Regional Report | The large economies on the east coast of Latin America—Brazil, Venezuela and Argentina—are slumping badly. Things are far different out west.

 

Author: Tiziana Barghini

PACIFIC HEIGHTS

Gonçalves, Banco Fator: Recesson in Brazil will spill into the first two quarters of 2016.

A sizable hike in exports would be a tonic for Brazil and the other large economies on the east coast of the continent. Out west, it would simply provide greater impetus to the ongoing recovery in the Pacific Rim nations. Peru and Chile are currently benefiting from accommodating fiscal and monetary policies. They also appear to be best positioned to overcome the shock from the falling commodities prices. One of those commodities—industrial metals—has actually seen a pickup in prices of late. Both Chile and Peru are big exporters of copper and other metals used in manufacturing.

According to Consensus Economics, Peru’s gross domestic product rate is expected to rise 4.2% in 2016. Chile, which will likely register GDP growth of 2.4% this year, is projected to see a 3% rise in output in 2016. Mexico is on a similar trajectory. The country’s Treasury department expects the value of goods and services produced this year to rise by around 2.4%. But gains from the opening of the country’s economy to foreign competition should kick in after a few years, particularly in the energy and telecommunications sectors. Some economists now expect Mexico’s GDP growth rate to rise steadily over the next few years, hitting 4% by 2018.

Colombia’s economy is also expanding at a solid pace. The country recorded a 4.6% GDP growth rate in 2014, according to the World Bank. This year, that number will be closer to 3.5%, the organization estimates. The drop is mostly owing to the plunge in the price of petroleum. Alejandro Grisanti, head of research and strategy for Latin America at Barclays Capital, worries that officials in Bogotá are not doing enough to compensate for the fall in oil revenues. But a massive government build-out of the country’s highway system—launched in 2014 by Colombian president Juan Manuel Santos and dubbed the Fourth Generation—is spurring investments in the country. When completed, the new roads should cut travel time between major cities by nearly half. In addition, the highways will drastically lower the cost of transporting goods between industrial zones in the Andes and major ports.

Such a network should prove to be a fillip for the Pacific Alliance members. The trade pact aims to hike business between the four nations by establishing a single market with no tariffs and no barriers to free trade. So far, the alliance is making strides, albeit slowly. Cervera of Credit Suisse notes that 10 years ago, fully 90% of Mexico’s trade was with the US. The percentage is closer to 80% now. A good deal of the decline stems from increased trade with nations in Asia, however. The Pacific Alliance could help Mexico reduce its reliance on trade with the US, although the trade arrangement is not going to have an immediate impact on the country. “Mexico should look more at its trade with southern countries,” said Barclay’s Grisanti. “It would be to the benefit of Mexico and to the benefit of the rest of the region.”

DEFAULT RISK

Farther east, the news keeps getting worse. In Argentina, investors are nervously monitoring a legal battle between the government and a group of American hedge funds over unpaid debt from the country’s 2002 default. A resolution to the dispute could reignite interest in Argentina and attract a new wave of foreign capital to the country. But restoring investor confidence is going to take time. GDP growth in Argentina will likely come in at a dismal 0.5% in 2015. Next year won’t be much better. Economists see a mere 1% rise in 2016.

Leaders in Venezuela would be thrilled by such an economic performance. A further fall in petroleum prices—which many economists are predicting—could once again rock the oil-rich nation. The country has already been gutted by the collapse of the cost of crude. Venezuela’s economy is expected to contract by a whopping 6.4% this year, and 2.7% next year, according to Consensus Economics. At the same time, consumer prices are likely to double.

The good news? The country is not expected to default on state debt in the coming months, nor the loans taken out by the state-owned oil giant PDVSA. But Barclays’ Grisanti says the real test will be a payment due in October 2016. To meet that deadline, Grisanti warns, things have to break Venezuela’s way. “Either oil prices recover,” he says, “or China will lend Venezuela more funds.”

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