Can South America Avert an Economic Bust?
Can South America Avert an Economic Bust?
The president of Venezuela calls for budget cuts as plummeting oil prices slash the country’s export income. Peru relaxes environmental regulations to clear the way for major mining projects, hoping to lift production in the face of falling prices of copper, gold and other metals. In Brazil, hurt by slumping prices for iron and soybean exports, a new, business-friendly cabinet is expected to cut spending and eliminate tax breaks to shore up government finances.
For a decade, the continent was transformed by sustained economic growth and historic reductions in poverty, driven by a boom in prices for the region’s abundant commodities, including oil, natural gas, copper, gold, iron, soybeans and corn.
But now that boom is over, prices for those products are falling, and questions hang over the region. Will the good times be followed by a bust, as has happened repeatedly over the decades? Will governments react as they have before by loading up on debt and ignoring the danger signs?
Or will things be different this time?
“We have entered into a new stage,” said José Antonio Ocampo, a former finance minister of Colombia who is a professor at the School of International and Public Affairs at Columbia University in New York. “I don’t think governments have fully realized yet that this is so, and that they have to change their policy strategy.”
Yet there are signs, he said, that many countries in the region are better positioned now than in the past to tackle the challenge.
The key measure across the region, Mr. Ocampo said, is that the ratio of external debt to foreign reserves is at a historic low, which could give countries more room to maneuver during hard times.
“Latin America has less debt and more reserves, less liabilities and more assets,” he said. That gives countries a greater ability to borrow money to bridge shortfalls or pay for government stimulus measures.
Many countries also have built stronger institutions, such as central banks and banking regulators, while finance ministers are often better prepared and, it is hoped, able to benefit from an understanding of past mistakes.
“We are already in a period of slower economic growth, and the question is, ‘What’s next?’ ” said Jorge Familiar, the World Bank’s vice president for Latin America and the Caribbean. “Ten or 15 years ago we would be talking about crisis management, and right now we’re talking about growth strategies.”
Brazil, the continent’s economic giant and the seventh-largest economy in the world, according to the World Bank, encapsulates both the problems and the promise of the region.
After years of steady growth and poverty reduction, Brazil’s economy has stagnated. While there are many problems, including corruption and government missteps, the situation has been aggravated by falling prices for some of its main exports, including iron ore and soybeans.
President Dilma Rousseff, a leftist who was re-elected to a second term in October, has signaled that she will make economic growth a priority in her new term, choosing an economic team widely seen as being pro-business.
They have a chance of succeeding, Mr. Ocampo said, because Brazil has developed a large manufacturing sector that could be the beneficiary of the region’s new economic reality. When commodity prices are high, the currencies of exporting countries tend to rise in value. That can hurt other sectors of the economy, such as manufacturing, since a stronger currency means that exported manufactured goods become more expensive to foreign buyers.
That cycle is now in reverse, with currencies in Brazil and several other Latin American countries depreciating. While that can increase inflation, as has happened already in Brazil, in the long run it could lead to growth in manufacturing exports.
The challenges are as great for Peru, which depends heavily on the mining operations that powered growth of more than 6 percent annually from 2002 to 2012. With metals prices now in retreat, the central bank predicts the economy will grow by just 3 percent this year.
In response, the government of President Ollanta Humala has pushed stimulus measures that include increased government spending and tax cuts. Mr. Humala has also sought to clear the way for more mining, oil and gas projects, hoping to compensate for falling prices by increasing a metals production that remains profitable, if less so.
But many of those projects have been stalled by environmental concerns and stiff opposition in local communities. Part of the government’s new strategy is to streamline or scale back environmental regulations, including efforts to speed up the process of evaluating environmental impact statements, setting penalties for officials who do not meet deadlines and rolling back recent increases in fines for many environmental violations.
“It just got cheaper to pollute,” said Ricardo Giesecke, a former environment minister who is critical of the changes.
Alonso Segura, the Peruvian finance minister, said the measures should help the country resume economic growth similar to that of recent years.
“We want to sustain it at or close to 6 percent over the medium term,” he said. New mining projects will enter into production next year while others are expected to increase production, he said. Infrastructure projects expected to get underway, like a Lima mass transit train line and a gas pipeline in southern Peru, will also generate jobs and economic activity.
But Francisco Rodríguez, an economist with Bank of America Merrill Lynch in New York, said that optimistic predictions of new mines and other projects had fallen short in the past, often because of local opposition. He also pointed to the country’s inability so far to tame its appetite for imported goods, a hangover from the years of high commodity prices.
“They don’t seem to have accepted that 6 percent growth is not a reasonable objective for Peru, and that means they haven’t accepted that the commodities boom is over,” he said. “That’s called denial.”
Perhaps no country is more troubled, or more closely tied to the ups and downs of commodity prices, than Venezuela, which last year received more than 95 percent of its export income from oil. But oil prices have tumbled since the summer, with the price of the benchmark West Texas Intermediate crude dropping to less than $60 in December from more than $100 a barrel in July. President Nicolás Maduro said recently that the collapse had cut his country’s hard currency income by about a third, but the impact is expected to become even more acute next year.
The Venezuelan economy was in bad shape before the oil price drop, with inflation of more than 60 percent, by far the highest rate in the region, and chronic shortages of consumer goods — a state of affairs for which, rightly or wrongly, most Venezuelans blame Mr. Maduro.
Most economists believe the economy is now in recession, although it is not possible to know for sure, since the government has stopped releasing such data. The economy is also burdened by price controls, a greatly overvalued currency (at the principal exchange rate) and a central bank that has been printing vast amounts of money to keep the government operating.
At the same time, yields have soared on the country’s bonds, a signal that investors are concerned about a possible default. Mr. Maduro has said that will not happen and many economists say that it is unlikely.
Yet Mr. Maduro has only sharpened investors’ fears by attributing the country’s problems to enemies waging an “economic war” aimed at toppling his socialist-inspired government. It is not clear whether they were soothed when Mr. Maduro said in a speech this month that in 2015 he would put aside most of his other duties to focus exclusively on the economy.