An update on Latin America

by Dave

HSBC analysis via Malta Business Weekly

While Latin America as a region seems to have improved, it is clear that there are countries that have taken advantage of the favourable external environment to improve structurally, while others have not only failed to improve, but have actually made their own situation worse. We talk about a third group of countries that seem to be somewhere in the middle; we are waiting for further definition in terms of the direction each country may take.

Politics plays a fundamental role in determining each country’s group. It is not a matter of the traditional left versus right-wing paradigm, given that the more successful countries cannot be characterised through political geometry. It is rather the return over the last decade of populism and, in some cases, backward steps taken in building up democratic institutions. Given the track record of populism in Latin America, we find it troublesome that some countries are applying economic policies that have weak theoretical underpinnings and that have clearly not worked in the past.

In our view, the countries that have seen a strong deterioration in their fundamentals (as a result of authoritarian populism) are Bolivia, Ecuador, and Venezuela. The countries that have improved their fundamentals (albeit, some more than others) are Brazil, Chile, Colombia, Costa Rica, Mexico, Panama, Peru and Uruguay. This leaves six countries that have yet to decide clearly which route they wish to take: Argentina, El Salvador, Guatemala, Honduras, Nicaragua and Paraguay.

Up until recently, Latin America had been characterised as a politically and economically unstable region. As of late, however, a highly favourable global environment has helped turn the region around, and it is now emerging as one of the most promising regional economies in the world. Nevertheless, we question whether this is just a new cycle that will soon end, or if it is really a sign of a newfound maturity. Upon examination, we still find many structural weak points. But the most important conclusion we draw is that Latin America today is a very heterogeneous region, characterised by three groups: clear winners, countries that seem to be heading toward serious trouble and a group that falls into a grey area.

World economic growth is expected to continue slowing down, especially
that of the US. While it is expected that the US will influence
prospects for economic activity in Mexico and most of Central America,
it is believed that the slower growth anticipated in most of South
America will actually be self-induced through more restrictive monetary
policy. The weighted average growth for Latin America of 5.4 per cent
in 2007 was above potential and a source of inflationary pressures.
Growth is expected to moderate to 4.2 per cent in 2008 and then to 3.5
per cent in 2009. Panama and Peru should continue to experience the
highest growth rates in the region, while Mexico and Ecuador will
continue to be notorious underperformers. Uruguay, Argentina and Costa
Rica will be the countries that are expected to see the sharpest
slowdown, followed by Venezuela, Paraguay and Brazil. Only Chile, El
Salvador and Honduras will likely perform better in 2009 than in 2008,
although it is expected that the improvement will be marginal.