A Cautiously Optimistic Economic Forecast for Latin America

Dear Readers,

Today’s post will be my last for several weeks, as I’m moving to Medellin, Colombia. Starting next week the very capable Julia Sick will be taking over the mailing list and blog.  I will return on September 5, and she and I will alternate postings from then on. I wish you all a very pleasant rest of the summer, and thank you for following my posts.

Best,

Geoff

During the 2008 recession, Latin American economies managed to hold together reasonably well, with average regional growth only falling by little more than two percent in 2009 and bouncing back to six percent last year.  While the economic forecast for the coming years is still unclear, the region may meet a potential deepening of the European and U.S. debt crises with the same resilience, especially in South America.  Indeed, Bloomberg and Reuters report that finance ministers from the Union of South American Nations (UNASUR) are meeting in Buenos Aires to consider creating a $10 to $20 billion emergency fund to assist nations that undergo a loss in foreign direct investment in the coming months.

As noted in today’s Economist, inflation in Latin America remains higher than most would like and a decrease in exchange rates would be more than welcome, but the region’s central banks have managed to raise interest rates to combat this. Additionally, fiscal deficits and national debt are low.  Citing the UN Economic Commission for Latin America, the article claims that public debt averaged only 32% in the region, minus the Caribbean.

The primary driver of growth in the Latin America has been demand for minerals and agricultural exports. In South America the main contributor of this demand has been China, and this is likely to stay high.  What’s more, domestic consumption has been on the rise in recent years as well, as an increasing number of people in the region climb out of poverty and find themselves with more discretionary income.

Still, Latin America faces major economic hurdles in the coming years, most notably from a lack of public investment in education and infrastructure.  As a second Economist piece points out, this is especially the case in the region’s major cities, home to 80 percent of its population:

Latin America’s overall record of productivity growth is poor, thanks to a toxic mixture of burdensome regulation, a large informal economy and a lack of innovation. Given the cities’ economic weight, it is not surprising that many of the region’s wider problems are reflected there. Compared with their peers in developed countries, Latin America’s top ten cities are unsafe, suffer endemic housing shortages, poor schooling and weak health services. They are also inefficient in their energy use and waste management.

For example, every dollar of GDP generated in Chile’s capital, Santiago, requires 60% more energy than a dollar of GDP generated in (much colder) Helsinki in Finland. [Management consulting firm] McKinsey reckons that Bogotá needs to double its housing stock by 2025. Overcoming Latin America’s housing shortage and supplying its urban population with associated services (sewerage, water, gas and electricity) would require investment of $3 trillion by 2025.

So if Latin America’s “jaguars” hope to catch up with the Asian tigers and Indian elephant, they will have to devote more attention to urban planning issues like overcrowding, housing shortages and pollution. But with the region’s economies embracing a recent push towards fiscal tightening, and more likely to come, it remains to be seen if they have it in them.

News Briefs

• Mercopress has positive news on the stock market front: the MSCI Latin America stock index is on the rise after taking a serious beating last week. Brazil's benchmark Bovespa stock index is up by 10% since it fell to its lowest point in two years on Monday.

• CNN Mexico and AP report that the Mexican Supreme Court has voted to let Mexico City maintain ownership of a plot of land in the capital, which was expropriated by then-mayor Andres Manuel Lopez Obrador.  Lopez Obrador very nearly lost his mayoral position in 2005 after he ignored a court order to return the land, an incident which severely hampered his 2006 presidential campaign.

• Mexican police announced yesterday that they had arrested the alleged leader of a drug gang known as “The Hand With Eyes,” a group which has been blamed for bringing an uptick in violence to the Mexico City area.  Milenio says the man, Óscar Osvaldo García Montoya, alias “El Compayito,” has confessed to ordering or participating in more than 600 murders in the area.  According to AFP, Garcia was trained in Guatemala by ex-members of the country’s special forces, known as “kaibiles.”

• CNN en Español interviewed Guatemalan human rights advocate and 1992 Nobel Peace Prize winner Rigoberta Menchu, in which she claims that her country’s politics is dominated by a “fascist, racist mentality.”  Menchu also reports receiving death threats ahead of the upcoming September elections.

• Colombians for Peace, the organization led by former Colombian Senator Piedad Cordoba, has sent a formal request to the FARC, asking the guerrillas to release their hostages unconditionally. Caracol has a copy of the letter, which was signed by several humanitarian leaders of the region.  Cordoba  told CM& yesterday that she remains convinced that her effort has potential to bring the rebels to the table and initiate a series of peace negotiations.

• Colombia Reports profiles a demonstration in Medellin yesterday by members of Antioquia’s indigenous. CR cites the country’s Constitutional Court as saying that more than 27 indigenous groups are in danger of being wiped out as a result of the country’s armed conflict.  Meanwhile, Gustavo Gallon, the director of the Colombian Commission of Jurists, writes in an op-ed for El Espectador that 3,000 paramilitaries who supposedly demobilized in 2005 are unaccounted for today, and it is expected that many have rejoined armed groups.

• AP reports that Venezuelan President Hugo Chavez has accused the opposition of trying to foment discontent within the ranks of the country’s military.  In an address made via telephone yesterday, he told the armed forces to “be ready for any possible conflict like those in Libya and Syria,” saying that the U.S. is in decline and is looking for potential targets, “like a wounded lion.”  Meanwhile, Reuters claims that Chavez has finished his second round of chemotherapy in Havana and is expecting to return to his home country “soon.”

• Reuters reports on Peruvian President Ollanta Humala’s odd withdrawal from the spotlight in the first few weeks of his presidency, even in the face of several mild scandals. While some in the country say he is still taking stock of his responsibilities and getting his agenda in order, others argue that his diverse range of cabinet picks has made it difficult for him to take action.

• Chile’s El Mostrador published a very detailed report on the country’s social unrest earlier this week, highlighting the students’ new demand for a constitutional referendum.  Meanwhile, the Atlantic offers some incredible photos of the demonstrations.

• Bloomberg says that Argentina’s presidential race promises to be more competitive than most have predicted.  Although President Cristina Fernandez is still nearly 20 points ahead of her nearest competitor, 30 percent of the country is undecided or is leaning towards minor candidates, meaning that the contest is far from over. Fernandez will face a primary election on August 14, the results of which will serve as an indicator of her popularity.