Latin America’s hopes rest on Brazil after dismal year
After a dismal year in which violent protests erupted in countries along the Andes, Venezuela’s economy descended further into chaos and a severe regional hangover persisted from low commodities prices, Latin America is pinning its hopes for 2020 on Brazil.
Economists predict that President Jair Bolsonaro’s pro-business policies will finally deliver a long-awaited recovery in Latin America’s biggest economy, boosting growth to 2.0-2.6 per cent in 2020 from around 1 per cent this year — although they concede that a similarly optimistic forecast for this year has failed to materialise.
“Brazil is the economy best positioned now to keep growing,” said Mario Mesquita, chief economist at Itaú Unibanco, the country’s biggest bank. Lower interest rates, investor-friendly reforms and an increasing willingness by business and consumers to spend should all help, he added.
Even with stronger growth in Brazil, Latin America is forecast to expand at only 1.2 per cent to 1.8 per cent next year, a slower rate than other emerging markets and well below the continent’s average growth rate of the past 10 years. Rising internal demand will be the main engine, as exports remain depressed by the global trade war and low commodities prices.
“Whether it’s 1.2 per cent or 1.5 per cent, the region as a whole is doing pretty badly,” said William Jackson, chief emerging market economist at Capital Economics in London. “The region is still struggling to recover from the commodities price shock.”
Brazil disappointed this year because companies and consumers were waiting for the new government to make its moves and a recession hit neighbouring Argentina, a key export market. Repeated interest rate cuts have pushed the cost of borrowing in Brazil down to record low levels and Mr Bolsonaro’s government has passed a landmark pension reform, boosting confidence.
“There will be a tipping point where people abandon their caution and invest,” said Gustavo Rangel, chief Latin America economist at ING in New York. “A lot of the caution is over the question: “Is it going to last? . . . But it should be an unusually sustainable recovery.”
The picture is much bleaker in Mexico, the region’s second-biggest economy. Growth has stalled after leftwing populist president Andrés Manuel López Obrador took power pledging to tear up 40 years of free-market policies, which he said had failed to deliver prosperity. His solution is to boost state investment in the oil industry, pushing out the private sector, and to pour money into grand infrastructure projects in the country’s neglected south-east.
Most forecasters expect Mexico to rebound slightly next year and grow around 1 per cent as government spending picks up but they warn that Mr López Obrador could turn more radical if his policies fail to deliver the faster growth he has promised and his supporters become restless. “It is typical in Latin America that when your policy is proved wrong, you don’t revise it, you double down on it,” commented ING’s Mr Rangel.
“In Mexico there is a widening gap between domestic sentiment and investors’ perception,” noted Citibank in a research paper. “A majority of Mexicans still love Amlo [Mr López Obrador] and have high expectations . . . Still, the domestic private sector continues to be worried as evidenced by low confidence and dormant investment.”
One-time star performer Chile is casting a long shadow over the rest of the region after two months of riots by protesters demanding more social spending and greater equality. Ecuador and Colombia were also shaken by demonstrations in recent months and investors worry that pressure from the streets will lead to unaffordable spending promises at a time when growth is weak and government budgets are already under strain.
“Outside Brazil, it’s a very dismal picture,” said Alberto Ramos, chief Latin America economist for Goldman Sachs. “The numbers from Mexico are very weak, in Chile the economy will struggle to grow one per cent and Argentina is still a big, big question mark.”
Forecast to be among this year’s fastest-growing Latin American economies, Chile is now flirting with recession. The economy contracted faster in the first weeks of the riots than at any time in the past 20 years, including the aftermath of a severe earthquake in 2010, according to recent data.
Growth forecasts for next year have been slashed from over 3 per cent to nearer 1 per cent as investors pull back, and beleaguered President Sebastián Piñera tries to spend his way out of trouble with a $5.5bn stimulus package and promises of a new constitution.
Doubts also hang over Argentina, where the incoming Peronist government must renegotiate over $100bn of foreign debt, pull the economy out of recession and satisfy supporters’ demands for higher wages and controls on prices. Most forecasts predict that the recession there will moderate in 2020 but growth will not return until the following year.
At the other end of the Andes, there is more optimism about Colombia, despite a wave of street protests there. Most forecasters expect it to be one of the region’s top performers next year, growing at between 3.0 and 3.5 per cent, similar to Peru. The economic collapse in Venezuela, where President Nicolás Maduro’s socialist revolution has led to GDP shrinking by two-thirds since 2016, is forecast to moderate next year, with output falling by just 10 per cent.
Overall, though, optimism is in short supply. William Jackson, chief emerging markets economist at Capital Economics in London, compared Latin America’s performance to “a drunk stumbling along — it doesn’t take much to make him trip up”.