Latin America: On The Precipice of Progress
21 May 2018
Largely thanks to the recovering prices of some key commodities, the region recorded a positive first quarter in 2018, with the IMF forecasting Latin America and the Caribbean’s GDP growth for the year to reach 2%. Currency volatility remains among the primary challenges, however, offsetting some gains. The economy is thus centre stage in countries headed to the polls this year, potentially ushering in a period of economic transformation in several of the region’s major players.
Political changes ahead for Colombia, Mexico and Brazil
It’s exciting times again in Colombia as candidates run the final leg of the race to the presidency, with the elections taking place later this month. After three years of economic slowdown and the peace process with the Revolutionary Armed Forces of Colombia dominating the political focus, investors are ready for the incoming party to promote more liberal policies that will help to increase investment, particularly in infrastructure and the oil and gas sector.
Next, we are likely to witness a political turn in Mexico in early July. Leftist Andrés Manuel López Obrador (also known as AMLO) is now the best-placed candidate for the elections, and it is hoped that the cycle of reforms – namely in energy, education and tax – continues at a steady pace. Internally, the country has received significant investments in the energy and automotive sectors, in part through the acceleration of the special economic zones programme, which received expressions of interest totalling $6.5bn in the first four months of 2018 alone.
Outside its borders, the Mexican ambition to secure new trading partners remains strong, with AMLO widely trusted to progress this effort. As the North American Free Trade Agreement talks with the US drag on, finding new markets, particularly with countries in the Pacific region, appears increasingly essential. To facilitate this shift, the country is enhancing its west coast ports to raise its cargo-handling capacity by 74% to 47m tonnes a year.
Brazil, also facing elections this year, lives a different story. Seriously damaged by corruption and suffering from a considerable socioeconomic gap, the country has embraced the higher oil and gas prices and is finally seeing some recovery in its internal consumption levels, all of which will play into the outcome of October’s vote.
Government reforms and sector overhauls support recoveries across the region
Although the instability of Argentina’s currency and increased interest rates have created a certain degree of uncertainty, this is to be expected given that the country is undergoing much-needed fiscal reforms. Inflation levels are still relatively high, but a further deficit reduction should help to contain the pressures on the peso. Meanwhile, the government is working towards the liberalisation of the economy as a way to boost growth, with the new incentives for foreign airlines in the aviation sector just one good example of the Argentinian market becoming more open.
In Peru the rising of mineral prices combined with stable domestic demand has driven a substantial economic expansion, enabling the country to achieve a growth rate of 2.5% in 2017, and aspire to reach 4.6% GDP growth in 2018. On the policy side, the authorities are implementing counter-cyclical fiscal and monetary policies that are aimed at sustaining economic growth.
The Caribbean is still an area we have our eye on: the progressive recovery of oil and gas prices has given wings to economies such as Trinidad and Tobago, which has launched initiatives to streamline its energy industry and revamp sectoral activities. More broadly, increased regional integration continues to be a priority for emerging Caribbean nations.
Spurred by expanding domestic consumption and encouraged by rising commodity prices, 2018 is shaping up to be a year of economic take-off for Latin America. The region’s focus on expanding trade with the Pacific region is expected to boost exports, while infrastructure upgrades to support this shift in trade networks should also provide ample business at home. In addition, this ongoing progress is likely to attract investment inflows, with the majority of Latin American markets demonstrating their desire to do so at the recent Summit of the Americas in Lima, Peru. This has brought a wave of optimism to the region, despite Venezuela’s prolonged crisis.