Regional currencies face turbulent start to 2016
January 19, 2016
Lower commodities prices, an economic deceleration in major trading partners and persistent domestic challenges among Latin America’s largest economies represented significant headwinds to the region in 2015. More complete data show that the region’s economic deterioration worsened in the third quarter of last year. A GDP estimate elaborated by FocusEconomics shows that the region’s economy contracted 0.7% annually in Q3, which contrasted the 0.1% increase observed in Q2. Q3’s decrease marked the first contraction in economic activity since Q3 2009 and mainly reflected deteriorating economic conditions in Brazil, which is by far the region’s largest economy. Moreover, recently-released data suggest that economic activity did not stabilize in the last quarter of 2015.
Following heightened volatility in the region’s currencies in the last three months of 2015, in early 2016 many major Latin American currencies continued to tumble. Their weakening against the U.S. dollar reflected turbulence in global financial markets and sharp falls in commodities prices, particularly prices for oil and basic metals. Moreover, the slowdown in China and inertia from the Federal Reserve’s December rate hike put additional pressure on the currencies.
Latin America is starting out 2016 facing fundamental political and economic challenges. The vast majority of economies in the region are major commodities exporters and prices for these materials are expected to remain low, at least through the first half of the year due to well-supplied markets. In the second half, commodities prices are expected to see a gradual increase, mainly due to expectations of stronger global economic growth and a fall in inventories, although they are seen decreasing slowly. Meanwhile, key countries in the region will continue to face political challenges going forward, including: the evolution of the fiscal and political crises in Brazil, President Mauricio Macri’s desire to quickly address economic imbalances in Argentina, presidential elections in Peru, and Venezuela’s newly-elected National Assembly’s struggle with the administration of Nicolás Maduro.
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Following a year of recession, better performance expected in 2016
Last year, Latin America entered into recession for the first time since the global financial crisis hit the region in 2009 with an expected contraction of 0.3%. The region’s lackluster performance was mainly the result of a deep contraction in the Brazilian economy, which is expected to have decreased 3.6%. In addition, crisis-hit Venezuela likely experienced its worst economic recession in many years, with GDP likely plunging 8.2%.
Looking to 2016, the analysts surveyed for this month’s LatinFocus Consensus Forecast foresee a gradual recovery in the region, while at the same time major currencies are seen weakening further. Forecasters expect Latin America’s economy to expand 0.3% in 2016. That said, this month’s survey again showed that analysts have an even more pessimistic view regarding the region’s growth prospects. Forecasters cut the 2016 projection by 0.3 percentage points in January, which marked the 13th consecutive downward revision. Next year, the region’s economy is expected to perform better and increase 2.4%.
Behind the cut in the 2016 GDP growth forecast was a reduction in the projections for almost all of the economies included in the survey. Peru was the only economy for which panelists did not change the GDP growth projection due to expectations related to this year’s presidential elections, as well as a stronger-than-expected recovery supported by new mining projects entering into operation, a stabilization in private investment and an increase in public spending.
BRAZIL | Political uncertainty continues to weigh on the outlook, recession is expected to continue
Low commodity prices, high inflation, large fiscal imbalances and political crisis all came to a head in 2015, with Brazil’s economy on pace to have contracted at the fastest rate in over a decade. After GDP tallied the worst annual reading on record in Q3, data for Q4 remained abysmal: industrial production plunged in November and consumer confidence fell to a new record low in December. On the political front, Nelson Barbosa took over as Finance Minister on 21 December, inheriting the tough role of trying to halt the government’s deteriorating finances amid dismal economic data. Barbosa, who is more left-leaning than his predecessor, has stated that correcting government accounts remains a top priority, however, a specific plan has not yet been unveiled and doubts remain regarding whether he has the ability or willpower to pass vital reforms.
Brazil’s outlook is bleak. The economy is unlikely to rebound without much-needed yet unpopular economic reforms, but a hostile Congress and record-low approval ratings for the government may lead to slow implementation. FocusEconomics panelists see the economy contracting 2.6% in 2016, which is down 0.8 percentage points from last month’s forecast. For 2017, the panel sees the economy rebounding and growing 0.9%.
MEXICO | Economic growth firms up in Q3, drug lord is recaptured amid high political costs for the government
GDP firmed up in Q3 2015 and was supported by strong momentum in domestic demand. Mexico’s economy increased 2.6% year-on-year (Q2: +2.4% year-on-year) as it benefited from still healthy dynamics in private consumption and strong growth in exports of goods and services. More recent data suggest that private consumption continued to fuel economic growth in Q4 2015, buoyed by ongoing gains in employment and remittances in November and increased consumer confidence in December. On 8 January, Joaquín "El Chapo" Guzmán, leader of the Sinaloa Cartel and the world's most wanted criminal, was recaptured in an operation led by the Mexican army. This is the third time that Guzmán has been apprehended, which highlights both the degree of corruption in Mexico’s security agencies as well as the high political cost for the government. It remains to be seen if the government will extradite Guzmán to the U.S.
The economy is expected to have recorded a modest 2.4% expansion in 2015, as a fall in oil production and global headwinds dragged on economic growth. Analysts surveyed this month expect Mexico’s economy to accelerate and increase 2.7% in 2016. Growth will benefit from a recovery in the U.S., the implementation of structural reforms and strong domestic demand. Nevertheless, downside risks in the form of falling oil prices and fiscal tightening prevail, which prompted analysts to cut the economic outlook by 0.1 percentage points this month. For 2017, LatinFocus panelists expect the economy accelerate further and expand 3.2%.
ARGENTINA | New Macri administration is moving swiftly to implement changes
Mauricio Macri, who triumphed in December’s presidential elections, is quickly moving forward with reform implementation, thus fueling expectations of an economic turnaround. Last month, the new government scrapped export taxes and devalued the currency amid depleting foreign reserves. While the tax reforms and the weaker peso are expected to benefit the country’s exports, the depreciation of the currency will likely fuel inflation, which is already in the double-digits. Moreover, Macri’s government hopes to seal a deal with the U.S. hedge funds over the defaulted debt as soon as this month. A successful deal would give Argentina much-needed access to international capital markets. Recent data show that consumers were less confident in December as the consumer confidence index dropped to a three-month low, likely reflecting concerns of higher expected inflation.
GDP growth is likely to decelerate in the short term as the economy slowly adjusts to the new government’s macroeconomic policies. Moreover, external threats such as a deceleration in Brazil and low commodity prices cloud the outlook going forward. On the other hand, higher exports helped by a weaker peso as well as a swap agreement with China will shore up Central Bank reserves. The panelists we surveyed for this month’s LatinFocus Consensus Forecast expect GDP to expand 0.2% in 2016, which is down 0.3 percentage points from last month’s Consensus. For 2017, the panel projects the economy to increase 3.1%.
VENEZUELA | New Legislative Assembly takes office in early January amid high economic and political uncertainty
The newly-elected National Assembly took office on 5 January. Even though the political opposition secured a two-thirds majority, which enables the opposition to push for sweeping reforms, the prospects of political and economic change are uncertain. Prior to the opposition-controlled Assembly being sworn in, the government approved numerous bills that undermine the Assembly’s power to push for reform or tackle the current economic crisis. Meanwhile, on 15 January, President Nicolás Maduro declared a 60-day economic state of emergency that allows him to rule by decree. The measure was announced hours before delivering the first State of the Nation address to the Assembly in 17 years in which he declared that inflation in September soared to 142% and GDP contracted by 7.1% in Q3 2015 compared to the previous year. The decree grants the President sweeping power to combat shortages of goods and ballooning inflation.
Despite the change in Venezuela’s National Assembly, the country’s growth prospects are grim. A shrinking economy, runaway inflation and low oil prices are likely to maintain the economy in a deep recession. Economic analysts who took part in this month’s LatinFocus Consensus Forecast panel foresee a 4.8% contraction in GDP for 2016, which is down 0.3 percentage points from last month’s forecast. For 2017, the panel sees GDP rising 0.5%.
INFLATION | Regional inflation ends 2015 at a 20-year high
Inflation in Latin America ended 2015 at the highest level in two decades. Regional inflation shot up to 18.8% in 2015 from 10.4% in 2014 due to swift increases in inflation in Brazil, Colombia, Peru, Uruguay. Venezuela recently released official inflation data through September 2015, which confirmed that inflationary pressures have remained unabated and have soared past 100%. Analysts surveyed by FocusEconomics estimate that inflation in Venezuela ended 2015 above the 180% mark.
Inflation is expected to remain elevated this year and Central Banks in the region will likely continue the tightening cycle that began at the end of last year. Nevertheless, analysts expect that, given lackluster economic growth, the tightening cycle will end soon.
Inflation is projected to continue rising this year and is seen ending 2016 at 19.1%, according to the panel of analysts FocusEconomics surveyed this month. The projection was up 1.6 percentage points from last month and reflected upward revisions to the inflation outlook for 5 of the 11 economies surveyed. The inflation forecasts for 3 economies were revised down, while Chile, Paraguay and Uruguay were the only countries for which forecasts were left unchanged. Venezuela continues to be a source of concern as inflation is expected to remain near 200% in 2016.
Written by: Ricardo Aceves, Senior Economist
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