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Falling oil prices make 2014 the worst year for Latin America since 2009

Falling oil prices make 2014 the worst year for Latin America since 2009

Posted by Juan Gavasa on January 07, 2015

A drop in the prices of commodities, especially for crude oil, have spoiled Latin America’s plans to get out of the economic crisis. A year ago, banks, consulting firms and international organizations predicted that the economic downturn that began in 2011 would end in 2014. The region came out of the 2008-2009 global crisis swiftly but, soon after, it lost momentum. According to FocusEconomics, projections grew more and more pessimistic and eventually fell to a 1.1 percent growth rate in 2014.

Certain key factors affect almost all countries. On the one hand, there is the end of the so-called supercycle of high commodity prices which account for the majority of exports from most countries, including Mexico. Even though 74.8 percent of its exports are manufacturing products, it relies on crude oil to generate a third of its revenue. The price of oil fell by 46 percent in 2014 and the downward trend continues into 2015. This drop will hurt Brazil, Colombia, Venezuela and Ecuador while benefitting importers like Chile, Peru, and Argentina. Argentina, however, is also looking for new investors to develop its own non-conventional oil fields in Vaca Muerta, a task made more difficult when oil prices are falling.

Soy, an important export for Brazil, Argentina, Paraguay, and Uruguay, fell by 22 percent. The price of copper, a significant contributor in Chilean and Peruvian mining industries, fell by 17 percent and iron, the main Brazilian export (It accounts for 13 percent of the South American giant’s exports) dropped by 47 percent.

Meanwhile, manufacturing plays a significant role in the largest economies of the region. It represents one third of exports from Brazil and Argentina but only one fifth from Colombia. It makes up about 14 percent of the business for Peru and Chile. Venezuela barely has any manufacturing exports at all.

And, anticipation of higher interest rates in the United States strengthened the dollar, which caused a drop in commodity prices traded in that currency and a devaluation of Latin American currencies, thus threatening to hike up inflation. Analysts say there will be less financing to Latin America now compared to times of low interest rates in the United States. But, governments with access to international credit markets have not felt the impact of the shift yet.

The good news is that these tight monetary policies in the United States come as the country is experiencing its highest growth rate, which benefits countries where it is the main trading partner - countries like Mexico, Colombia and those of Central America. On the other hand, export business in Brazil, Argentina, Venezuela, Peru and Chile will be more affected by the economic downturn in China, a consumer of their commodities.

Every country faces its own unique challenges. According to the Economic Commission for Latin America (ECLAC), Brazil barely grew by 0.2 percent in 2014. The organization says the country lacks the latitude to put in place fiscal and monetary policies that promote economic growth. The Mexican economy grew by 2.1 percent, ECLAC says, during a year marked by efforts to attract investment for the telecommunications and oil industries and to improve the quality of education. Still, FocusEconomics warns that public discontent over violence may affect economic progress.

Argentina shrank by 0.2 percent, ECLAC reports. The organization mostly blames the crisis on the devaluation of the peso in January 2014 and on the country’s renewed difficulties with exchange rates due a debt crisis caused by its battle with the vulture funds in July. The administration of Cristina Fernández de Kirchner recognized that, compared to last year, Growth Domestic Product (GDP) shrank in the third trimester for the first time since 2009. Some financial advisors and banks told FocusEconomics that their own estimate was a 2.1 percent decline. Toward the end of the year, investment from China, Telefónica, and other competitors helped stabilize the peso while the currencies of other nations in the region fell. Consumption also grew in December for the first time that year.

Venezuela also sought Chinese investment to counteract its foreign currency shortage but its case is worse than Argentina’s. ECLAC says the economy contracted by 3 percent while carrying a 63 percent inflation rate - much higher than the 38.9 percent rate Argentinean statistics bureaus register. Falling oil prices raise doubts over Venezuela’s ability to pay its debts but analysts say it will be able to avoid default. They are more concerned about scarcity and the country’s messy currency exchange system, which has three types of official rates, and an unofficial market. And, the falling price of Venezuelan crude oil presents a tremendous challenge to the country.

Chile and Peru are suffering the impact of their own reforms, but each faces its own distinct set of challenges. In Chile, higher income taxes and the government’s efforts to expand workers’ rights worry businesses. In Peru, on the other hand, a too flexible labor market for youths has led to protests. According to ECLAC, Chile grew by 1.9 percent and Peru by 2.8 percent, at a much lower rate than it has in recent years.

Only Colombia distinguished itself from the modest and mediocre progress of its largest neighbors. Its economy grew by 4.8 percent, in part due to its plans for investment in infrastructure and housing though cheap oil will also have an impact.

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