Latin America hangs on economic gloom

This year, once again, Latin America is shaping up to be an economic disappointment.

Argentina was once far richer than Italy and Venezuela, above, was wealthier than Spain.

The old joke about Brazil is that the South American giant is the country of the future and always will be. The same might be said for Latin America as a whole.

This year, once again, Latin America is shaping up as an economic disappointment. Brazil’s economy shrank slightly in the year’s first half, and Mexico’s didn’t grow at all. Argentina is now tumbling towards another episodic financial crisis.

Then, of course, there is Venezuela, which won’t have much of an economy left after it shrinks another 25 per cent to 35 per cent this year. In the past six years, about two-thirds of its annual economic output has vanished, the second largest such decline for any country on record, according to the Institute of International Finance.

“It’s been a very gloomy start to the year, with everyone rushing to downgrade their expectations for the region,” said Edward Glossop, chief economist for Latin America at Capital Economics.

The International Monetary Fund expects regional growth of 0.6 per cent this year, having started the year with a forecast of 1.4 per cent. That compares with its global growth forecast of 3.2 per cent.

The reasons for the disappointment vary. In Mexico, for instance, businesses are wary of investing thanks to President Andres Manuel Lopez Obrador, who spooked investors by doing things such as cancelling Mexico City’s partially built airport. Threats of tariffs by President Trump haven’t helped.

But the failure of Latin America to grow has deeper roots. For the past five years, the region’s economic growth averaged 0.66 per cent — well below the global average. From 2000 to 2016 the region grew 2.8 per cent compared with 4.8 per cent for 56 other emerging economies excluding China, according to a study by the McKinsey Global Institute, despite a boom in commodity prices that lifted growth. In other words, Latin America is becoming relatively poorer with each passing year compared with the rest of the world. Never mind that Argentina was once far richer than Italy and Venezuela wealthier than Spain.

Making matters worse, the region didn’t grow amid a benign global environment of steady growth and cheap credit that may not last. Signs point to a slowdown in the US economy and elsewhere.

The IMF is projecting 2.3 per cent regional growth next year for Latin America, but the risks seem firmly on the downside.

South America, which still relies heavily on exporting raw materials such as oil, soybeans and metals, is suffering the hangover from the China-driven commodity boom during the 2000s, when growth and incomes rose.

Countries like Chile, Peru and Colombia managed their finances prudently in the boom, and have managed to grow as China slowed and the boom ended. Populist governments in Brazil, Argentina and Venezuela didn’t save any of the windfall. And they spent even more by printing money or taking on debt — the equivalent of a fiscal fiesta. All three have been mired in recession or crisis.

Argentina’s plight shows how difficult it is to emerge from the bust end of a boom. After taking power in 2016, President Mauricio Macri started cutting budget-busting subsidies for electricity and tra­nsport but took a gradual appro­ach and borrowed heavily to cover the remaining gap in finances.

Many economists now expect Argentina to default on its debts again, as a steep recession reduces government revenues.

“Adjustment is what happens after the populist experiment. And it’s hard to be popular presiding over that,” said Alberto Ramos, chief economist for Latin America at Goldman Sachs.