Economically speaking, it is no secret that last year was a tough one for Latin America. After recovering from the 2009 global meltdown with several consecutive years of relative prosperity, the World Bank estimates that Latin America’s GDP contracted by 0.7% in 2015. News of recession is particularly alarming when contrasted with world GDP growth of 2.4% in the same year.
So why did Latin America fare so poorly? Firstly, Latin America is a commodity driven region with commodities representing 50% of exports between 2012 and 2014, according to the World Bank. Over the last year, well supplied global markets combined with slowing demand from key trading partners (think: China) led commodity prices to tumble. From crude oil to corn, prices dipped to their lowest levels since the fallout of the Great Recession. In particular, low energy prices undermined the oil dependent countries of Brazil, Mexico and especially Venezuela where oil makes up 95% of exports and contributes 25% of GDP (with gas), according to OPEC.
In addition, the unique economic and political challenges of individual countries bled across borders to dampen the region’s growth as a whole. Of particular concern was the deceleration witnessed in Brazil – the biggest economy in the region, accounting for 40% of GDP. Throughout 2015 the country battled inflation unseen in a decade while output floundered amid political turmoil that include a potential presidential impeachment and a turnover of the country’s finance minister. These issues resulted in a downgrade of Brazil’s credit rating and led the real to lose half its value over the course of the year. Even though currency devaluations such as this work to promote exports, low commodity prices masked the effect. Case in point, Brazil’s exports in 2015 rose 10% in volume terms, but fell 22% in value terms.
So we understand that 2015 was rough, but what lies ahead? Are the economic prospects for the future stronger as we look to 2016 and beyond? In general, the sentiment seems to be 2016 will be a year to recover and reorganize while preparing for improved economic performance in 2017. Commodity prices are unlikely to dramatically improve, although they will likely stabilize and begin to show upward ticks in the second half of 2016. In particular, the oil price has reached an unsustainably low level and we must assume that suppliers will be forced to take steps to cut supply and raise the equilibrium price. Furthermore, in the absence of some major turnaround in the lethargic developing economies that demand many agricultural products, grains, meal, and oils are likely to stay soft over the coming years.
The situation in individual countries is likely to vary greatly. Brazil will probably need at least 2016 to pull itself out of its economic slump. In fact, the World Bank predicts that Brazil will contract another 2.5% over the year. Venezuela is also unlikely to have a great 2016 as low oil prices will continue to torment their economy while they battle with currency instability and ridiculous inflation. However, there is also some cause for hope. For example, many believe that Argentina’s new president is on track to tame their wild economy and while the results may not be seen in spades in 2016, many appreciate that he is setting the groundwork upon which future growth will be built.
To look specifically at the numbers, FocusEconomics’ consensus survey predicts regional economic growth of 0.3% in 2016. This modest number is aligned with estimates from The Economist and the World Bank who are forecasting regional growth of 0.5% and 0.1%, respectively. Only the IMF predicts another recession year by which GDP would shrink by 0.3%, driven mostly by continued strife in Brazil. The good news, however, is that by 2017 they expect that the region will be back on track to grow by 1.6%. The World Bank is even more optimistic, with a 2017 growth estimate of 2.3%.
Most economists believe there is more downside risk to their forecasts than upside. For example, we may not have yet seen the commodity price floor. Or, El Niño which has to date been relatively mild could damage crops in the region that are destined for export.
While all this news makes things seem bleak, it is important to remember that tough times can reveal big opportunities. While domestic producers and consumers may struggle during 2016, it could be a great opportunity to purchase assets that would otherwise be unavailable or may be too expensive. In the end the region’s strong fundamentals persist. Population trends continue to show that we will need to feed more people than ever before and Latin America is one of the few places in the world with the resources to do so. Despite its idiosyncrasies, Latin America still holds tremendous opportunity for those willing to work within its volatility and risk structure.