September 8, 2016 South America: Soon to see some light at the end of the tunnel? Opportunities for bold investors Several factors have undermined economic growth in South America in recent years. The slump in commodity prices, the slowdown in global trade and the Chinese economy, and numerous political problems have given the region a rough ride. We note that Brazil and Argentina have been particularly hard hit. However, the situation now appears to be improving, with the help of encouraging political reforms. Things are looking brighter for the years ahead, for South America and for investors who take an interest in this region. Since 1990, the average annual real GDP growth of Graph 1 – In the past two years, growth has lagged well below the Latin America as a whole has been close to 3.0%. However, historical average Ann. var. in % Ann. var. in % after years of fast economic growth fuelled by a commodity Real GDP growth – Latin America and the Caribbean 7 7 boom, South America1 has recently been languishing in 6 Average, 1990–2015 6 the doldrums (graph 1). The slump in commodity prices, 5 5 soft Chinese demand, high inflation largely caused by 4 4 depreciation in South American currencies against the 3 3 U.S. dollar, and numerous political problems have even 2 2 driven a few countries (Brazil first and foremost) into 1 1 recession. For the first time in 30 years, South America 0 0 seems to be on the verge of having two straight years of -1 -1 contraction in real GDP, in 2015 and 2016. This economic -2 -2 reversal is being observed in a few countries of the region 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 (graph 2), but particularly in Brazil which, with around 3% Sources: World Bank and Desjardins, Economic Studies of global GDP based on purchasing power parity (PPP) Graph 2 – Most of the countries of South America have in 2014, carries a good deal of weight. experienced a slowdown in recent years Ann. var. in % Ann. var. in % GROWTH THAT IS DEPENDENT ON GLOBAL Real GDP 14 2013 14 CONDITIONS AND THE COMMODITIES MARKET 12 2014 12 10 2015 10 The weakness of the Brazilian economy in particular and of 8 8 6 6 the South American economies in general is partly due to 4 4 the slowdown of the global economy. The slower growth in 2 2 0 0 imports in most of the advanced nations, and in emerging -2 -2 -4 -4 countries like China, has done considerable damage -6 -6 Weight within global GDP based on purchasing power parity in 2014: -8 -8 (graph 3 on page 2). 2.89% 0.56% 0.49% 0.35% 0.33% 0.16% 0.06% 0.06% 0.05% -10 -10 Brazil Chile Peru Bolivia Ecuador Uruguay Paraguay Argentina* Colombia Venezuela 1 * The World Bank does not calculate GDP based on purchasing power parity for Argentina. This report mainly discusses the major countries of South America. Sources: World Bank and Desjardins, Economic Studies However, some data released by international institutions such as the World Bank and the International Monetary Fund cover Latin America (which also includes the countries of Central America, including Mexico) and In fact, the rise of the Chinese economy since the beginning the Caribbean. We published an analysis on Mexico in May 2016, www. of the 2000s has had major negative consequences on the desjardins.com/ressources/pdf/pv160505-e.pdf?resVer=1462452919000. François Dupuis Benoit P. Durocher 514-281-2336 or 1 866 866-7000, ext. 2336 Vice-President and Chief Economist Senior Economist E-mail: [email protected] NOTE TO READERS: The letters k, M and B are used in texts and tables to refer to thousands, millions and billions respectively. IMPORTANT: This document is based on public information and may under no circumstances be used or construed as a commitment by Desjardins Group. While the information provided has been determined on the basis of data obtained from sources that are deemed to be reliable, Desjardins Group in no way warrants that the information is accurate or complete. The document is provided solely for information purposes and does not constitute an offer or solicitation for purchase or sale. Desjardins Group takes no responsibility for the consequences of any decision whatsoever made on the basis of the data contained herein and does not hereby undertake to provide any advice, notably in the area of investment services. The data on prices or margins are provided for information purposes and may be modified at any time, based on such factors as market conditions. The past performances and projections expressed herein are no guarantee of future performance. The opinions and forecasts contained herein are, unless otherwise indicated, those of the document’s authors and do not represent the opinions of any other person or the official position of Desjardins Group. Copyright © 2016, Desjardins Group. All rights reserved. Economic Viewpoint September 8, 2016 www.desjardins.com/economics Graph 3 – Growth in exports from the emerging countries of Latin Graph 4 – GDP per capita has also deteriorated in some countries America is keeping pace with the global cycle of the region Ann. var. in % Ann. var. in % Ann. var. in % Ann. var. in % In real terms PIB réel per capita 35 35 Growth due to the 30 30 4 4 depreciation of Latin 25 25 American currencies 20 20 2 2 15 15 10 10 0 0 5 5 0 0 -2 -2 -5 -5 -10 -10 -4 -4 -15 -15 Average, 2000–2013 -20 -20 -25 -25 -6 Average, 2014–2015 -6 2000 2003 2006 2009 2012 2015 -8 -8 Exports from the emerging countries of Latin America Imports by the advanced countries Brazil Chile Peru Bolivia Ecuador Uruguay Paraguay Imports by Asian emerging countries Venezuela Argentina Colombia Sources: CPB Netherlands Bureau for Economic Policy Analysis and Desjardins, Economic Studies Sources: World Bank and Desjardins, Economic Studies South American manufacturing sector. According to the Graph 5 – The South American countries lag far behind in terms of income per capita World Bank, Chinese competition caused a shortfall of over In US$* In US$* Gross national income per capita in 2015 6% in Brazilian exports of manufactured products between 60,000 60,000 2001 and 2011. For the rest of the region, that shortfall 50,000 50,000 is between 3% and 7%. On the other hand, China’s fast development has boosted exports of agricultural products by 40,000 40,000 over 10%, and mining products by 20%. Not only do global 30,000 30,000 economic conditions, primarily those of China, clearly 20,000 20,000 influence the volume of exports from South America, but 10,000 10,000 they also dictate the type of its exports. 0 0 Peru Chile Brazil States United Bolivia Canada Ecuador The commodities market has become increasingly important Uruguay Paraguay Venezuela Euro zone to the South American economies during the latest upward * According to purchasing power parity. cycle. Oil prices in particular are key to the exports and Sources: World Bank and Desjardins, Economic Studies investments of Columbia, Ecuador and Venezuela. Brazil, It represents 42% of Latin America excluding Mexico. As Chile and Peru are also highly dependent on commodities, a result, the swings of its economy greatly affect the other especially in the mining and agricultural sectors. countries of the region. Brazil receives the lion’s share of the exports of Argentina, Bolivia, Paraguay and Uruguay But we must not overlook the influence of currency (graph 6). At the same time, we note that despite its size, movements on trade, especially when they are intense, as Brazilian demand is far less important to the countries on has been the case in recent years. Consequently, despite the continent’s Pacific coast. For Venezuela, Colombia and global growth that was still slow in 2015, Brazil’s real Ecuador, the primary export destination is the United States. exports climbed by 6.1% last year, thanks to depreciation For Chile and Peru (as well as for Brazil), it is China. by its own currency, the real. Graph 6 – Brazil is an important destination for many South POVERTY IS STILL VERY PREVALENT American countries In % Exports to Brazil as a % of total exports In % Despite the progress of recent decades, poverty is still Average, 2011–2015 35 35 rampant in South America, and the situation has deteriorated 30 30 in recent years with downturns in real GDP per capita in Venezuela, Brazil and Argentina (graph 4). We also note 25 25 that national income per capita is still extremely low in 20 20 South America compared with the advanced countries 15 15 (graph 5). But most of the major countries of the region find 10 10 themselves better off than China or India. 5 5 0 0 Peru Chile CLOSE-UP ON BRAZIL Bolivia Ecuador Uruguay Colombia Paraguay Argentina Boasting the seventh largest GDP in the world based on Venezuela . PPP, Brazil is by far the largest economy of South America. Sources: International Monetary Fund and Desjardins, Economic Studies 2 Economic Viewpoint September 8, 2016 www.desjardins.com/economics The Brazilian economy has done well in the 2000s, apart Graph 8 – A falling currency and rising inflation have led the Bank from 2008–2009 when the global economy collapsed of Brazil to tighten its monetary policy (graph 7). Between 2000 and mid-2013, it recorded average Ann. var. in % In % 12 16 real growth of 3.6%. Its exports particularly benefited 11 15 14 from rising prices for commodities (iron, oil, etc.) and 10 13 9 agricultural goods (soybeans, sugar, coffee, etc.).