“We don’t expect any quick rebound of Latin American economies this year,” said Dr Le Xia, Asia Chief Economist at BBVA Research, speaking at a roundtable luncheon at the Hong Kong General Chamber of Commerce on 8 January.
Xia shared his insights on the general prospects for the region, and also took a closer look at some of its biggest economies. BBVA expects a slowdown in growth for Latin America to 0.7% in 2020. On a brighter note, Xia added, the region’s institutions and democratic functions remain strong.
External factors are among the key issues, and there is a close correlation between the global economic performance and that of the region.
“Latin America is very integrated to the global trade system. One important reason they haven’t performed well in the past year is because of the global trade problems,” Xia explained.
There may be some reason for optimism in 2020 on this front. Sentiment indicators regarding the trade war are improving with the prospect of a phase one deal between China and the United States. Both sides have incentives to reach a deal.
Looking at the region’s export figures demonstrates why the external environment is so important.
“If you look at all the exports in the region, 80% of exports go to the rest of the world, and only 20% are within Latin America.”
China is a key importer from the region, including beef from Argentina and Uruguay, for example. And 95% of cherries consumed in China come from Chile.
“Latin’s America’s growth is very correlated with global growth, especially due to the export sector,” Le said. “It is also dependent on commodity prices. If commodity prices get hit, Latin America gets hit as well.”
Few Latin American economies have managed to escape social unrest in the past year, which is adding to the uncertainty. High debts across the region mean the economies do not have a lot of policy room to try to revive their economies.
But the region has seen progress in some areas, Xia explained.
“There has been good news in Brazil: they recently passed a reform bill for pension funds that will save the country around US$200 billion over 10 years. Also, this indicates the government’s priorities on the fiscal side in public spending.”
Brazil is expected to rebound further, partly because of this pension bill and the prospect of further structural reforms of the country’s tax and spending.
“Brazil has performed better than expected. This year we expect investors to have more confidence as a result of the government’s reforms.”
Brazilian President Jair Bolsonaro, described as the “tropical Trump,” raised concerns when he took office a year ago with his populist policies and attitude towards deforestation. However, his fiscal reforms suggest he may be less of a loose cannon than had been feared.
In Chile, however, recent developments have put the brakes on its growth prospects. Like Hong Kong, in 2019 it experienced an outbreak of sometimes violent protests that have hit the economy hard.
“We used to say that Chile was a ‘good student’ among emerging markets. But as a result of the social unrest we have downgraded their growth prospects to 1% for 2019, and this will slow to 0.5% in 2020,” Xia said. “This social unrest will have a long-lasting impact.”
Chile will also have a referendum on changing its constitution this year. “This should be a technical change, but could involve a lot of uncertainties throughout the process.”
While inflation is under control in most countries, this is not the case in Argentina, which has seen inflation running at around 50% for the past couple of years.
“Last year was very bad; this year will be worse,” Xia said. “They need to find ways to deal with inflation as well as the country’s IMF and private debt.”
Mexico has disappointed by failing to live up to expectations in recent years. “The policymaking process is not that clear, and we don’t know how the new president will perform,” Xia explained. “A lot of uncertainty weakens sentiment.”
However, the new trade agreement with Canada and the United States has eliminated some of the uncertainties for Mexico.
“This year, all of the region’s most important economies are subject to serious challenges,” Xia summarized. “On the policy side: although on the monetary side they have some room to manoevre, on the fiscal side they need to do more control, rather than spending.”
In the long run, however, BBVA – a Spanish global bank that has a major presence in Latin America – retains its confidence.
“Now, the environment is challenging,” Xia said. “But compared with 30 years ago, especially in terms of institutions, the region has made a lot of progress.”