty supermarket shelves and the endless queues for bread and toilet paper. Inflation is in three digits and the black market exchange rate is hundred times more than the official rate of 10 Bolivars to a dollar. Shortage of electricity has forced the government to declare three day weekend holidays to save energy. Cuba, the godfather of Maduro has ditched him as part of its process of normalization of relations with US. Cristina Fernandez and Lula, the ex-presidents of Argentina and Brazil who used to offer external support have lost power. The new rightist Argentine president Mauricio Macri is openly opposed to the Chavista regime. The current Brazilian President Dilma Rouseff is fighting for her own survival and is least bothered about the fate of Venezuela. This makes Venezuela ripe and vulnerable for external destabilization with support from the domestic oligarchy. But the ugly truth is that there is absolutely no hope for Venezuela as long as the Chavistas are in power. The country needs liberation from the Chavism as early as possible.
The Argentine economy which was driven into a mess by President Cristina's disastrous mismanagement in her second term, has already started the process of recovery under the new President Macri. However, Ecuador, being dependent on oil exports, will continue to be affected as long as the oil prices remain slow.
The continuing bear market and lower prices of commodities and the Chinese slowdown forecast for the near future, do not augur well for a quick and robust recovery of Latin America within this year. The depreciation of most of the currencies of the region will continue to dampen their global imports.
But the good news is that no Latin American country is going bust like Greece. Nor does any country need emergency IMF rescue. Except Venezuela, all the other countries of the region have relatively better macroeconomic fundamentals and have developed the resilience to withstand shocks and downturns better than in the past. The inflation ( average for the region-5.5% in 2015) and external debt ( 39% of GDP which is safe) are under control except for Venezuela and to some extent Argentina.
India's trade with Latin America will decline in 2016 in view of the poor performance of the region's economies and the fall in its foreign trade. However, it will be the imports which will fall more ( in terms of value, not volume) than the exports. India will benefit from the lower prices of crude oil, minerals and edible oil which are its main imports from the region. For those Indian companies interested in acquisitions in the region, this is a good time to take advantage of the low price of assets. This is the reason why Brazil continues to attract the largest FDI in the region, despite the economic problems.