Latin American currencies have weakened a great deal since early 2014 in large part due to slow growth in the region. These trends are likely to continue through 2015, for three primary reasons.
Lower commodity prices: US Dollar (USD) prices for agricultural, energy and metals exports have fallen across the board and will reduce export revenue to varying degrees in the region.
Large current account deficits: In many Latin American nations, trade deficits are larger than historical norms and may require weaker domestic demand (less imports) in order to compensate for sluggish (or negative) growth in export revenue.
Rising inflation: Most Latin American economies have experienced an increase in inflation due to the lag impact of weaker currencies. This may hinder the ability and willingness of the region’s central banks to boost demand by easing monetary policy and, in some cases, may lead to more restrictive monetary conditions.
While our overall outlook is for continued below-potential growth in Latin America in 2015, we emphasize that the region is highly diverse, and growth rates and inflation will differ greatly from one country to another. Among the region’s varied economies, we expect that Brazil, Chile, Mexico, and Peru will be relative outperformers, while Colombia will slow substantially, after many years of impressive growth. Finally, we expect difficult times for Argentina and especially so for Venezuela, where we anticipate a deep recession with the possibility of triple-digit inflation. Let’s take a brief look at each economy:
Brazil: Sector Outperform
After a significant slowdown from its post-crisis rebound, Brazil’s growth may be set to pick up again in 2015. We anticipate 1.5 percent real GDP growth this year, above the 0.5 percent consensus expectation in a recent Banco do Brazil survey of economists. Among the Latin American countries, Brazil is the most insulated from the impact of falling commodity prices. Moreover, its currency has weakened more than most of its peers, which should boost exports, especially to the U.S., which may replace China as the biggest source of growth for Brazilian merchandise. Finally, Banco do Brazil may have a little bit of scope to ease policy, in contrast with many of its Latin American peers.
Chile: Caught Between Copper and Oil
Chile appears to be skating on the edge of a recession. The lag impact of a weaker Chilean Peso (CLP) may help Chile avoid an outright downturn but one cannot rule out the possibility. Chile’s economy will benefit from the collapse in oil prices but will be hampered by the drop in copper prices. If copper prices fall further and oil prices rebound, that could be a toxic mix for Chile and could tip the economy into recession. As such, Chile’s fate remains to some extent in the hands of the Chinese and their demand for copper, which is Chile’s main export. Slowing growth in China is bad news for Chileans.
Colombia: From Success to Distress?
Colombia has been one of the great success stories of the past 15 years with falling rates of inflation and robust economic growth spurred by dramatically lower levels of violence. In the long term, we remain optimistic on Colombia but we do see growth taking a stumble in 2015, with expansion slowing into the 0-2 percent range. Lower oil prices will take a bite out of Colombia’s economy. Some of this will be offset by the weakening of the Colombian Peso versus the U.S. Dollar.
Mexico: Slow growth to remain slow
Mexico’s growth rate has been slow the past several years and it appears likely to remain slow in 2015, perhaps in the 1.5-2.5 percent range as a base case scenario. Fortunately, the country is not as dependent upon oil as it once was. The collapse in oil prices appears likely to shave more than 1 percent off economic growth in 2015 but the good news is that some of that is likely to be offset by the lag impact of a weaker currency, which should boost exports to the United States, Mexico’s main trading partner. Additionally, U.S. economic growth appears likely to be robust in 2015. Moreover, Banco de Mexico has done an exemplary job of containing inflation. Even so, its policy rate is currently below the rate of inflation and one cannot rule out a few rate hikes over the course of 2015, especially if MXN were to weaken further.
Finally, there is the issue of Mexico’s stability. The level and pervasiveness of violence calls into question the government’s control over large sections of the country as well as the attractiveness of certain regions Mexico as a business and tourist destinations.
Peru: Potential for a Currency Devaluation
Peru’s currency, the New Sol, has depreciated to a much lesser degree than its Latin American counterparts. This is problematic given Peru’s enormous current account deficit, relatively slow growth and the likely impact of weaker commodity prices. As such, we see economic growth remaining weak, probably around 1 percent real growth in GDP, with a significant risk (35 percent) of a recession.
Given the disinflationary influence of lower commodity prices, a relatively strong currency (for the moment) and slow economic growth, we don’t see much short-term risk of the central bank tightening policy.
Argentina: Cry for Me
Argentina enters 2015 under challenging circumstances. Inflation is soaring) and the central bank appears to be behind the curve, having just begun tightening policy during the last few months. Moreover, the country is once again in default and appears to be unwilling to negotiate with its creditors ahead of the 2016 elections. Finally, the government of President Cristina Kirchner is enveloped in a scandal involving an alleged cover up of Iranian involvement in the July 18, 1994 attack on the Asociacion Mutual Israelita Argentina in Buenos Aires. Irrespective of the veracity of these allegations, the surrounding controversy could hamper the government’s ability to deal with Argentina’s economic challenges.
Venezuela: Muy Duro (Very Difficult)
Venezuelan President Nicolas Maduro finds himself in an unenviable situation. Inflation is soaring and real growth is stagnant . Officially, inflation is around 70 percent and appears headed toward 100 percent. The price of oil, responsible for the near totality (96 percent) of Venezuela’s export earnings, has collapsed. Currency reserves are running out so quickly that the central bank converted a loan from China into foreign exchange reserves. In January, Maduro visited China, Qatar and Russia to ask for loans and aid to stave off an impending default on Venezuela’s debt. Shortages of basic goods from toilet paper to tampons are creating social unrest.
To make matters worse, Venezuela employs three official exchange rates that apply to different kinds of goods. Officially, there are 6.30 Bolivars to the U.S. Dollar. On the black market, one U.S. Dollar buys 175 Bolivars. Finally, the government’s yawning budget deficit is being financed to a large extent by the printing of money, in the vein of the Weimar Republic (though not on the same scale).
Read Erik Norland’s complete 2015 Latin America outlook here.