Download South America: Soon to see some light at the end of the

September 8, 2016
South America: Soon to see some light at the end of the tunnel?
Opportunities for bold investors
Several factors have undermined economic growth in South America in recent years. The slump in commodity prices,
the slowdown in global trade and the Chinese economy, and numerous political problems have given the region a rough
ride. We note that Brazil and Argentina have been particularly hard hit. However, the situation now appears to be
improving, with the help of encouraging political reforms. Things are looking brighter for the years ahead, for South
America and for investors who take an interest in this region.
Since 1990, the average annual real GDP growth of
Latin America as a whole has been close to 3.0%. However,
after years of fast economic growth fuelled by a commodity
boom, South America1 has recently been languishing in
the doldrums (graph 1). The slump in commodity prices,
soft Chinese demand, high inflation largely caused by
depreciation in South American currencies against the
U.S. dollar, and numerous political problems have even
driven a few countries (Brazil first and foremost) into
recession. For the first time in 30 years, South America
seems to be on the verge of having two straight years of
contraction in real GDP, in 2015 and 2016. This economic
reversal is being observed in a few countries of the region
(graph 2), but particularly in Brazil which, with around 3%
of global GDP based on purchasing power parity (PPP)
in 2014, carries a good deal of weight.
Graph 1 – In the past two years, growth has lagged well below the
historical average
Ann. var. in %
6
5
5
4
4
3
3
2
2
1
1
0
0
-1
-1
-2
-2
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Sources: World Bank and Desjardins, Economic Studies
Graph 2 – Most of the countries of South America have
experienced a slowdown in recent years
Ann. var. in %
14
12
10
8
6
4
2
0
-2
-4
-6
-8
-10
Weight within global GDP based on purchasing power parity in 2014:
ay
gu
ol
0.05%
14
12
10
8
6
4
2
0
-2
-4
-6
-8
-10
Pa
ra
iv
ia
0.06%
B
gu
ay
0.06%
ru
do
r
0.16%
U
Pe
ru
hi
C
0.33%
Ec
ua
Ve
ne
0.35%
le
0.49%
zu
bi
a
a*
tin
om
ol
C
zi
ra
en
rg
B
0.56%
el
a
2.89%
A
1
This report mainly discusses the major countries of South America.
However, some data released by international institutions such as the World
Bank and the International Monetary Fund cover Latin America (which
also includes the countries of Central America, including Mexico) and
the Caribbean. We published an analysis on Mexico in May 2016, www.
desjardins.com/ressources/pdf/pv160505-e.pdf?resVer=1462452919000.
Ann. var. in %
Real GDP
2013
2014
2015
l
The weakness of the Brazilian economy in particular and of
the South American economies in general is partly due to
the slowdown of the global economy. The slower growth in
imports in most of the advanced nations, and in emerging
countries like China, has done considerable damage
(graph 3 on page 2).
Benoit P. Durocher
Senior Economist
7
Average, 1990–2015
6
GROWTH THAT IS DEPENDENT ON GLOBAL
CONDITIONS AND THE COMMODITIES MARKET
François Dupuis
Vice-President and Chief Economist
Ann. var. in %
Real GDP growth – Latin America and the Caribbean
7
* The World Bank does not calculate GDP based on purchasing power parity for Argentina.
Sources: World Bank and Desjardins, Economic Studies
In fact, the rise of the Chinese economy since the beginning
of the 2000s has had major negative consequences on the
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Note to readers: The letters k, M and B are used in texts and tables to refer to thousands, millions and billions respectively.
I mportant: This document is based on public information and may under no circumstances be used or construed as a commitment by Desjardins Group. While the information provided has been determined on the basis of data obtained from sources that
are deemed to be reliable, Desjardins Group in no way warrants that the information is accurate or complete. The document is provided solely for information purposes and does not constitute an offer or solicitation for purchase or sale. Desjardins Group
takes no responsibility for the consequences of any decision whatsoever made on the basis of the data contained herein and does not hereby undertake to provide any advice, notably in the area of investment services. The data on prices or margins are
provided for information purposes and may be modified at any time, based on such factors as market conditions. The past performances and projections expressed herein are no guarantee of future performance. The opinions and forecasts contained herein
are, unless otherwise indicated, those of the document’s authors and do not represent the opinions of any other person or the official position of Desjardins Group. Copyright © 2016, Desjardins Group. All rights reserved.
September 8, 2016
Economic Viewpoint
Boasting the seventh largest GDP in the world based on
PPP, Brazil is by far the largest economy of South America.
2
In US$*
a
B
ol
iv
ia
gu
ay
y
Pa
ra
U
ru
gu
a
Pe
ru
C
hi
le
C
ol
om
bi
In US$*
Gross national income per capita in 2015
60,000
60,000
30,000
30,000
20,000
20,000
10,000
10,000
0
Bolivia
0
Paraguay
40,000
Ecuador
40,000
Peru
50,000
Brazil
50,000
* According to purchasing power parity.
Sources: World Bank and Desjardins, Economic Studies
It represents 42% of Latin America excluding Mexico. As
a result, the swings of its economy greatly affect the other
countries of the region. Brazil receives the lion’s share of
the exports of Argentina, Bolivia, Paraguay and Uruguay
(graph 6). At the same time, we note that despite its size,
Brazilian demand is far less important to the countries on
the continent’s Pacific coast. For Venezuela, Colombia and
Ecuador, the primary export destination is the United States.
For Chile and Peru (as well as for Brazil), it is China.
Graph 6 – Brazil is an important destination for many South
American countries
In %
In %
Exports to Brazil as a % of total exports
Average, 2011–2015
35
35
30
30
25
25
20
20
15
15
10
10
5
5
0
0
.
Sources: International Monetary Fund and Desjardins, Economic Studies
Ecuador
CLOSE-UP ON BRAZIL
Graph 5 – The South American countries lag far behind in terms of
income per capita
Venezuela
Despite the progress of recent decades, poverty is still
rampant in South America, and the situation has deteriorated
in recent years with downturns in real GDP per capita in
Venezuela, Brazil and Argentina (graph 4). We also note
that national income per capita is still extremely low in
South America compared with the advanced countries
(graph 5). But most of the major countries of the region find
themselves better off than China or India.
Sources: World Bank and Desjardins, Economic Studies
Colombia
POVERTY IS STILL VERY PREVALENT
-8
Peru
But we must not overlook the influence of currency
movements on trade, especially when they are intense, as
has been the case in recent years. Consequently, despite
global growth that was still slow in 2015, Brazil’s real
exports climbed by 6.1% last year, thanks to depreciation
by its own currency, the real.
-8
Venezuela
The commodities market has become increasingly important
to the South American economies during the latest upward
cycle. Oil prices in particular are key to the exports and
investments of Columbia, Ecuador and Venezuela. Brazil,
Chile and Peru are also highly dependent on commodities,
especially in the mining and agricultural sectors.
-6
Average, 2014–2015
Chile
South American manufacturing sector. According to the
World Bank, Chinese competition caused a shortfall of over
6% in Brazilian exports of manufactured products between
2001 and 2011. For the rest of the region, that shortfall
is between 3% and 7%. On the other hand, China’s fast
development has boosted exports of agricultural products by
over 10%, and mining products by 20%. Not only do global
economic conditions, primarily those of China, clearly
influence the volume of exports from South America, but
they also dictate the type of its exports.
-4
Average, 2000–2013
-6
Uruguay
Imports by Asian emerging countries
Sources: CPB Netherlands Bureau for Economic Policy Analysis and Desjardins, Economic Studies
-2
-4
Chile
Imports by the advanced countries
-2
Uruguay
Exports from the emerging countries of Latin America
0
Euro zone
2015
2
0
Argentina
2012
4
2
zi
l
A
rg
en
tin
a
Ec
ua
do
r
2009
4
Canada
2006
Ann. var. in %
PIB réel per capita
Bolivia
2003
Ann. var. in %
a
2000
35
30
25
20
15
10
5
0
-5
-10
-15
-20
-25
B
ra
Growth due to the
depreciation of Latin
American currencies
United
States
Ann. var. in %
In real terms
35
30
25
20
15
10
5
0
-5
-10
-15
-20
-25
Paraguay
Ann. var. in %
Graph 4 – GDP per capita has also deteriorated in some countries
of the region
Ve
ne
zu
el
Graph 3 – Growth in exports from the emerging countries of Latin
America is keeping pace with the global cycle
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September 8, 2016
Economic Viewpoint
The Brazilian economy has done well in the 2000s, apart
from 2008–2009 when the global economy collapsed
(graph 7). Between 2000 and mid-2013, it recorded average
real growth of 3.6%. Its exports particularly benefited
from rising prices for commodities (iron, oil, etc.) and
agricultural goods (soybeans, sugar, coffee, etc.). It has also
benefited from the general development of the emerging
countries, in particular by being a member of the BRIC
block (Brazil, Russia, India and China), that new pole of
global growth. In fact, foreign investment has expanded
fairly quickly, reaching an average annual change of 19.6%
between 2000 and 2013. A relatively expansionist budgetary
policy throughout the period has also supported growth.
Graph 7 – Up until the recent period of weakness, the Brazilian
economy had shown fairly strong growth
In %
2000
In %
Real GDP
12
10
8
6
4
2
0
-2
-4
-6
-8
-10
-12
-14
-16
2002
2004
2006
2008
Quarterly ann. var. in %
12
10
8
6
4
2
0
-2
-4
-6
-8
-10
-12
-14
-16
2010
2012
2014
2016
www.desjardins.com/economics
Graph 8 – A falling currency and rising inflation have led the Bank
of Brazil to tighten its monetary policy
Ann. var. in %
In %
12
16
11
15
14
10
13
9
12
8
11
10
7
9
6
8
5
7
4
6
3
5
2010
2011
2012
Consumer price index (left)
2013
2014
2015
2016
Bank of Brazil’s SELIC key interest rates (right)
Sources: Banco Central do Brasil, Datastream and Desjardins, Economic Studies
This state of affairs has greatly affected the mood of
economic agents. Both business and consumer confidence
indexes in Brazil have dwindled (graph 9).
Graph 9 – Confidence has eroded considerably in Brazil
Index
Index
120
70
65
110
60
100
55
90
50
Ann. var. in %
45
80
Sources: Central Statistical Organisation and Desjardins, Economic Studies
40
70
But this virtuous circle has been replaced with a far more
difficult situation. The slump in commodity prices, political
and financial scandals (affecting Petrobras in particular,
Brazil’s largest company), the slowdown in Chinese demand
and a new wariness on the part of international markets
towards the emerging economies, have all conspired to
rock the Brazilian economy. It now finds itself in a recession
from which it has yet to completely emerge. Real GDP
has pulled back by 7.9% between the cyclical peak of the
first quarter of 2014 and the beginning of 2016, recording
seven quarters of contraction during the period, including
six in a row. The World Cup of soccer in 2014 and the
Rio Olympics this summer do not seem to have managed
to give a boost to the Brazilian economy. As mentioned
earlier, the currency’s depreciation, losing nearly half of
its value against the U.S. dollar since 2013, has provided
some support for exports. However, the internal cost of that
depreciation has manifested itself in rising inflation and
falling foreign investment. Moreover, the Bank of Brazil
has been forced to react by tightening its monetary policy
several times, raising the main key interest rate by 700 basis
points (from 7.25% to 14.25%) since 2013 (graph 8).
35
60
30
2010
2011
2012
2013
Consumer confidence (left)
2014
2015
2016
Business confidence (right)
Sources: Fundacao Getulio Vargas, Brazilian National Confederation of Industry
and Desjardins, Economic Studies
FAIR WEATHER ON THE HORIZON
On the bright side, we note that the Brazilian economy
appears to be nearing a turning point. Many indicators,
such as confidence indexes, have begun heading up since
the start of the spring. The annual changes in retail sales
and industrial production are still broadly negative, but the
downturns are already less severe. The monthly economic
activity index compiled by the National Bank of Brazil has
risen in two of the past three months.
Since the beginning of the year, many commodity prices
have been stabilizing or increasing, giving support to
this improvement in the Brazilian economy. For example,
international prices for iron ore, the country’s main export,
have soared by 39.8% since the start of the year. Coffee
prices are up by 28.2%, oil prices by 25.2%. Soybean prices
have risen more slowly over the summer, but this comes on
the heels of a spike of 31.7% in the first half of 2016. Since
the start of the year, we nevertheless note a gain of 10.6%.
3
Economic Viewpoint
This fairly generalized upward movement in the prices of
Brazilian exports is also one of the factors that have enabled
the currency to appreciate by 29.5% since the January low.
Furthermore, Brazil’s main stock market index has boomed
by 60.3% since last January’s low, whereas it had contracted
by 39.4% since its peak of 2014.
POLITICAL SUPPORT FOR GROWTH
In Brazil: One of the factors that are helping Brazil glimpse
some light at the end of the tunnel is the change in the
country’s leadership. To make way for the parliamentary
impeachment process, President Dilma Rousseff—in
office since January 2011, and re-elected in 2014—was
temporarily removed from power in May 2016. She was
then permanently impeached by the Senate on August 31.
The numerous political scandals linked to the Rousseff
administration and to the Brazilian ruling class in general
(especially those associated with the Petrobras oil company)
were factors underlying the deteriorating confidence and
decline in investment of recent years. The government
led by Vice-President Michel Temer has been welcomed
very favourably by the markets, notably thanks to highcalibre appointments to important economic positions.
It remains to be seen whether the progress achieved by
Mr. Temer’s administration will continue.
In Argentina: Argentina has also experienced serious
economic, financial and political problems in recent
years. However, the replacement of the populist regimes
of Christina Fernandez and, before that, her husband
Nestor Kirchner by the reformist government led by
Mauricio Macri is generating a good deal of optimism.
In the very short term, the reforms could be harmful to
economic growth, because the government is trying to
regain financial credibility by reforming a system that is
largely based on subsidies and state-sponsored waste.
However, we are already seeing reductions to import trade
barriers and export taxes. In the longer term, if these efforts
are not curtailed through legislative action by supporters
of the former regime, they should bear fruit and accelerate
Argentina’s economic growth. We already note that the
government has managed to return to the international
financial markets with its first bond issues after 15 years of
“exile”. One of the challenges that remain to be tackled is
the necessity of easing the Argentinian inflation rate, which
still stands at around 35%. Investments in infrastructure,
especially in the energy sector, will also be needed to
generate more stable and lively economic growth.
In Peru: Although it is not terribly dependent on the
Brazilian economy, the Peruvian economy nevertheless
has slowed due to the weakness of Chinese demand and
the slump in commodity prices, especially that of copper.
4
September 8, 2016
www.desjardins.com/economics
Yet, the growth rate in 2015 still reached an enviable 3.2%.
One of the positive factors for the Peruvian economy is
the soundness of its institutions, especially where the
management of the economy is concerned. The recent
election of Pedro Pablo Kuczynski as President, over the
right-wing populist candidate Keiko Fujimori, should mean
that this sound and prudent management of the Peruvian
economy will continue to promote growth.
In Colombia: In this country it is not so much a change of
government that could support economic growth, but rather
the recent peace accord between the government and the
revolutionary army that have been waging war for 52 years.
If it is endorsed by the population through a referendum
to be held on October 2, this permanent cease-fire should
promote investment and tourism.
But not yet in Venezuela: Venezuela is still in the throes
of a serious recession, in fact a real economic crisis.
Real GDP reportedly contracted by 3.9% in 2014 and by
5.7% in 2015. In April, the International Monetary Fund
(IMF) was forecasting a slump of nearly 8.0% in 2016 and
another, of 4.5%, in 2017. Obviously, it is falling oil prices
that are to blame for these economic woes. That market
represents nearly 95% of Venezuela’s exports, with the
United States, India and China as the main destinations.
Public finances are a complete mess, inflation is hovering
around 800%, the currency has totally collapsed and power
outages and problems in the distribution of essential goods
are commonplace. For the time being, the government is
receiving financing from China, but great political and
economic uncertainty prevails.
INVESTMENT OUTLOOK
Times have generally been tough for the South American
economy in recent years, in particular for Brazil and the
countries that have close trade ties with it. However, the
stabilization of the commodities market and the moderate
continuation of price increases should give a lift to the
economy of the entire region. Some indicators are already
showing this, and it is reasonable to assume that this new
trend will continue. In fact, the IMF’s forecasts are calling
for such improvement (graph 10 on page 5). Despite a
downward revision of nearly all the growth scenarios due
to concerns relating to the Brexit vote (which actually
should not affect this region much), that organization has
revised its forecasts for Latin America upwards slightly
(+0.1% in 2016 and in 2017). The IMF is now predicting
a 0.4% contraction of real GDP in this region this year, and
a 1.6% gain next year. The upward revision mainly affected
Brazil. This economic spurt should promote the renewal of
faster growth in the domestic market, and in investment,
in Brazil and Argentina. The IMF’s forecasts for the
September 8, 2016
Economic Viewpoint
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Graph 10 – The years to come are looking brighter for Argentina
and Brazil
Ann. var. in %
Ann. var. in %
Real GDP
2
6
4
0
2
-2
0
-2
-4
Average, 2013–2016
-4
Average forecast, 2017–2021
South American stock markets, which have been depressed
throughout the slowdown and contraction phase, have started
picking up in recent months. Since the beginning of the
year, the main stock indexes have seen very strong growth
that looks even better when expressed in U.S. dollars (with
the exception of Argentina). Peru comes out on top in this
department: its stock market has boomed by almost 60% so
far in 2016 (graph 11). However, these gains come on the
heels of some fairly large contractions in 2015. Actually,
the price/earnings ratios do not appear to be exaggerated,
and they generally stand below what is observed in the
United States (graph 12). If the economy keeps improving
and confidence recovers, higher profits should materialize
as the stock indexes keep rising. Indeed, the outlook on
profits is relatively good, similar to that of the United States
or Canada (except for the spike in Peru) (graph 13). It has
generally been improving in recent months.
Graph 11 – Stock markets have been booming in South America
since the beginning of the year
Stock index growth since the start of 2016
Var. in %
70
In local currency
60
In US$
50
50
40
40
30
30
20
20
10
10
0
0
United
States
Canada
Chile
Sources: Bloomberg and Desjardins, Economic Studies
Colombia
25
25
20
20
15
15
10
10
5
5
0
0
2010
do
Ve
ne
zu
el
a
zi
l
STOCK MARKETS
60
30
2011
2012
Argentina
2013
2014
Chile
Colombia
2015
Peru
2016
United States
Sources: Institutional Broker’s Estimate System, Datastream and Desjardins, Economic Studies
other countries do not really change things, but they were
prepared last April based on rather pessimistic forecasts
about commodity prices.
70
Ratio
Price/earnings ratios
Brazil
Sources: International Monetary Fund and Desjardins, Economic Studies
Var. in %
Ratio
30
Ec
ua
r
B
ra
C
hi
le
A
rg
en
tin
a
y
U
ru
gu
a
B
ol
iv
ia
Pe
ru
Pa
ra
C
ol
om
bi
gu
ay
-6
a
-6
Graph 12 – Price/earnings ratios are not showing any major
overvaluations
Brazil
Argentina
Peru
Graph 13 – Forecasts of long-term, average, annual growth of
earnings per share
Ann. var. in %
Ann. var. in %
Forecast, August 2016
60
60
50
50
40
40
30
30
20
20
10
10
0
0
United
States
Canada
Chile
Colombia
Brazil
Argentina
Peru
Sources: Institutional Broker’s Estimate System, Datastream and Desjardins, Economic Studies
For Canadian or U.S. investors, the upswing in the South
American stock markets has been inflated by currency
exchange trends. The sharp appreciation of the currencies
of many emerging countries since the beginning of the year
is not likely to continue, however. The relatively strong
inflation rates in some countries of the region, especially
Brazil and Argentina, should prevent the currencies of those
countries from advancing further. The prospect of another
key interest rate hike by the Federal Reserve represents
another constraint on the appreciation of emerging
currencies, one that could even lead to an outflow of capital.
We cannot rule out the possibility of more optimistic
confidence supporting both the economy and the currencies
but, in the short or medium term, those factors should not
inflate the stock market value when calculated in Canadian
or U.S. dollars to the same degree as they have been doing.
CONCLUSION
After some difficult years, it is undeniable that a gentle
breeze of optimism is starting to blow over South America.
Many of the global and national impediments that had been
undermining economic growth in recent years have started
to fade away. It is too early to talk about a new momentum,
but things are not as gloomy as they were. First and
5
Economic Viewpoint
foremost, the political landscape seems more conducive,
especially in Brazil and Argentina, to a sustainable renewal
of confidence that could attract more domestic and foreign
investments.
However, the problems have not all disappeared, and the
South American economy remains fragile and vulnerable to
the ups and downs of the international commodities market
and of demand from China and the advanced countries.
That fragility also stems from long-term weaknesses such
as endemic poverty, persistent income inequality and major
corruption problems. To all those we must add more recent
phenomena like the zika virus crisis, which is likely to
hinder tourism.
But attractive opportunities do exist for these economies
in the medium term. To take advantage of them, it will
be necessary to undertake or continue reforms, especially
those pertaining to the transparency of public institutions.
Improved productivity, through education and more
developed infrastructures, is key to enable the countries
of South America to reap greater benefit from global
growth, especially since such growth is likely to stay
relatively slow, compared with previous cycles. Improved
intracontinental trade via the Mercosur zone (the common
market of the south) will have to continue, and agreements
will need to be reached with other parts of the world. On
this point, the Trans-Pacific Partnership (TPP) represented
a good opportunity for Peru and Chile (along with Mexico),
which were planning to participate, but political pressures,
particularly in the United States, are such that it probably
will not see the light of day.
If global economic growth manages to maintain a
satisfactory pace and the political reforms keep moving
forward, the opportunities for investors who are interested
in South America should proliferate and become more
attractive, although they will remain relatively risky.
Francis Généreux
Senior Economist
6
September 8, 2016
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