Five takeaways from the Latin American market of 2015

Will the relationship between Argentina and China go south? China, as part of Beijing’s interest in securing strategic economic relations with commodity rich emerging nations, has gone the extra mile (over several thousand in this case) to prop up the floundering Argentine economy. In January, Argentina received $400 million from China (the fourth installment of the $11 billion currency swap signed in 2014). China’s financial props have enabled Argentina’s Central Bank to maintain its reserves above $31 billion in early 2015. In February, Argentina and China signed some trade and investment projects agreements. But the Argentine dependence on China has limitations. What happens if Argentina is unable to meet its commitments? Argentina, because of the new friendship, has limited access to international financial markets. If Argentina becomes the new Greece, the chances are the blush of this new found friendship with Beijing would fade very fast. Where will the expanded Panama Canal have a significant impact on Latin America trade patterns? The Panama Canal expansion is now expected to be finished in 2016. Most of the impact is projected to be an expansion of trade between the US East Coast and Gulf ports with Asia, possibly cutting into the West Coast dominance. However, the biggest impact might be to Caribbean and South American ports. The investment in logistics centers in Panama [see Karen Thuermer article] could mark a real change in port rotations for both the East and West Coasts of South America. Such a change could open up intra-Latin American trade opportunities as well as North-South markets. Will the West Coast outperform the East Coast of South America in 2015? Peru and Chile occupy most of South America’s West Coast and have been outperforming the economies (albeit considerably larger in Brazil’s case) on the East Coast. But they are also suffering from the fall in commodity prices, particularly the slowdown in China. Most economists are still looking favorably at Peru, despite the flat 4^th quarter of 2014. Even with all the global difficulties, the economy grew at over 5%. The GDP grew at 3.1% and is forecast this year to grow at 4.8% and in 2016 6.0% (these are the largest growth rates forecast for South America). There is investment in a large number of strategic projects being undertaken in Peru that will help continue growth. Chile, like Peru, suffered from a fall in commodity prices, particularly copper. GDP growth in 2014 was disappointing 1.7% - considerably off the 4% growth expected in 2014. With China being the world’s largest consumer of copper, the slow down in China had a big impact on exports. Nevertheless Chile with the decline in the peso against the dollar has continued to run a positive trade balance. The projected growth rates are nearly 3% this year and nearly 4% in 2016. Overall the West Coast nations look like they will outperform the East Coast counterparts over the next couple of years and with economic diversification any uptick in commodity prices could really have a positive impact on the region. Can Brazil emerge from its struggles in 2015? Brazil is South America’s largest nation and biggest economy – the mega state abuts ten of the twelve South American nations. To a degree, as Brazil goes, so does South America. And right now, Brazil is struggling and the outlook isn’t good. The corruption scandal at state-controlled Petrobras has undermined faith in the government and the economy. Foreign investors are gun shy, unemployment is rising, industrial production is falling, the Real is dropping against the US dollar, inflation is hitting a nine year high and the economy is shrinking. Added to these problems is a weak demand for commodities. It is not likely Brazil will emerge from these struggles in 2015. The forecast is for the economy to shrink 0.6% in 2015 before GDP grows at 1.5% in 2015. The real question remains how long it will take to fix the fundamentals behind an under performing economy. What if anything, can fix Venezuela’s downward spiral- the Simadi? The Venezuelan economy is in the midst of a recession. Nearly all the major economic indices, with the possible exception of cross-border black market trade with Colombia, is spiraling downward. With an economy 96% dependent on oil exports, the fall in oil prices had catastrophic impact. Back in 2012, the economy had a GDP growth rate of 5.6%. The latest IMF forecast has the GDP in 2015 falling -7%. In February, the government launched an overhaul of the exchange rate system, which includes a new mechanism called Simadi that allows for legal trading of the Bolivar. Almost instantaneously the Bolivar plummeted. The question is whether Venezuela will be able to pay its financial obligations to foreign stakeholders. Right now foreign companies are sitting on the sidelines waiting to be paid, and the recent ban by the US on select Venezuelan officials does nothing to relieve anxiety.