Latin America: Region relies on Mexico for growth
Strength of economic recovery exaggerated; Necessary reforms in Brazil are lacking
The widespread and generally accepted claims that Latin America passed the test of the 2008 crisis is being re-evaluated as growth in the region falters. Immediately after the 2008 crisis, Latin America returned to growth and, and as part of the emerging markets story, grew strongly – at least initially. Latin America attracted record levels of inward capital – through international markets, flows into domestic markets and foreign direct investment. However, data from Standard & Poor’s show that while Latin America was quick to return to positive growth following a brief contraction (-3.6% in 2008 and -1.3% in 2009) its strong performance in 2010 (GDP growth of 6%) may have been somewhat misleading in terms of post-crisis trend growth. Subsequent growth has slowed and is noticeably lower than in the pre-crisis years.
"There has been significant slowdown in the region post the crisis," says Roberto Sifon-Arevalo, managing director of sovereign and international public finance ratings at Standard & Poor’s, who attributes this to three main factors: "First, the impact of the crisis on commodity prices; the lower pace of growth from the region’s two leading economies – Brazil and Mexico; and third, a lot of the momentum pre-crisis had been generated from macro-economic reforms, which gave the economies a short-term boost. From now on, growth will [need to be generated by micro-reforms] and those reforms take a bit longer to pay off." Many economists argue that those micro reforms have yet to be initiated in the region’s largest economy, Brazil. The performance of Brazil is central to the region’s prospects and its immediate post-crisis rebound of 7.9% growth in 2010 was a large part of the regional bounce. However, growth remains sluggish, reforms postponed until next year – after elections – at the earliest and the deteriorating fiscal situation is threatening a downgrade.
At the World Economic Forum in Davos, Luciano Coutinho, the president of state development bank BNDES attempted to brush off a downgrade, which would be damaging economically, financially and politically. "I don’t see reasons for Brazil to have a downgrade, there aren’t objective reasons," he was quoted by Bloomberg as saying. "The government has shown commitment to stability, to maintaining tighter fiscal policy."
However, Coutinho’s confident assertion is not backed up by the rating agencies. In October 2013 Moody’s lowered its outlook to stable from positive, citing a deteriorating debt profile and evidence of slow growth, while in June last year Standard & Poor’s placed Brazil’s rating on negative outlook. "The Brazilian government is compensating for the lack of growth by using expansionary fiscal policy – through the use of [entities] such as BNDES and others," says Sifon-Arevalo. "When we placed Brazil on a negative outlook in June we were looking to see a pick-up in economic growth or a change in [fiscal] policies. So far we haven’t seen that materialize; 2013 growth came in below our expectation and 2014 isn’t [looking] great either – our forecast is lower than in 2013. The fiscal side is also tied up with the election. It’s difficult to imagine a change in policy in an election year. So we continue to see no improvement and we will continue to monitor."
Neither side of the equation looks likely to change soon: according to data from the finance ministry, government spending rose 14% in the first 11 months of 2013. Private-sector growth from consumption and investment is unlikely to help the equation in the short term as the central bank is still in the middle of the world’s strongest monetary tightening: the headline rate has risen from 7.25% to 10.5% in the past year and the bank expects to raise rates further before the end of the current cycle.
Mexico is therefore the more likely engine of Latin American growth, but the region’s second-largest economy grew by just 1.2% last year. In November, Mexican industry suffered another relapse when industrial production contracted by 1.2% year on year, down from growth of 0.3% in October. In all, industrial production fell in annual terms in eight of the 11 months that have been reported for 2013, with output declining by an average of 0.7%.
This performance will "test the patience of even the most fervent of Mexico bulls," says David Rees, Mexico analyst at Capital Economics in London. However, he thinks that growth in the US will lead to an annual expansion in Mexican industry of 5% this year – driving GDP growth to around 3.7% this year and accelerating into 2015. "Accordingly, we think that 2014 is shaping up to be a bumper year for Mexican industry," Rees said in a client note. "We remain comfortable with our view that the Mexican economy will be the region’s relative outperformer over the coming years."