Download Latin America: Regional Profile

Latin America: Regional Profile
Economic Profile | February 2016
KEY POINTS
 Latin America’s real GDP is expected to grow by 0.3% in 2016. Private final consumption should
grow by 0.5% in real terms.
 Argentina’s economy will continue to struggle in 2016 with real GDP contracting by 1.1% after gains
of just 1.4% in 2015. Exports are falling sharply owing to the drop in commodity prices. Argentina’s
default on its debt adds to its problems by depressing the currency and deterring foreign
investment. However, there is growing optimism that a new government will reverse the
government’s interventionist policies and resolve the holdout saga with the US hedge funds.
 Brazil’s real GDP contracted by 3.7% in 2015 and another decline of 2.7% is predicted for 2016. The
contraction is partially due to a slowdown in China which has undermined demand for Brazil’s
commodity exports but it is broadly based, affecting virtually all sectors. The corruption scandal
affecting Petrobras, the state-owned oil company, is another significant drag. The economy shrank
by 1.7% in the third quarter of 2015.
 Mexico’s real GDP is expected to grow by 2.6% in 2015, up from 2.4% in 2014. Gains in
manufacturing, construction and services partially offset problems for oil and other resource
industries. However, increased volatility in financial markets and a cut in government spending are
drags. The fall in oil prices is slowing exports and dampening investor interest just as the oil sector
is being opened up. The pace of growth slowed to 2.2% (year-on-year) in the second quarter.
FACTS
Regional Composition
The Latin American region consists of 45 countries. They include Anguilla, Antigua, Argentina, Aruba,
Bahamas, Barbados, Belize, Bermuda, Bolivia, Brazil, British Virgin Islands, Cayman Islands, Chile, Colombia,
Costa Rica, Cuba, Curacao, Dominica, Dominican Republic, Ecuador, El Salvador, French Guiana, Grenada,
Guadeloupe, Guatemala, Guyana, Haiti, Honduras, Jamaica, Martinique, Mexico, Nicaragua, Panama,
Paraguay, Peru, Puerto Rico, Sint Maarten, St. Kitts, St. Lucia, St. Vincent and the Grenadines, Suriname,
Trinidad and Tobago, Uruguay, US Virgin Islands and Venezuela.
GOVERNMENT
Political Stability and Risks
Political stability in some parts of Latin America is shaky.
In Venezuela dollar shortages, combined with soaring inflation, have led to large-scale protests and strikes
among workers. Venezuela also has one of the highest murder rates in the world. Elections took place in
December 2015 but many opposition candidates reported that the authorities barred them from running
for office in the run up to the elections.
Billions of dollars in illegal money are believed to leave Mexico each year. The cross-border transfer of funds
is a primary means of evading taxes, depriving the government of tax revenues crucial for providing public
goods. In addition, the national statistics institute estimates that crime cuts a full percentage point off
Mexican growth.
Brazil’s judicial system is dysfunctional and many of its judges are corrupt. The country’s largest cities are
some of the most dangerous in the world. Brazil is regarded as the second largest national market for
cocaine in the world.
In Colombia, peace talks between the government and the Fuerzas Armada Revolucionarias de Colombia
(FARC) have made sporadic but significant progress. A ceasefire has been in force since July 2015. The two
sides have agreed to the creation of special courts to try crimes committed during the conflict. A Truth
Commission and an amnesty law have also been agreed. A full settlement of all issues is thought to be
possible in 2016.
ECONOMY
Economic Structure and Major Industries
Agriculture employs 17.1% of the region’s workforce, whilst manufacturing accounts for 12.8% of overall
GDP.
Agriculture employs 6.7% of the Argentinian workforce. Argentina’s fertile soils have traditionally made it a
leading agricultural power. Argentina is the world’s leading exporter of soya bean oil and the second largest
exporter of corn. Manufacturing contributes 13.5% of GDP and employs 13.2% of the workforce. Several car
manufacturers are cutting back on production as exports to Brazil weaken. Automobile production fell by
more than 20% in 2014 but the industry has staged a modest recovery in the first half of 2015. Tourism is
traditionally a big earner of foreign exchange. The real value of tourist receipts rose by 12.0% in 2014 and
growth of 2.1% is expected in 2015.
Brazil dominates the sugar, coffee and orange juice markets and competes with the US to be the world’s
biggest soya bean exporter. However, the rising costs of labour and land have pushed up production costs
for many agro-processors. Manufacturing accounts for 12.0% of GDP and employs 12.6% of the workforce.
Brazil’s biggest manufacturers include producers of automobiles, consumer electronics, computers and
software and heavy industries. Automobile production (which makes up one-fifth of the industrial base) fell
by a dramatic 20% in the first half of 2015. Brazil’s service sector makes up 71.5% of GDP. Tourist receipts
(in real terms) grew by 1.4% in 2015.
Farming is the mainstay of the Colombian economy with production of coffee, sugar, bananas, cotton and
meat. Agriculture employs 17.0% of the workforce. Half a million families are reliant on coffee for their
livelihoods and production in 2014 should easily meet the annual target. Manufacturing makes up 11.9% of
GDP and employs 12.9% of the workforce. Most manufacturing operations are concentrated around the
cities of Medellín, Bogotá, Cali and Barranquilla. The sector is dominated by large private conglomerates.
The service sector makes up 58.1% of GDP. In the banking system a consolidation of banking through
mergers and acquisition is expected. In the retail sector, rising domestic demand along with greater
purchasing power should spur growth.
Agriculture employs 11.2% of the Mexican workforce. Government aid to the sector is slanted significantly
in favour of large farms but it is the many small farmers who face the most problems. The government
admits that only about 5% of all farms are efficient and profitable. Manufacturing accounts for 19.3% of
GDP and employs 15.7% of the workforce. Mexico is the world’s largest producer of flat screen televisions
and a major car producer with a fast-growing aerospace industry. Since mid-2014, seven Asian and European
auto manufacturers have opened new assembly factories or announced plans to do so, while others have
boosted their capacity. Tourism provides employment for more than 13% of the work force. The real value
of tourist receipts rose by 20.1% in 2014. Receipts are expected to rise by 5.1% in 2015. The government’s
aim is to become one of the world’s top five tourist destination by 2018, up from tenth place currently.
Agriculture in Venezuela is fragmented and lacking in investment. The sector employs 4.8% of the workforce.
Farmers produce cotton, coffee, cocoa, rice, sugar, tobacco and bananas, both for domestic consumption
and for export. The petroleum industry is the mainstay of Venezuela’s economy, accounting for around half
of total government revenue, more than 95% of exports and a sizeable portion of GDP. With the fall in oil
prices, Venezuela is inevitably poorer than ever. Manufacturing accounts for 12.6% of GDP and 10.9% of
total employment. The real value of gross manufacturing value added fell by 4.4% in 2014. Services account
for 49.7% of GDP. The real value of tourist receipts fell by 5.2% in 2015 and another decline of 11.3% is
expected in 2016.
Evaluation of Market Potential
Though Argentina’s prospects are moderately encouraging, the in-coming government will still face a
number of challenges. Argentina’s next president will have to push through a number of unpopular policies.
These include spending cuts and a painful currency devaluation that will likely depress wages. Another tricky
issue will be to renegotiate the government’s decade-old debt impasse which has effectively excluded it
from foreign capital markets. Thirdly, the new president must find a way to restore credibility and
independence to Argentina’s institutions, particularly the judiciary, the central bank and the discredited
statistics institute.
Brazil’s long reliance on a consumption-led growth model – at the expense of investment – has run its
course. Capital outflows are more than US$12 billion per year and the trend must be reversed. Brazil invests
less than 20% of GDP compared to the regional average of about 23%. Infrastructure, alone, will require
investment of up to US$150 billion in 2014-2019 according to the IMF. A particular challenge is to expand
railways and other logistics networks connecting ports to the interior of the country. Part of the problem is
poor execution but the current economic slowdown and growing uncertainty are also deterrents to
investors.
In Colombia, real rates of growth should gradually edge upward over the next few years, supported by the
government’s infrastructure investment programme, improvements in the business climate and a gradual
rise in world oil prices. The government also expects a significant rise of investment in mining and oil. These
efforts should push growth up to about 4.5% per year by the end of the decade. The economy will see
additional benefits if negotiations with FARC continue to proceed smoothly. A lasting deal would open the
country’s eastern plains to Brazilian-style agribusiness, and divert tax revenue from security and defence
spending to more productive uses.
Mexico’s medium term growth rates will reach 3.2% per year. External demand should strengthen over the
next several years while private investment is expected to pick up, eliminating much spare capacity.
Government spending will be slashed but recent structural reforms should yield some benefits. Finally,
Mexico’s energy reforms are expected to eventually add about 1.5% to annual growth of GDP but the slide
in oil prices means that the associated investment boom will take much longer than recently thought.
In Venezuela, marginal rates of growth have led to a steady rise in government spending, leaving the
economy increasingly vulnerable to the drop in oil prices and a prolonged fall in capital inflows. Public
spending is likely to slow in the medium term, contributing to an economic slowdown. The economy is
expected to contract throughout the period 2016-2019 with a positive – but negligible – rate of growth in
2020.
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