Growth projected to regain some steam in Q4; crisis-stricken Venezuela groans under oil sanctions Latin America’s bumpy economic recovery is expected to have had a better quarter at the end of 2018, after growth slumped in the third quarter. FocusEconomics estimates that GDP increased 1.7% year-on-year in Q4, above Q3’s 1.5%. Despite the modest uptick, growth remains weak in the Latin American economy, which had a disappointing 2018 overall. Weaker global trade, a noisy election cycle, shifting sentiment for emerging-market assets and one-off shocks in major players caused the recovery to flounder last year. Preliminary data for Mexico revealed that growth lost steam in the fourth quarter. Plunging industrial activity on the back of contractions in the construction and mining sectors dented economic activity, while retail trade figures were more positive. Official GDP figures for the rest of the region’s economies are still outstanding, although FocusEconomics analysts estimate that Ecuador and Uruguay both also lost steam in Q4. Moreover, Argentina’s recession is expected to have deepened as sky- high inflation, falling employment and decimated confidence undermined economic activity. Elsewhere in the region, dynamics are expected to have held up better. A pick-up in Brazil’s economy likely fueled the overall regional acceleration, on the back of a recovering labor market and returning confidence. Peru’s economy is also projected to have bounced back from a poor Q3, thanks in part to soaring infrastructure spending, while growth in Chile is also seen having accelerated in Q4. Growth is seen receding slightly at the start of 2019 and the Latin American economy is seen expanding 1.5% annually in Q1. Signs of a looser monetary policy stance in the United States are supporting sentiment for emerging-market currencies and should help give most central banks more room to encourage economic activity. In addition, the end of the crowded election cycle should allow governments to shift focus to implementing much-needed reforms, although a degree of uncertainty will likely linger until new policies are pushed through. Slower global growth, however, could take some wind out of the region’s external sector this year. On the political front, Venezuela has been in the spotlight in recent weeks after the leader of the opposition-controlled National Assembly, Juan Guaidó, declared himself interim president on 23 January. Several countries, including the United States, have since recognized his presidency, ramping up international pressure on President Nicolas Maduro to resign or hold new elections. Moreover, the United States is using its economic might to squeeze the crisis-stricken country, imposing new sanctions on state-owned oil firm PDVSA. These measures will likely dent oil revenues and further exacerbate the country’s already dire economic condition. The situation is fast-evolving and there is considerable uncertainty regarding the future of the country and whether Maduro will be able to cling onto power. Some of our panelists have begun forecasting a political transition, while there is also the risk that the recent actions by the United States could boost Maduro’s standing in the country.
U.S. sanctions set to exacerbate economic crisis On 28 January, the Trump administration significantly increased the economic pressure on President Nicolás Maduro’s government by announcing sweeping sanctions against PDVSA, the state-owned oil firm. The new measures freeze around USD 7 billion of PDVSA’s assets in the U.S. and would effectively halt Venezuela’s oil exports to the U.S., amounting to USD 11 billion in lost export revenues over the next year. In addition, proceeds from oil sales by PDVSA would flow into designated accounts outside the control of the Maduro government. Considering that the country depends almost entirely on oil exports for its hard currency income, the sanctions deal a serious blow to the government’s cash flow and to the already crippled economy. The U.S. is the main buyer of Venezuelan crude, currently importing around 500,000 barrels per day (bpd). It also exports about 100,000 bpd of diluents to Venezuela, which are needed to mix with its heavy type of oil before it is exported. Under the sanctions, PDVSA would have to seek alternative buyers for its crude, such as in India, and would have to sell at a sharp discount to secure those markets. Furthermore, the cost of importing diluents from elsewhere would rise as Venezuela would lose the price advantage from its proximity to the United States. Consequently, lower revenues stemming from the loss of its main export market, coupled with the higher costs of importing diluents, will severely curtail Venezuela’s capacity to produce, process and export oil going forward. This will have a significant impact on public finances and on the economy more broadly. While previous U.S. sanctions implemented in August 2017 already made it hard for the government to access international financing, the new ones will constrain even further its ability to acquire much-needed hard currency. A major implication is that the Maduro government and PDVSA could struggle to service their hefty foreign debt obligations, which could push them closer into default and in turn put Citgo—PDVSA’s U.S.-based subsidiary and most valuable foreign asset—and other assets at risk of action by creditors. On the domestic front, lower inflows of dollars will further distort the foreign exchange system, as noted by Milton Guzman, analyst at Andes Investments: “Despite the recent effort from the government to apply a more flexible FX scheme, at least, in the next three or four months, the net amount of external resources will be significantly low as to feed up the market in a satisfactory way.” This in turn increases the risk of the exchange rate weakening considerably, which would further fuel hyperinflation. In addition, given the economy is highly import dependent, lower foreign currency revenues means the country will be able to import significantly less, leading to deeper shortages and increased hardship on the Venezuelan population. This was highlighted by Efrain Velazquez, director at AGPV, who commented: “[The sanctions] imply that public imports will have to be reduced. Economic and social impacts will be huge. Food shortages will increase and hyperinflation may accelerate even more.” As such, the sanctions would inflict a heavy toll on the average Venezuelan and could potentially intensify outward migration. Going forward, analysts see the economic outlook deteriorating further, a view that is shared by Velasquez: “Our next macroeconomic projections may show lower GDP growth and higher inflation.” That said, in light of the highly uncertain political environment, others are contemplating various scenarios to play out, like the one illustrated by Guzman: “Since our most recent macro FOCUSECONOMICS Venezuela LatinFocus Consensus Forecast | 113 February 2019 forecast is assuming that a political change would take place between May and June, the sanctions could be lifted, while additional efforts from a transition government to prevent the rapid oil output decline reported since 2017 could also contribute to mitigating the impact of the new sanctions.” Although the sanctions are designed to spark a political transition, which is a scenario that some of our panelists have factored into their forecasts, it is far from certain whether this will be accomplished. By further deteriorating domestic conditions, the measures could even backfire by helping Maduro shore up his support on the ground. All in all, panelists participating in the LatinFocus Consensus Forecast project that GDP will contract 10.3% this year, which is down 0.6 percentage points from last month’s forecast. For 2020, panelists expect GDP to fall 2.8%.