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Latin America’s forecasts may be too rosy

Latin America’s forecasts may be too rosy

Posted by Juan Gavasa on April 21, 2014

What’s most interesting about the World Bank and International Monetary Fund economic projections released last week was not that they forecast a slower-than-expected growth in Latin America for 2014 — we already knew that — but that they foresee a rebound in 2015 and 2016.

Are the good times coming back to the region? Or are the world’s largest financial institutions once again being too optimistic?

According to the IMF’s semi-annual report released at its spring meeting in Washington on April 8, Latin America’s economy will grow by 2.5 per cent this year, and by 3 per cent next year. That’s lower than the region’s growth rates in the past decade, but suggests that its economies may soon begin to rebound.

The World Bank, in its “consensus forecast” based on nearly three dozen projections by mostly private sector banks, said that Latin America’s economy will grow by 2.3 per cent this year, and by 3 per cent in 2015. In January, the World Bank had forecast an “upbeat” future for the region, forecasting a 3.7 per cent growth rate in 2016.

Among the region’s largest economies, the best-performing one will be Mexico, which is scheduled to grow by 3 per cent this year, and by 3.5 per cent next year, the IMF said. “Mexico’s ongoing economic reforms, especially in the energy and telecommunications sectors, herald higher potential growth for the medium term,” the IMF said in its report.

Other countries that will show healthy growth rates will be Peru, (projected to grow by 5.5 per cent this year and 5.8 per cent next year,) Bolivia (5.1 per cent this year and 5 per cent next year,) Paraguay (4.8 per cent this year and 4.5 per cent next year), Colombia (4.5 per cent both years) and Chile (3.6 per cent this year and 4.1 per cent next year,) the IMF said.

Among the countries that will show meagre growth are Brazil, the region’s largest country, which is projected to grow by 1.8 per cent this year and 2.7 per cent next year, according to the IMF. Brazil’s economy will continue to suffer from a “loss of competitiveness and low business confidence,” the IMF said.

Finally, Latin America’s worst performing economies will be Venezuela and Argentina, the IMF says. Venezuela’s economy will shrink by 0.5 per cent this year, and will drop by another 1 per cent next year.

In an interview, IMF Western Hemisphere director Alejandro Werner told me that he projects Venezuela’s inflation rate, which reached a world record of 56 per cent last year, to rise to 75 per cent in 2014.

Werner said that unless Venezuela adopts an economic adjustment programme, inflation may turn into hyper-inflation in coming years. “Typically, when countries reach inflation rates of 50 or 55 per cent, they either adopt adjustment programmes to put a break on it, or inflation keeps growing progressively,” he said.

Argentina’s economy is projected to remain virtually flat, with a 0.5 per cent growth this year, and will probably grow by 1 per cent next year.

Overall, both the IMF and the World Bank predict a rebound in 2015, mainly because of expectations that the world economy will improve, and that the ongoing depreciation of Latin American currencies will help boost the region’s exports. Also, economic reforms in Mexico and Brazil may start drawing massive investments next year, economists say.

My opinion: I’m a bit sceptical about the IMF and World Bank upbeat projections for 2015, because — despite having some of the best economists in the world — international financial institutions often work too closely with government officials of the countries they study, and tend to err on the side of optimism.

At this time last year, both the IMF and the World Bank, as well as the United Nations Economic Commission for Latin America, projected that Latin America would grow by 3.5 per cent in 2013. Now, the three institutions agree that the region grew by only 2.5 per cent last year.

Unless Brazil — the region’s largest economy — takes serious measures to encourage investments and become more competitive in the world economy, and Venezuela and Argentina make a serious U-turn from their disastrous spending sprees of the past decade, my guess is the region will barely grow over the next two years.

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