Outlook for Latin America A turning point towards markets?

Transcription

1 Outlook for Latin America A turning point towards markets? PIIE Global Economic Outlook Session April 1, 213 Barbara Kotschwar Research Fellow Peterson Institute for International Economics 175 Massachusetts Ave., Washington, DC 236

2 Latin America: A Tale of Two Types A decade of reasonably robust growth, low inflation and fiscal restraint. No one Latin American economic model: the region is split between 21 st century socialists and 21 st century capitalists. Recent events may be the start of turns from one to the other: Venezuela: Death of Hugo Chavez Argentina: Repsol expropriation, bond debt case Cuba: Castro s exit plan Or mark a turning point in the consolidation of a model: Mexico: Labor, education, telecom, energy and fiscal reforms

3 The bifurcated region 21 st century socialist 21 st century capitalist Venezuela Chile.9.8 Panama Argentina.7.6 El Salvador.5 Bolivia.4.3 Peru.2 Nicaragua.1. Costa Rica Ecuador Mexico Brazil Uruguay Respect Property Rights Investment Freedom Sources: WEF Global Competitiveness Index and Heritage/Fraser Index of Economic Freedom Honduras Guatemala Paraguay Goods Market Efficiency Financial Freedom

4 CDS Latin America: bifurcated risk spreads Nov 28-March /4/28 11/4/29 11/4/21 11/4/211 11/4/212 Source: Thomson-Reuters Datastream CHL ARG BRZ COL MEX PER URY VEN Argentina Venezuela

5 Economic Regime Change in Venezuela? Probably -- but not any time soon. Politics: No change in political control likely on April 14 th Economics: But Chavez s successor inherits a difficult economic environment with many domestic constraints Percent growth GDP growth vs oil price GDP growth oil price Source: Venezuelan Ministry of Energy and Petroleum, IMF and Consensus Forecasts $ per barrel After growing by an average of 1 percent p.a. in 24-28, Venezuela grew just under 2 percent in Despite oil prices of over $1/barrel, growth will not exceed 3 percent 213 and

6 Turning Point? Venezuela Fiscal discipline: Government primary balance (% of GDP), Inflation (% annual CPI) Venezuela has not been a paragon of fiscal virtue and one can expect more spending ahead of the April elections Venezuela currently has fifth highest inflation rate in world, after Belarus, the Sudans and Iran Source: IMF

7 Turning Point? Venezuela 7. Bolivar 24.5 Black market Jan Source: IMF 8-Jan 15-Jan 22-Jan 29-Jan 5-Feb Government devalued the bolivar on Feb 8 from 4.3 bolivares to the dollar to 6.3 bolivares. 12-Feb 19-Feb 26-Feb 5-Mar 12-Mar 19-Mar 26-Mar Chavez death 26-Feb 28-Feb 2-Mar 4-Mar 6-Mar 8-Mar 1-Mar 12-Mar 14-Mar 16-Mar 18-Mar 2-Mar 22-Mar 24-Mar 26-Mar Source: eldolarparalelo.com The new rate is still below the black market rate.

8 The Future of Socialist Venezuela Will President Maduro be able to continue Chavez s 21 st Century Socialism? Social programs: yes, but with cuts Foreign policy Aid to Cuba: No Petrocaribe: No Support to like-minded leaders: No Fund regional initiatives: UNASUR, ALBA: Maybe Price controls: Mostly no

9 Pressures on Argentina Economic Pressures: High inflation (officially still not recognized) Declining foreign currency reserves Significant devaluation Political pressures: increasing civil unrest decreasing union support IMF sanctions Bond debt court ruling

10 Argentina: the good times rolled unsustainably From 23 to 211, Argentina grew by an average of 7.8 percent per year Expansionary monetary and fiscal policy Billions of pesos Q1 22Q1 23Q1 24Q1 25Q1 26Q1 27Q1 28Q1 29Q1 21Q1 211Q1 212Q1 Government spending as % GDP Source: IMF IFS

11 Argentina: pressure points Overvalued exchange rate, rising and understated inflation, and declining reserves percent Inflation: official vs. unofficial Declining reserves, overvalued exchange rate Billions $US Pesos/$US Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Estimated CPI Reserves Peso blue Peso (official) Source: IMF, inflacionverdadero.com Source: ThomsonReuters Datastream

12 Argentina: external pressures Commodity prices have been high but are tapering off Industrial Inputs (agricultural raw materials and metals): 25= Slower growth in Argentina s main export markets: Brazil Chile China United States Source: IMF WEO

13 Mexico: turning to growth? Mexico s growth has been tepid over past halfdecade despite low inflation, low debt and steady interest rates Forecasts of 3.5 and 3.9 percent, respectively, in Recent reforms may boost this growth: Labor reform Education reform Telecommunications reform Energy and fiscal reform?

14 Cuba: finally, some reforms? Most significant reforms in decades Succession plan. 218: the end of Castro. Loosening controls on people End of travel ban Cell phones allowed Loosening economic role of state Public sector layoffs Private sector openings Changes, yes but expect continued relentless gradualism"

15 Conclusions Growth in Latin America is highly dependent on external factors, including the US and EU economic outlook and, increasingly, China. South American growth also influenced by Brazil. Will the cases discussed be turning points, or bumps in the road to more of the same? Venezuela: how long can Chavez s legacy last? Argentina: when will reserves run out? Mexico: will the pact last long enough to bring about real economic reform? Cuba: How slow to go?