SCAN the Latin American newspapers and it is hard to find much sign of a convincing economic recovery. True, Brazil’s industrial production is perking up after a two-year slump. Mexico’s energy reform is starting to pay off, at last, with a big new oil discovery by an international consortium. And Peruvian restaurateurs celebrated “National Char-roasted Chicken” day on July 16th, hoping to dispatch a million birds, up from last year’s 720,000.
Otherwise, animal spirits are in short supply. After five years of deceleration and one of recession, Latin America should register modest economic growth of 1-1.5% this year, according to forecasters. The picture varies from country to country. The return to aggregate growth is largely thanks to Brazil and Argentina, which are coming out of recessions. Venezuela’s economy is collapsing. Mexico, Chile, Colombia and Peru are expanding at a sluggish rate of 2-3%. Only in Central America, the Dominican Republic and Bolivia is growth a respectable 4% or so.
What makes this particularly worrying is that external conditions are generally favourable. The world economy is picking up speed. The United States and China, the region’s biggest trading partners, are growing nicely. Financiers look favourably on Latin American governments and companies, as Argentina’s recent launch of a 100-year bond illustrated.
So why is the region still so off-colour? One answer is that adjusting to the end of the commodity boom, which benefited South America particularly, has taken longer than expected. Between 2003 and 2010 China’s industrialisation boosted demand for minerals, oil and foodstuffs. Commodity prices fell steadily between 2010 and 2015. As export revenue shrank, the region’s currencies weakened, curbing imports and pushing up inflation.
The good news is that in many countries this external adjustment went smoothly and is largely over. The region’s current-account deficit narrowed by 1.4 percentage points of GDP last year (to 2.1%). Inflation is falling swiftly, allowing central banks to cut interest rates (see chart). That offers hope of a pickup in growth in 2018.
But Latin America also faces a fiscal squeeze. The commodity boom temporarily boosted tax revenues. Too many governments spent, rather than invested or saved, this windfall. The primary fiscal deficit (ie, before interest payments) in the region as a whole increased from 0.2% of GDP in 2013 to 2.6% last year. In other words, public debt is rising. Many governments have started to retrench. Few are in a position to prime the pump of recovery.
There is a second factor slowing the rebound: political uncertainty. That starts with Donald Trump. While he has agreed to renegotiate, rather than scrap, the North American Free-Trade Agreement with Mexico and Canada, he continues to threaten to impose protectionist measures, discourage investment south of the Rio Grande and deport millions of Mexicans and Central Americans. So far Mexico’s economy has held up better than feared: the peso is stronger now than it was before Mr Trump’s election last November. The annual growth rate was 2.7% in the first quarter of this year. But Mexico is living from month to month.
The second doubt concerns domestic politics. Latin America will not return to faster growth unless it does more to solve the structural problems that hold it back. They include inadequate infrastructure, poor-quality schooling, badly designed taxes and regulations that hobble business. Fixing these requires persuasive leadership. But in the larger countries, the only president who is even moderately popular is Mauricio Macri of Argentina. In Brazil, Michel Temer has an approval rating of 7% and may be evicted from office because of corruption allegations.
Between November of this year and October 2018, Chile, Colombia, Mexico and Brazil all face presidential elections (while Argentina has an important mid-term congressional election this October). These contests will take place amid popular disillusion with politicians, caused partly by corruption. In each, there is some risk that a populist could triumph.
No wonder investment remains depressed. Growth this year is coming mainly from a small recovery in exports and from import substitution. The first task facing governments is to provide investors, both local and foreign, with a reasonable degree of policy certainty. More than is usually the case, for insights on their economic prospects, Latin Americans should turn to political scientists rather than to economists.