Gavin O’Toole, the author of Politics Latin America and other five books about Latin America, gives his opinion on what to expect for Latin American nations in 2019
Winds from two directions are pushing Latin America into stormy waters as it embarks on its economic voyage in 2019 after a fragile recovery began to stall.
Global gales whipped up by trade tensions, tougher financial conditions and volatile commodities markets threaten to push the region into troubled seas.
But domestic squalls generated by rising political risk could also rock the boat as voters rebel behind a new generation of populists.
This means that while Latin America remains on course to grow, its journey will be hazardous and other emerging regions will sail past it.
Growth projections have been scaled back from more optimistic forecasts in early 2018, and now hover at between 1.8% and 2.2%.
Global risk
External factors will weigh down prospects in 2019.
Commodity prices have escaped the post-2013 whirlpool but will languish below 2011–12 levels, limiting near-term growth for Latin American exporters.
US-China trade tensions could weigh heavily upon countries integrated in global and regional supply chains, such as Mexico and Brazil.
Moreover, while US growth has rebounded, this will not last as the boost from Donald Trump’s tax cuts fades and the Federal Reserve edges up interest rates.
Rising US rates, a stronger dollar and the trade tensions have curbed net capital inflows in Latin America and driven up borrowing costs, weakening currencies.
Meanwhile, the IMF expects growth in China to fall in 2019, potentially bruising countries that have forged growing ties with it.
Europe is also suffering a political headache, fuelled by the UK’s decision to leave the European Union and tensions caused by populism.
Global financial conditions are tightening in response to these shifting currents – and most analysts foresee some emerging markets running aground.
Political risk
These external forces mean internal demand, private consumption and investment will be key to Latin American growth in 2019.
But perilous politics also threaten a freak wave – BBVA’s political stress index indicates a resurgence of risk across the region.
The two largest markets, Mexico and Brazil, start the new year under populist presidents pledging to scrap business as usual, and investors are watching what they do to boost growth.
In Mexico, markets want to see if new president Andrés Manuel López Obrador – the first leftist leader for a generation – is good for business after his decision to use referendums to decide investment projects battered the peso.
In Brazil, the new rightwing president Jair Bolsonaro is trying to seduce markets by appointing investment banker Paulo Guedes as his new Economy Minister – yet concerns remain about their ability to overhaul the pension system, which will require deft political footwork.
Peru had its share of populist turbulence in 2018 with the resignation of one president, the accession of another, the arrest of the opposition leader, and divisive political reforms.
Policy unease persists in Argentina, where an exchange rate crisis in August forced the conservative president Mauricio Macri to go to the IMF with a begging bowl.
Political tension has also risen in Colombia and Chile over tax reforms, and forthcoming elections in Bolivia and Uruguay will aggravate uncertainty.
These external and internal crosswinds lashing Latin America imply volatility – although at least fiscal performance is improving after a lengthy adjustment to the commodity price slump.
Fiscal consolidation has pushed down primary deficits, driven mainly by an increase in revenues rather than spending cuts – suggesting more room for manoeuvre in 2019.
This means growth will come from a rebounding private sector and not public spending – and the good news according to the IMF is that there has been a pick up in investment. It’s hardly surprising, then, that confidence has been improving across the region.
Currency depreciation in 2018 means there is scope for some appreciation, and inflationary pressures have been contained – except in Argentina and Uruguay.
As a result, although growth projections for Latin America have been revised downward, most observers expect moderate improvements.
Uneven growth
However, growth will be uneven and will depend on local circumstances.
In Mexico, the recovery slowed in 2018 but confidence has grown after the uncertainty of elections.
Under intense scrutiny, the pragmatic López Obrador has pledged fiscal discipline – and based on his record as Mexico City’s mayor is likely to avoid overspending.
He enjoys a super-majority in congress that will ease governability fears, and he will benefit from the deal to replace NAFTA with the US and Canada (USMCA).
Better terms of trade and rising domestic demand have swelled consumer and business confidence in some Andean economies, particularly Chile and Peru.
Nonetheless, Chile is vulnerable to a slowdown in China, its largest trading partner.
And tensions have been building in Peru – new president Martín Vizcarra has a weak political base, complicating his anti-corruption crusade and struggles with the Fujimori clan.
Colombia’s recovery has also stumbled as markets wait to see if new president Iván Duque – whose tax reforms have already flopped – can keep his fiscal promises.
South American economies specialising in primary goods are expected to stay afloat but, at 1.6% in 2019, growth will be underwhelming – for two good reasons: Brazil and Argentina.
Promises by Bolsonaro to restore Brazilian growth have buoyed markets – but they will only believe that he has what it really takes to undertake fiscal reform with their own eyes.
Reforming pensions is crucial for fiscal consolidation and curbing public debt to restore Brazil’s investment grade rating.
Moreover, while markets reacted favourably to Bolsonaro’s victory, as ever in Brazil time may not be on his side and he must make rapid progress to convince wary investors.
Argentina will suffer in silence from the fallout of its currency crisis, which badly dented confidence in Macri.
The president’s critics are ignoring the legacy of his Peronist predecessors – and reminding him of his promise to deliver rapid results.
But with the economy potentially contracting, Macri, too, is running out of time: he faces an election in October amid Argentina’s second recession in three years.
Could he become the first Latin American captain swept overboard this year?
Final thoughts
The tempestuous global and domestic crosswinds blowing across the bows of Latin America make it easy to conclude that it could take in water during its 2019 voyage – or even founder on the rocks.
But that would be to ignore the progress made by this dynamic region since the financial crisis – and solid fundamentals that make its hull more seaworthy than ever before.
Its crew – the labour pool – is young and strong, meaning growth can still count on an expanding and increasingly well-educated workforce for the next decade at least.
Trade risks and the end of the commodity supercycle again steer the destination away from a reliance upon traditional exports to a new horizon of diversification, high-value added activities – and the wholesale adoption of digital technology and automation.
And the voter revolt in countries like Mexico and Brazil that unnerves investors can also be viewed with a different eyeglass – as evidence of maturing democracies now willing to fire a shot across the bows of a corrupt political class.
Gavin O’Toole is an author and journalist who lives in London, UK. He specialises in Latin America, economics and public finance, and has published several books including Politics Latin America, Environmental Politics in Latin America and the Caribbean, The Reinvention of Mexico, and Che in Verse.
