Here’s some good news from Latin America: Much of the region’s economy may recover sooner than expected.
Indeed, less than a month after the International Monetary Fund and other international financial institutions predicted that the region’s economy will contract for the second year in a row in 2016, and that it may remain in recession for the next two or three years, there are signs that the region may soon see the light at the end of the tunnel.
The main reason for some guarded optimism is that US interest rates will not rise significantly, and most Latin American currencies will continue appreciating in relation to the dollar.
It sounds complicated, but it really isn’t. What’s happening is that the US economy is growing at a slower pace than economists had predicted. This is likely to cause the US Federal Reserve to maintain US interest rates relatively low. When the US economy slows down, the Fed usually tries to maintain interest rates low in order to allow firms to borrow money relatively cheaply and keep the economy going.
That’s driving big international investors away from US bonds, and moving them to put their money in emerging economies such as Argentina, Colombia, Mexico, and Brazil, which offer higher interest rates.
It’s already happening. When Argentina’s new government recently announced plans to issue $16.5 billion in bonds that offered between 6.7 per cent and 7.5 per cent interest rates, it got offers for a whopping $68 billion from some 600 investment groups, most of them from the United States.
The influx of US dollars makes Latin American currencies stronger, allowing countries in the region to buy more foreign goods, and to pay their foreign debts. Incidentally, it also makes it easier for Latin Americans to travel abroad and visit Miami.
“Latin America will grow more than expected, for completely external reasons,” says Alberto Bernal, an emerging markets expert with XP Securities. “Ironically, the recovery will have little to do with what Latin American countries are doing, and will be almost entirely due to what’s happening with the US economy.”
Bernal adds that “the growth numbers for the region won’t be good, but they will be better than predicted a month ago by the International Monetary Fund.”
Last month, the IMF predicted that Latin America’s economy will contract by 0.5 per cent in 2016. Many independent economists now believe that the region could return to flat or even slightly positive growth this year.
According to XP Securities’ forecasts, the Brazilian currency will appreciate by 11.6 per cent relative to the US dollar in 2016, Mexico’s currency will strengthen by 7.3 per cent, Colombia’s by 13.4 per cent, Chile’s by 12.4 per cent, and Peru’s by 12 per cent.
The only major country where the currency will continue weakening relative to the US dollar will be Argentina, whose peso will depreciate by 8.3 per cent between January 1 and December 31 this year, it says.
My opinion: Granted, while stronger Latin American currencies will help most of South America’s commodity-exporting countries, they will hurt manufacturing exporting nations such as Mexico. Because Mexico’s labour costs will rise, its goods will become somewhat more expensive to buy abroad.
And, although I haven’t yet found an economist who is predicting a sharp rise in commodity prices anytime soon, there is also the danger that a small hike in the price of oil, minerals and other raw materials will make commodity-dependent countries return to their usual state of complacency, and postpone once again their urgent task of diversifying their economies.
But the appreciation of the US dollar may be just the right dose of relief South American nations need to get back on their feet, and do what they should have done long ago: invest in quality education and innovation, and diversify their economies.
Also, the region’s slight respite from its economic stagnation comes at a time when the political winds are changing, and many countries are moving away from their disastrous populist policies of recent years. Argentina has already done that, and Brazil, the region’s biggest country, may do it as early as this week, if President Dilma Rousseff is impeached and replaced by vice-president Michel Temer, as many expect.
The strengthening of the region’s currencies will be a huge opportunity for Latin America to put its energies on producing more sophisticated goods, become more competitive in the global economy, and start an era of long long-term prosperity.
