Latin America Economic Outlook August 2014 Contents The world and the region: 1 The outlook for the region remains positive Country outlooks: Argentina 2 Challenging scenario in the short-term Brazil 3 Weak economic activity Chile 4 Low growth Colombia 5 On the right track Ecuador 6 Favorable projections Mexico 7 Recovering economy Peru 8 Unrealized potential for growth Venezuela 9 Structural imbalances unaddressed 10 Macroeconomic variables The world and the region The outlook for the region remains positive 1 2 3 Nearly six years removed from the worst Although global markets generally, and of the subprime crisis, the U.S. economy emerging markets in particular, have thus 4 appears to be slowly returning to normal. far been dependent on the steps that the The economy is growing, employment Fed has taken, recent international fears 5 is up (the unemployment rate is falling), concerning adjustments to its monetary people are spending more, and companies policy are perhaps overblown. A change to 6 are doing their part in terms of investing in the policy would be a natural consequence physical and human capital. of an economy that, after the disruptions 7 of 2008, is resuming development under 8 Even if there is a long road ahead before a more normal conditions. And globally, a return to pre-crisis levels, the ground gained return to relative normalcy by the world’s 9 is plainly evident. And so it is no surprise largest economy can never be bad news. that the Federal Reserve is continuing with On the contrary, both the developed world 10 its plan to cut back on special monetary and emerging economies should benefit stimulus. It is important to point out that this enormously if, in the medium-term (over the tapering does not imply a change in policy next twelve months), the U.S. sees economic stance. The policy remains expansive, but conditions that no longer require a hyper- with less stimulus than just a few months relaxed monetary policy. ago. Barring unforeseen events, however, the special monetary-stimulus program is expected to come to an end in the final months of 2014, thus paving the way for higher short-term interest rates in the second half of 2015. 3 Latin America Economic Outlook 1 2 3 Given this reality, the ECB will If it is apparent that the U.S. economy The problem is that in Europe, unlike in the is recovering, it is much more difficult United States, there are structural factors 4 continue to relax monetary to be optimistic about Europe. The crisis that tend to dilute the effects of monetary policy in the short-run, jeopardizing the future of the euro is policy on economic activity in general, and 5 definitively behind us, but problems job creation in particular. In other words, keeping the nominal short- remain for the short- and medium-term. in the Eurozone, a very relaxed monetary 6 The decision by European Central Bank policy, however necessary, would gain much term interest rate close to (ECB) president Mario Draghi to stand less traction than in the U.S. There are still 7 behind the sovereign debt of troubled major competitive differences between the 0% and enacting special 8 Eurozone countries put an end to the Eurozone economies that cannot be resolved monetary-stimulus policies. financial instability that was tormenting the through a more lax monetary policy. Looser 9 majority of Europe’s economies in 2011–12. monetary controls would help to depreciate Nevertheless, many of those economies the Euro, improving the zone’s global 10 remain weak, with meager performance in competitiveness, which is desirable, but of terms of activity and employment, and with themselves would not be enough to improve clear and persistent deflationary pressures. the overall picture. Only to the extent that Given this reality, the ECB will continue monetary easing raises inflation in the to relax monetary policy in the short-run, Eurozone’s most competitive countries will keeping the nominal short-term interest rate it prove useful. But it is hard to imagine this close to 0% and enacting special monetary- happening, given these countries’ reluctance stimulus policies. to accept higher inflation rates and the ECB’s refusal to sanction a higher inflation target for the Eurozone as a whole. 4 Latin America Economic Outlook 1 2 3 Thus, even with a more relaxed monetary Unit labor cost policy by the ECB in the short-run, most 4 Eurozone economies will remain hampered. Costo Laboral Unitario Without substantial improvements to 5 140.0 GermanyAlemania 138.9 productivity, and without a deliberate effort SpainEspaña to increase inflation in the countries at the ItalyItalia 6 130.0 center, such a policy will continue to allow FranceFrancia 128.2 Eurozone Zona Euro 121.8 7 deflationary pressures in the countries at 120.0 121.5 the periphery, pressures rooted in meager 8 economic growth and high unemployment. 110.0 107.4 Índice Base 2000 = 100 Base index 2000 = 100 9 Clearly, we are on a path to two-tiered 100.0 100.0 growth in the developed world; though 10 90.0 far from being ideal, it is a step in the 2001 2004 2007 2011 right direction, considering expectations 2000 2002 2003 2005 2006 2008 2009 2010 2012 2013 prevailing at the height of the subprime crisis Source:Fuente: EuropeanComisión Europea Commission in late 2008 and early 2009. For emerging economies, the outlook remains positive, despite the possibility of continued financial uncertainty and volatility occasioned by the policy shift at the Fed. This does not apply universally, however: those that have implemented sensible policies will continue doing well, but present conditions point to barriers for those that fail to shift toward better economic policies. 5 Latin America Economic Outlook 1 2 3 Country outlooks 4 5 6 7 8 9 10 6 Latin America Economic Outlook Argentina Challenging scenario in the short-term 1 2 3 Economy in recession. Declining real Forecasts for December 2013 to December wages, rising interest rates, restrictions 2014 vary from 38% to 40%, well above the 4 on imports, and growing uncertainty are 27.9% recorded between December 2012 the reasons for the recession in which the and December 2013. The 20% devaluation 5 Argentine economy is mired. According imposed at the end of January 2014, and to unofficial estimates, GDP has fallen an the expectation of an additional devaluation 6 average of 1.1%, year-on-year, in the first in the second half of the year, are the main five months of 2014, lending support to reasons that an inflationary acceleration is 7 forecasts that economic activity would drop anticipated. 8 by 1.5% to 2.0% for the year. Among the most affected sectors are manufacturing The holdout dispute deepens. The United 9 (in particular, automobile production) and States Supreme Court finally rejected the wholesale and retail trade; the former motion for appeal that Argentina had filed in 10 has been impacted mostly by diminishing response to rulings against it in lower courts. imports, and the latter by a decrease in Argentina is now required to pay out US$1.5 purchasing power across broad sectors of billion to a group of holdouts (investors who society. decided not to participate in the debt swaps that took place in 2005 and 2010) that had Inflation, however, has not fallen. Despite secured favorable judgments in American the contraction of economic activity, prices courts. continue to rise rapidly, though more slowly than in the first few months following the As time to negotiate has expired and devaluation of January 2014. According to Argentina and the hedge funds haven’t private sector measurements, retail inflation reached an agreement, Argentina has for the past 12 months was around 39%, entered in a default, preventing it from and most analysts predict that these levels external financing at least in the short-term. will continue until the end of the year. 7 Latin America Economic Outlook 1 2 3 The most likely scenario From the statements that the Minister of There is market consensus, however, Economy of Argentina has presented after that several of these matters will begin 4 for the short-term is low the meeting, it isn’t clear that an agreement to be resolved with the arrival of a new economic growth, possibly (between the Government and the holdouts) administration at the end of 2015. 5 can be reached in the near future. However, even a slight recession, a private agreement (between private banks The future holds challenges. The most 6 and/or private companies and the holdouts) likely scenario for the short-term is low and a relatively rapid rise in shouldn’t be ruled out definitely. economic growth, possibly even a slight 7 recession, and a relatively rapid rise in domestic prices. 8 Pending issues. The shrinking of the fiscal domestic prices. Furthermore, continuing deficit, control over inflation, normalization uncertainty regarding the conflict with the 9 of relative prices (especially those related holdout investors may affect the economy’s to energy), and the elimination of foreign- real and financial indicators. The good news 10 exchange and trade restrictions are all is that the international environment remains matters still to be resolved. Although the favorable (in terms of commodity prices, authorities have made great strides in global interest rates, emerging growth, etc.), recent months in normalizing Argentina’s and medium-term opportunities (especially international financial relations, thanks to those associated with the unconventional agreements with both Repsol (through the energy market) continue to be fully available. expropriation of YPF) and the Paris Club, it is clear that foreign financial inflows will continue to be limited as long as these issues remain unresolved (especially, if the default situation extends).