Take a good look at Latin America’s 21 countries today, and one quickly concludes that this is not a region moving in unison but rather a patchwork of divergent political and economic motors firing at different speeds, headed in different directions. Rarely has it been this challenging to analyze Latin America as a whole. Thus, it seems appropriate to showcase Latin America’s differences through the lens of Sergio Leone’s classic spaghetti western film.
BRAZIL: As unappealing as Jair Bolsonaro may be to some, he led a voter shift away from the PT and helped build a pro-reform political construct in congress that Brazil has not witnessed for almost three decades. The result is impressive progress on pension reform and a bold attempt at fiscal and labor reforms that promise to make Brazilian business far more competitive.
Thanks to a consistently well-run central bank, Brazil’s Selic rate is at a record low 4.5%. A series of new concessions and privatizations in the infrastructure and energy sectors will fetch over $250bn of new investment. Brazil’s corporate sector re-structured after three years of recession and is now posting record profits. Investor animal spirits are once again on fire in Brazil. Job creation and consumer confidence will take time to materialize but evidence is gathering that Brazil will drive LatAm growth over the next four years.
USA: One day historians will relish the irony of how Mexico was the greatest benefactor of Donald Trump’s most notorious policies. Even before taking office, Trump’s anti-Mexico/NAFTA rhetoric served to weaken the Mexican peso (by as much as 15%), providing Mexican export manufacturers with a compelling pricing advantage. Trump’s corporate tax breaks helped repatriate billions, strengthening the dollar and consumer demand. Anti-immigration policies combined with nativist rhetoric slowed workers from migrating to the US precisely as the American labor pool began to shrink. American manufacturers have little choice but to outsource. Then Trump picked a fight with the middle kingdom and American companies shifted production from China to Mexico. Even Chinese assemblers moved lines to Mexico, because the NAFTA (and soon to be implemented USMCA) protects access to the US market.
Since Trump was inaugurated, Mexican exports to the U.S. have grown an astonishing 24% after stalling for several years. Under Trump, U.S. exports to Mexico have grown a less impressive 9% — and the U.S. trade deficit with Mexico has jumped 55%. In 2016, Mexico was the 3rd largest exporter to the US. Now it is #1. Muchas gracias, Sr. Presidente Trump.
PERU: Peruvian President Vizcarra dissolved congress in September 2019, a move supported by 80% of voters. The bold gamble paid off on January 26th, 2020, when special elections voted in a new congress and Vizcarra’s political nemesis, the Fujimori-led Fuerza Popular party, was reduced from a majority-controlling 73 seats to an irrelevant 15. Two days later, a court in Lima ordered Keiko Fujimori to serve more jail time (15 months of pretrial detention) based upon corruption charges.
The new congress is a hodge-podge of nine different parties, including a fundamentalist party that combines evangelical Christianity with Incan mythology and the extreme right UPP who wants to free from jail its de facto leader, Antauro Humala — who led a failed military uprising in 2005 — and legalize the execution of corrupt politicians. Much of the new congress will be limited to a single, shortened term, which ends in 2021. However, in spite of the splintered party makeup of Peru’s new congress, analysts believe that Vizcarra can push through important reforms designed to reduce political corruption as well as rebuild investor confidence in Peru’s commitment to modernizing its infrastructure.
We will know soon enough if the new cast of political actors will act with unity and responsibility. But the good news is that in Peru, dysfunctional politics seems to have little impact on economic growth. Fiscal reforms and a pension system that was built decades ago together created the highest national savings rate in Latin America, a vibrant capital market, a well-financed banking system and the region’s most stable traded currency. Mega-projects in mining and energy provide long-term dollar income that fuels one of the strongest consumer markets in the region. Today, Peru has a higher per capita income than Argentina.
CENTRAL AMERICA (SANS NICARAGUA): Since energy prices collapsed in late 2014, Central America has led Latin American growth levels. Central America imports close to 50% of its energy supply and almost all of its fuel supply so when oil prices decline, there is more money to spend on expanding its economy. The same outsourcing surge that benefits Mexico has also aided Central America. A strong US economy has boosted total remittances to Central America from $16bn in 2015 to $22bn in 2018, a 39% increase. In Guatemala and Honduras, still agrarian societies, the migration of people from countryside to city helps generate new consumer spending. Expanding access to credit, some of which is backed by deposits made by relatives living in the US, today helps a record number of Central Americans to buy their first home. The region remains plagued by violence, drug trafficking and corruption, but incremental improvements on all three fronts add to a (relatively) rosy economic picture.
Honorable mention: Dominican Republic, Guyana, Uruguay, Paraguay
MEXICO: Ever since former President Carlos Salinas (1988-1994) signed the NAFTA and privatized over 300 state enterprises, roughly 1/3 of the economy was joined at the hip with the U.S., de-coupled from Mexico’s business cycle. In 2019, Mexico’s GDP growth was clocked at 0%. In reality, its export economy grew closer to 4% and its internal economy shrank at a rate of -2%. While Mexican consumers continue to spend, thanks to expanding credit and a healthy consumer balance sheet, the business class has lost confidence in the investment climate. The problem is the AMLO administration befuddles and angers investors with its blend of 1970s socialist rhetoric, incompetent management and political infighting. No less than 10 disastrous policy decisions — like the cancellation of the new airport — serve to undermine confidence and Mexico’s once-proud institutions. Since AMLO was elected, the monied class has moved billions (we estimate over $100bn USD) of assets out of Mexico.
CHINA: First a trade war, now coronavirus. China has a way to go to dig itself out of the most painful couple of years of its otherwise miraculous 30-year rise. Chinese investment and output numbers were never reliable, now less so under President Xi, whose bombastic leadership style is akin to that of a Latin American caudillo. Xi and the Chinese government now face shrinking access to its largest customer (USA) and a costly virus. Coronavirus won’t simply stop factories from running and interrupt supply chains — it is another blow to consumer confidence in the Chinese food system, further eroding faith in China’s government, which means more capital flight and more brain drain.
There may be some short-term opportunistic trade wins for South America (beef and horticulture exports, for example) but overall, Chinese GDP growth and trade levels will suffer. Monies earmarked for investments overseas in infrastructure — some of it bound for LAC markets — will be delayed or canceled. In 2020, Latin America will begin to feel how dependent it has become on Chinese customers and investors to fuel its economy, and it won’t be a good feeling.
CHILE: Just as analysts (including this one) were admiring the political calm that had settled over Chile following the devastating riots of October 2019, protests erupted again in January 2020. The promise of a constitutional referendum in April, a proposal supported by 70% of Chileans, clearly was not enough to quiet the anxiety felt by some. There is a palpable lack of trust of the Piñera administration and, by extension, of the monied elite that he symbolizes as a billionaire himself. With only 11% approval rating (and 82% disapproval), Sebastian Piñera is a liability to his party and to the political process awaiting a nervous country in three months.
Chilean anarchists and other extremists within a broad protest movement simply distrust the sincerity of the Piñera administration’s promise to draft a more inclusive constitutional framework. It is these small but highly motivated protest groups who feel compelled to keep their focus on the prize by protesting now till April. However, it is excessive policing of the protests that has galvanized much wider support for continued protests (59%). The National Institute of Human Rights has documented close to 4,000 civilians injured in rioting —including over 400 eye injuries, with over a dozen blinded — and the death of non-protestors. The country is poised for more protests through April and if the constitutional changes do not satisfy the public, protests may continue indefinitely. In October and November of 2019, Chile’s GDP dropped 3.3% year-on-year. If protests continue to interrupt Santiago’s economy, expect GDP under 1.5% for 2020, almost 2% below what analysts predicted only six months ago.
TRINIDAD & TOBAGO: When U.S. unemployment was nearing 10%, the U.S. natural gas industry lobbied President Obama to green light the construction of a dozen export terminals to move its excess production. Industrial buyers of natural gas (chemicals, power generation, value added gases) lobbied Obama to keep the gas ‘trapped’ inside the country, providing them cheap inputs. In return, they would build new plants, creating thousands of jobs. Obama took jobs over exports. The Trump administration changed course and now the U.S. is the largest LNG producer in the world, as well as one of the largest exporters. The biggest loser, of course, is Trinidad & Tobago, which cannot compete on price and continues to lose its customers in the Caribbean and in other markets. Since 2016, Trinidad’s economy has shrunk 8.5%.
Honorable mention: Ecuador
VENEZUELA: The world’s greatest human exodus and Latin America’s worst economic collapse on record still has not reached bottom. Over 6 million Venezuelans have now fled their once-wealthy nation. Fitch forecasts that Venezuela’s per capita income will drop from $570 in 2019 to $314 in 2020, making it the 2nd poorest country on earth (just above Burundi). Peruvians, by comparison, will earn $7,461 per capita in 2020. At best, these numbers are fictitious in an economy where inflation is measured in tens of thousands of percentage points and multiple currencies battle for market share including the Bolivar, the USD, gold and crypto currencies. Opposition leader Guaido has done a masterful job at rallying support inside and outside of Venezuela and is recognized by many as the de facto President. However, the chavistas control the military and the military still have a grip (albeit slipping) on a tinderbox nation, increasingly plagued by gang violence. No one dares predict how this tragedy might end but no scenario is without violence, food shortage and painful economic disruption.
ARGENTINA: $38.7bn USD is due this year in principal and interest payments on Argentina’s $311bn foreign debt. While Macri had won limited credibility among international lenders by closing the chapter on the last default and taking cost-cutting measures, the Fernández administration is openly ridiculed in the halls of lending bodies. The fact that the Central Bank decided to ditch economic forecasts because “they damage credibility” pretty much sums up the laughingstock of a misguided, confusing and contradicting Fernández policy framework. It took Argentina 10 years to restructure its debt following the 2001 default. Alberto Fernández hopes to negotiate a restructuring with the IMF and European bi-lateral lenders by April 2020. But the IMF has lost its patience and European governments are trying to boost their national economies. Therefore, many expect the Fernández administration to come back from its initial talks with the IMF, Germany, France and Spain in early February smarting from the spanking they will receive. Alberto Fernández will then have to convince fellow Peronists and the Argentine people that what Argentina requires is a dose of economic medicine even harsher than what was dished out by Macri. Buffered from reality by their own sense of exceptionalism, Argentines are not likely to rise to the challenge, which will lead to default and a downhill spiral of devaluation and hyper-inflation. Start crying now for Argentina.
Honorable mention: Nicaragua, Suriname
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