Join the conversation:

Latin America's Great Economic Divide

Latin America's Great Economic Divide

Posted by Juan Gavasa on June 06, 2014

There’s a rift in Latin America that is neatly defined by two oceans. According to the International Monetary Fund’s latest economic forecasts, the Atlantic-facing countries of Venezuela, Brazil, and Argentina, the largest members of the Mercosur customs union, will grow at an average rate of 0.6 percent this year; while Chile, Peru, Colombia, and Mexico—which make up the Pacific Alliance—will expand by 4.2 percent.

The divide has little to do with western Latin America’s orientation toward a dynamic Asia or the eastern countries’ exposure to a stagnant Europe. Blessed with abundant natural resources and an almost 200-million-strong consumer market, Brazil remains the regional economic giant. And Venezuela commands some of the largest petroleum reserves in the world. Yet at the end of a decade-long boom driven by cheap money and strong commodity prices, growth in both countries is lagging behind that of many of their neighbors. The standouts are those that, despite a more challenging global environment, have not reverted to the age-old “isms” (think statism and protectionism). “Some countries partied and splurged during the boom years; others did their homework,” says Ramón Aracena, chief Latin America economist at the Washington-based Institute of International Finance. “Latin America is no longer a unified bloc with a synchronized business cycle.”

Atlantic countries spent more while saving less. In Brazil, government spending averaged 40 percent of gross domestic product from 2010 to 2013, compared with an average of 27.5 percent for Chile, Colombia, Mexico, and Peru, according to an April report by Goldman Sachs (GS). Domestic savings are 16.4 percent of GDP in Brazil, compared with an average of 20.8 percent in the Pacific nations.

Debt-rating companies are taking note. Moody’s Investors Service (MCO) raised Mexico’s credit rating to Aaa in February, four levels above junk. A month later, Standard & Poor’s (MHFI) downgraded Brazil to BBB-, the lowest investment grade. Mexico’s economy will expand 3 percent this year, according to IMF forecasts, outpacing Brazil’s 1.8 percent. “Money follows growth,” says Ricardo Espírito Santo, president of the Brazilian unit of Espírito Santo Investment Bank. The Portuguese lender is interested in financing projects in Mexico, which is in the process of opening its energy industry to foreign investment. That country “is doing well,” Espírito Santo says, “so we’re focusing our activities there.”

Among the Atlantic countries, there’s no shortage of examples of heavy-handed government intervention squeezing company profits, discouraging investment, and curbing demand. Argentina, which defaulted on its international debt at the end of 2001, returned to growth with a mix of statist and restrictive trade policies under the late President Néstor Kirchner. The economy is now sputtering, and his successor and widow, Cristina Fernández de Kirchner, has had to cope with a severe drain on foreign exchange reserves. In December she slapped a 50 percent tax on foreign autos with a pretax value of more than 210,000 pesos ($25,944). As a result, car sales fell 40 percent in April from a year earlier, according to the Argentine Automakers Association. “This month we haven’t sold anything, and last month we sold very little,” says Tomas Herrera, owner of a dealership in Buenos Aires that specialized in luxury cars but now handles cheaper models. In the meantime, a 19 percent devaluation of the peso in January caused consumer prices to surge, further damping the economy—although it’s helped stabilize international reserves.

In Venezuela, which is still dealing with the legacy of the late Hugo Chávez, government expropriations, coupled with price controls, have depressed private investment, crimping capacity in a variety of industries including food processing and electricity. The resulting shortages have fueled the world’s highest rate of inflation—59.3 percent in the 12 months ended in March—and helped spark violent protests that have led to the deaths of at least 42 people since February. In an April 24 report, the IMF cited “distortionary” policies as one reason Venezuela’s oil-rich economy will stagnate this year.

Link To Full Article: 

Facebook comments



Monthly newsletter featuring articles hand picked by our country managers from the best content across PanamericanWorld.



Monthly newsletter featuring articles hand picked by our country managers from the best content across the Caribbean Region on PanamericanWorld.

PANAMERICANWORLD COUNTRIES