A combination of new political strategies at home and abroad, evolving trade routes and weak oil prices are creating a new environment for Latin America. The Banker asked a group of influential economists how the future will look for the region.

Participants 

  • Alberto Ramos, head of Latin America economic research, global investment research division, Goldman Sachs
  • Marcos Buscaglia, head of Latin American economics research, Bank of America Merrill Lynch
  • Ilan Goldfajn, chief economist, Itaú Unibanco
  • Pablo Breard, vice-president of international research, Scotiabank

Q: How are exceptionally low oil prices impacting Latin America?

Alberto Ramos: “Although Latin America is, on aggregate, a large oil producing region and net exporter of oil products, there are significant cross-country [differences] in terms of dependence on oil and exposure to oil price swings. For instance, Chile’s oil needs are satisfied almost exclusively through imports, while Argentina and Brazil produce oil and have large oil and gas deposits, but are still net importers of oil-related products.

"At the other end of the spectrum, Mexico runs a moderate oil net export surplus – less than 1% of gross domestic product [GDP] – but has significant budget exposure to oil revenue. It is followed by Colombia, where net oil exports generate close to a 7% GDP surplus, or more than 50% of total exports.

"Finally, Venezuela is by far the most oil-dependent and exposed economy in the Southern Hemisphere: oil represents 96% of total exports and generates a net export surplus of approximately 20% of GDP.”

Marcos Buscaglia: “As expected, the biggest negative impact has been on Venezuela, as oil makes up almost all of its exports and a significant portion of its fiscal revenues. After the drop, we have seen the first attempt to implement a [currency] devaluation, although there are details to fill in.

"We are still to see the impact on Colombia, but we do expect a significant economic slowdown and a monetary policy easing to counteract it. [Elsewhere], we have seen lower oil prices [quickly bringing] lower gasoline prices to Chile. Our estimate is that the drop in retail gasoline prices will put the equivalent of an extra 1% of GDP in the pockets of drivers this year compared with last year.” 

Ilan Goldfajn: “[Venezuela’s] vulnerability to oil is underscored by the near-default levels of the sovereign’s bond prices. Colombia also has much to lose. The country’s net energy exports account for about 8.4% of GDP, and a large share of foreign direct investment that the country receives flows to the energy sector. However, in contrast to Venezuela, Colombia has buffers, such as a flexible exchange rate, a low public debt and low external indebtedness.

"Mexico, too, is [losing out]. In the short term, however, Mexico is protected, as the government sets domestic gasoline prices and even the small energy surplus run by the country is hedged by the government.

"Argentina and Brazil benefit in the short-term, as both countries are currently net energy importers. But, as is the case with Mexico, their energy sectors have a lot of potential. Low oil prices could curb the exploration of their energy resources.”

Q: Do talks between Cuba and the US signal the beginning of a more open, pragmatic Latin America – both in political and economic terms?

Pablo Breard: “The eventual elimination of the US embargo on Cuba is long overdue. The Summit of the Americas event will take place in Panama in April, and US president Barack Obama has confirmed his attendance. The US president’s drive to deepen engagement with Latin America is the result of a major structural transformation in key countries in the region – particularly the four members of the Pacific Alliance [Chile, Peru, Colombia and Mexico] – the gradual demise of Russian and Venezuelan influence in Cuba as well as China’s increasing involvement in trade and investment activity in Latin America.

"The development of solid democratic institutions will not occur overnight. However, there is enormous business potential in key economic sectors such as banking, telecommunication, agriculture, infrastructure and aviation.”

Mr Goldfajn: “It is too early to tell how open politically and economically Cuba will become. In any case, Cuba’s government probably felt that the crisis in Venezuela has put the economic aid it receives from there at risk. In fact, lower commodity prices and higher interest rates in the US will likely leave many ‘market-unfriendly’ economies in the region without cash, which may make them less ideological when searching for economic partners.”

Mr Buscaglia: “First, as fiscal and external balances have worsened in recent years, governments will have to become more orthodox, whatever platform they were elected on. We are seeing this at play in Brazil already, with the appointment of Joaquim Levy as finance minister and the announcement of fiscal measures. 

"Second, we think we will see Latin Americans voting in more centrist governments as time goes by and the region continues growing slowly. This is the opposite of what happened in the early 2000s. The economic slowdown negatively affected centre-right governments then, and we think it will affect more left-wing governments now.

"The first in line to witness this change will be Argentina in our view. We expect a more centrist government to be elected in October this year. The news of talks between Cuba and the US will reinforce this trend.” 

Q: What challenges will the economic and financial relations between Latin American countries and China face in the future?

Mr Goldfajn: “China has became a top trading partner of Latin America. Bilateral trade between China and Latin America went from $12bn in 2000 to $289bn in 2013. China is now the second largest supplier of Latin America’s imports. After the US and the EU, China is the largest destination of Latin America’s exports. While exports from Latin America to China are mostly commodities, China’s sales to the region are based around manufacturing.

“China plays an important role in financing economies with limited access to capital markets or to official multi-lateral lending. Meanwhile, other commodity-rich countries in the region have been partly financed by Chinese foreign direct investment, with the funds flowing largely towards the exploration for natural resources. Now that [economic] growth is weakening in both Latin America and China, commodity prices are falling, and exchange rates in Latin America are also weakening, [this means that] trade and financial relations between Latin America and China will likely retreat.

"However, they will probably remain far deeper than they were at the beginning of the previous decade. After all, China’s appetite for commodities will continue to be strong, though it will certainly not grow as fast as it has in the past 10 years. In this context, potential conflicts may arise in relationships that were developed [with individual countries, with no direct reference to market prices]: the terms of Chinese lending to Argentina, Venezuela or Ecuador may become worse now that the credit profile of these economies is deteriorating.”

Mr Ramos: “As growth in China is expected to moderate in coming years and to gradually shift towards domestic-facing sectors and away from exports and construction, Latin America will be challenged to diversify its goods’ export book away from commodities and to increase the minute share of services in trade.

"In this regard, in order to deepen some natural production complementarities, South America should spare no effort in incorporating its main regional exporters into the manufacturing supply and distribution value chains of China. It should also strive to increase the value-added and technological content of the raw materials and the industrial/construction inputs currently sold to China.

"Finally, China’s high domestic savings rate and financial surpluses should create opportunities to expand conventional financing operations for both governments and corporates across Latin America.”

Mr Breard: “China’s commitment to financial market liberalisation may pave the way for periods of heightened volatility and temporary currency weakness. Beyond sensitivity to oil prices, China’s economic growth dynamics and US monetary policy shifts will fuel heightened volatility in emerging markets at large, prompting global investors to be more rigorous in differentiating countries.

"In Chile, the [trade-related] sectors of the economy will benefit from a weaker real exchange rate, yet they will remain sensitive to demand from China and other key Asia-Pacific markets. Beyond energy price movements, the magnitude and timing of monetary policy normalisation in the US will remain a critical factor swaying capital flows in financial markets.

“Another major issue globally will remain the degree of Chinese soft landing and the country's ongoing transformation to an economy less dependent on investment and exports, now that it has become the world’s largest economy as measured in purchasing power parity terms.

"The dual emergence of the BRICS bank [the multilateral development bank formed by Brazil, Russia, India, China and South Africa] and the Asian Infrastructure Investment fund is a positive development for China’s engagement in Latin America, as these two multilateral financial institutions do not have the traditional dominance of the US at the time of allocating credit flows.”

Q: Infrastructure is a big constraint in the region; which countries are doing better at improving their local and international connections?

Mr Goldfajn: “Most Latin American economies have infrastructure deficits, which is a hurdle for economic growth. According to [an infrastructure] ranking produced by the World Bank, Colombia has one of the worst infrastructures in the region; but even Chile – which ranks first in the region – has problems, as highlighted by its high energy costs. According to the ranking, most Latin American economies [deteriorated when it comes to infrastructure] between 2007 and 2014 – among the core countries of the region, only Mexico improved in 2014.

"Fortunately, governments are advancing in addressing these bottlenecks [with] ambitious programmes. In fact, in Mexico, Colombia, Peru and Brazil, infrastructure investment will be an important driver of growth.

"But there are many challenges for the implementation of these programmes. From a micro perspective, there are environmental licences, which are often hard to overcome, as well as excessive red tape. From the macro point of view, governments will be more cash constrained with the fall in commodity prices, while tighter external financial conditions might curb the participation of the private sector.”    

Mr Breard: “An aggressive infrastructure investment programme is at the core of growth dynamics in 2015 and 2016 in several countries. The Colombian government continues to use a large-scale public works programme as a counterbalancing mechanism against terms of trade erosion caused by the oil price shock.

"[In Mexico], the administration of president Enrique Peña Nieto will continue to implement an ambitious structural reform agenda in key sectors of the Peruvian economy.

"In Peru, a new investment cycle in the infrastructure sector will add strength to the economy in the first semester. Infrastructure investment will total $18bn in the coming years, with $3.4bn and $4.4bn earmarked for 2015 and 2016, respectively. The expanded Panama Canal is scheduled to be in operation in 2016, with positive multiplying effects in the trade-intensive economies of the Americas.”

Q: What is Brazil’s economic outlook over the next few years?

Mr Ramos: “The Brazilian economy has been underperforming since 2011, and the speed of macroeconomic deterioration accelerated significantly since late 2013. In fact, the Brazilian economy ended 2014 with several key macro indicators – fiscal deficit, public debt as share of GDP, trade balance, current account balance, job creation, real GDP growth, investment spending as share of GDP, consumer and business confidence – at the weakest levels seen in several years, and with some of them at their worst level in more than a decade. For instance, the twin current account and fiscal deficits now exceed a combined 10% of GDP, the widest combined deficit in 15 years.

"This in itself presents indisputable evidence of the significant deterioration on the macro picture and large imbalances generated by the interventionist policy approach of recent years – and therefore of the very significant challenges the new economic team will face to rebalance the economy and restore confidence.”

Mr Goldfajn: “The Brazilian economy in 2015 faces sharp increases in regulated prices, risks of rationing of electricity and water [because of depleted reservoirs and hydroelectric dams] and the pace of execution of infrastructure projects may be slowed by problems in construction companies. As a result, GDP growth is likely to be negative.

"If the programme of adjustments is successful, we expect growth to resume at a moderate level from 2016 onward. To boost growth further, Brazil needs an agenda of reforms facing up to microeconomic inefficiencies that [have created its] less-than-friendly business environment, and which should include trade liberalisation, infrastructure concessions, more flexible labour laws and deregulation.”

Mr Ramos: “Despite the expectation of slightly more disciplined policies in the short term, Brazil's macro picture is expected to deteriorate further in 2015 – accelerating inflation [to more than 7%] amid a recession – on the back of fiscal, credit and monetary policy tightening, and the ongoing adjustment of a number of repressed relative prices, such as regulated prices.

"The [poor] short-term inflation and growth dynamics are simply the consequence of the needed macro rebalancing and elimination of several macro and micro distortions, and the faster the economy adjusts and rebalances the sooner the authorities will be able to ease their policies and start to collect the benefits of an economy growing and operating under broad domestic and external balance.” 

Mr Breard: “The latest official data confirmed a sharp widening of the market-sensitive twin deficits – fiscal and current account – increasing the likelihood of a potential credit rating downgrade. The consolidated public sector deficit closed last year at 6.7% of GDP, a sharp increase from the 3.2% shortfall registered in 2013; the primary deficit of 0.6% of GDP, caused by election-related fiscal misconduct, was at the core of such negative fiscal outcome.

"Additionally, persistently high inflationary pressures led investors to increase their holdings of inflation-indexed government debt securities. To make matters worse, the current account deficit increased to $81bn (3.6% of GDP) by the end of the year as a result of weakening external demand and deteriorating terms of trade; foreign direct investment flows, at $62.5bn, were insufficient to cover the external financing gap. The central bank maintains a high-interest-rate environment to combat inflation and prevent large-scale capital outflows."

Mr Buscaglia: “For 2016 we expect a rebound. But we think that unless more structural reforms are implemented, encompassing labour markets, external trade and taxes, among others, growth is likely to remain not much higher than 2% in coming years.” 

PLEASE ENTER YOUR DETAILS TO WATCH THIS VIDEO

All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker



For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Join our community

The Banker on Twitter