A Tough Year Ahead for Latin America

Latin American countries have enjoyed a period of fairly steady economic growth since the mid 2000s, but recent reports show that this trend may be coming to an end. Analysts from the World Bank have reported that Latin America and the Caribbean have only grown by a disappointing 0.8% in 2014, only half of what was predicted earlier that year. And they predict further downward shifts in the near future. Despite growth in the US and other high-income Northern hemisphere nations, Latin America is experiencing this downturn as the commodities boom comes to and an end, and China’s economy slows down. For a large part of the past decade, Latin American countries such as Venezuela, Chile, Peru, and Brazil benefited from an increased demand in commodities, such as copper, iron ores, and other natural materials. This was due in large part to China’s rapid industrialization process, but now that their economy has slowed, global prices for commodities have gone into a free fall.  This fact, combined with ever-decreasing gas prices has put significant pressure on Latin America’s largest economies.

The concern among World Bank economists is not simply that this slowdown is happening, it’s that it will become the new normal. Growth projections for the next few years are equally dismal; Brazil, for example is only expected to grow by 0.5% in 2015, and the even more vulnerable Venezuela is expected to contract by 2%. Long-term slowdown in growth is indicative of deeper, infrastructural problems, and will require long-term solutions. Most experts agree that these countries cannot simply sit on their hands and hope for a bounce-back in commodity prices to keep their economies afloat, but will have to actively increase productivity. This process will certainly vary from country to country, but may include improving infrastructure, transportation systems, and education to produce a smarter, more efficient workforce. A large part of this last task specifically includes tackling the informal economy present in so many Latin American countries. In Peru, for example, roughly 61% of the workforce works informally. This of course, it’s a very long-term issue that that has cultural aspects as well as practical ones. In the short term, Jim Yong Kim, president of the World Bank advised countries to invest the savings derived from lower oil prices in social programs and structural reforms.

The reduction of these countries’ terms of trade also has the potential to cause volatility in financial markets.  Venezuela in particular is expected to devalue its currency and sell off assets in an effort to manage this general slowdown, as well as what UBS economist Rafael de la Fuente calls “years of inconsistent macroeconomic policies.” Devalued currencies are expected to some degree throughout the region, but the weakened exchange rates could mean a boost in exports.

These large economic shifts will most certainly call for political responses, and there are significant changes on the horizon. In general, Latin America is shifting from leftist administrations back towards the more market-friendly center. Brazil’s Dilma Roussef just barely won reelection in October of 2014, and has already hinted at more conservative fiscal action such as hiking taxes and cutting budgets. She has also appointed Chicago-trained Joaquim Levy as finance minister. In Argentina, president Cristina Fernandez de Kirchner will be out in October. Her successor will be one of three

men: Sergio Massa, or Daniel Scioli — both of whom are peronists — or the more conservative Mauricio Macri, who is currently the mayor of Buenos Aires. No matter who wins, their policies are likely to be more conservative than Kirchner’s.  Venezuela, embroiled in political, social and economic troubles, will likely see a confrontation in September between the unpopular but powerful military regime, and the opposition, divided between moderates and radicals.

Perhaps the only country poised to come out on top during this impending political and economic upheaval is Mexico. Due in large part to its proximity to the US, Mexico is expected to grow 3.3% in 2015 and 3.8% in 2016. It has also instituted a number of structural reforms that may shield it from the volatility of the region. It hosts a number of large firms that are highly productive and well integrated to the world economy. But the nation still has a significant informal economy that hinders overall productivity.

While the current situation does not seem to amount to a crisis, there are certainly rocky days ahead for many Latin American nations. While the imminent instabilities may present a challenge, they also present an opportunity to correct underlying structural and societal problems.