Here is an edited LatAm research post: After a weak 2019, regional growth is expected to regain steam next year. The acceleration wi...

Latin American Economic Troubles (Nov. 2019)

Here is an edited LatAm research post:

After a weak 2019, regional growth is expected to regain steam next year. The acceleration will be driven chiefly by a pick-up in Brazil’s economy, thanks to monetary easing and reviving confidence. Growth is also seen accelerating in Chile, Mexico and Peru. However, Argentina is expected to remain in recession amid high inflation and policy uncertainty.

Economic Overview
The economy is set to remain stuck in recession next year. Investment will likely plunge amid downbeat business sentiment and sky-high interest rates, while runaway inflation will continue to eat into consumer spending; the external sector, however, should continue to support growth. A radical shift towards far-left policies poses a significant downside risk to the economy.

After slipping this year, growth is seen accelerating next year on revived sentiment and accommodative monetary policy. In addition, a government measure to allow workers to tap into an unemployment benefit fund should boost household spending. Risks to the outlook linger, however, particularly weak export prospects amid the ongoing crisis in Argentina.

Growth is expected pick up next year, although at a slower pace than previously reported. Fiscal concessions are seen boosting private consumption, while higher copper prices and a more benign external environment should prompt an export rebound. Nevertheless, capital investment will likely cool somewhat amid heightened domestic uncertainties.

Growth is seen sustaining solid momentum next year as lower corporate taxes and fiscal exemptions enable a healthy expansion in fixed investment, while lower inflation should allow for solid private consumption growth. Nevertheless, delays to amend the tax scheme pose downside risks to the investment and fiscal outlook, at a time of heightened external risks.

The economy is seen picking up steam next year amid a rebound in government and capital spending, and stronger household consumption. Looser monetary conditions should also lend support to overall growth. Pemex’s fragile financial state, policy uncertainty, a subdued global growth environment and the risk of
reemerging trade tensions with the U.S. dampen the outlook.

The economy is set to pick up some steam in 2020, following a notable slowdown in 2019, powered by stronger domestic demand and a more benign external backdrop. Fixed investment is seen keeping pace thanks to growing infrastructure spending, while private consumption should also benefit from rising consumer confidence. Political uncertainty lingers in the background, however.

In Depth:

A rare release of data published by the Central Bank on 19 October revealed that the economy contracted by more than a quarter in annual terms in Q1, while prices shot up above 50% over the previous month in September. Hefty U.S. sanctions and chronic power outages have crippled the oil industry, which has seen production plummet by more than 40% since the start of the year until September. Hard-hit oil exports have curbed access to U.S. dollars required to pay for imports, in turn draining foreign reserves. In a bid to ameliorate the grim situation, on 29 October the National Constituent Assembly voted to exempt Russian energy giant Rosneft from value-added and export taxes to incentivize joint gas production. Meanwhile, the opposition is striving to retain control of PDVSA’s U.S. refining unit Citgo—the country’s most valuable overseas asset—filing a lawsuit to annul the 2020 bond issued by the state-owned oil company on the grounds that its issuance was illegal.

On 19 October, the Central Bank of Venezuela (BCV) released fresh macroeconomic data for the first time in six months, which underscored the severity of the crisis currently gripping the country. The economy contracted 26.8% in year-on-year terms in the first quarter of the year—the latest period for which data became available—following a 20.2% drop in the previous quarter. The downturn marked the 21st consecutive quarter of falling output and was the sharpest on record. Overall, the economy shrank 19.6% in 2018 (2017: -15.7%) and more than half since 2013, with output down to levels not seen since the late 1990s. The steeper decline in output in Q1 2019 compared to the prior quarter reflected a sharper contraction in domestic demand. Private consumption plunged 34.8% in year-on-year terms, the most severe decline since at least 1999 (Q4 2018: -25.4% year-on-year). Despite frequent hikes to the minimum wage, runaway inflation—largely fueled by exchange rate misalignments— has significantly eroded the purchasing power of households, with high unemployment further curbing spending.

Moreover, fixed investment tumbled 43.7% year-on-year in the quarter, falling continuously since Q2 2015 (Q4 2018: -39.4% yoy), while government expenditure fell 23.9% year-on-year, a markedly bigger drop from the previous quarter (Q4 2018: -8.4% yoy). On the external front, exports of goods and services—in which oil shipments account for the overwhelming majority—rebounded strongly in Q1, contrasting a slump in the previous quarter (Q1 2019: +34.8% yoy; Q4 2018: -9.3% yoy). Imports, however, plunged at the sharpest since Q4 2017 (Q1 2019: -17.4% yoy; Q4 2018: -1.4% yoy). Meanwhile, on the production side, activity in the non-oil segment of the economy shrank 27.3% in Q1 2019 over the same period in 2018 (Q4 2018: -20.4% year-on-year) as manufacturing output more than halved in annual terms and mining production fell more than one-third year-on-year. Furthermore, the all-important oil sector—which accounts for a significant share of foreign exchange earnings and government revenues—contracted more sharply and for the 16th month running (Q1 2019: -19.1% yoy; Q4 2018: -14.7% yoy).

Oil production has been on a steady decline since 2015 due to years of mismanagement, corruption, underinvestment and brain drain, and has been curtailed more recently by the imposition of economic sanctions. Looking ahead, the near-term outlook is bleak. Out-of-control inflation, dwindling oil production and a dysfunctional exchange rate regime will continue to cripple the economy, while financial sanctions aimed at choking off the government’s access to hard currency only worsen the already dire situation. FocusEconomics panellists project that GDP will contract 7.5% next year, which is down 0.7 percentage points from last month’s forecast. For 2021, panelists expect GDP to rise 2.1%.

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