Opinion: Dramatic slowdowns, moderate growth expected in Latin America this year

In 2016, the key challenges in Latin America will be in the region’s economies.

Argentina is faced with a recession which will only get deeper in the first quarter of the year. The new government, led by Mauricio Macri, will have to unpick the current absurd tapestry of exchange control and regulations, as well as make cutbacks in spending if it wants to set up a solid base from which to lead the country out of the crisis.

A golden decade has passed without major structural problems being resolved, still less those of poverty and inequality. 2016 will test the capacity of Latin American leaders and institutions to deal with these economic challenges, which will create significant political pressure.

— Leopoldo Martinez

Brazil will suffer a further contraction of its economy for the next six quarters as its fiscal deficit will continue to affect the credit worthiness of the South American giant.

What happens in Brazil and Argentina frames the possibilities for the economies of Paraguay and Uruguay — therefore, Mercosur bloc will face the need for major strategic decisions in 2016.

In Venezuela, the economy will repeat its frightening 2015 contraction of 8 percent along with continuing acute shortages (especially in food and medicines) and three-digit inflation, all of which will continue to deteriorate the quality of life of citizens, already harmed by rampant violent crime. And this will take place in a context of increasing political conflict after the crushing defeat inflicted on the government of Nicolás Maduro in December’s parliamentary elections.

The Venezuelan crisis is the result of the collapse of the national productive sector induced by the government, exacerbated by a new and dramatic fall in oil prices.

The monumental size of the Venezuelan crisis has naturally had an impact throughout the Caribbean and Central America. One is a predictable 180 degree policy shift toward the United States, something that even Cuba is doing as it accelerates its trade and economic relations with its northern neighbor.

Caribbean and Central American governments are looking for alternatives to Venezuela and its already exhausted Petrocaribe project, alternatives which will allow them to ride out the turbulence in the region. Growth rates of 2.5 percent to 3.5 percent for 2016 are predicted for El Salvador, Costa Rica, Honduras and Guatemala; 6 percent for Panama, 4 percent for Nicaragua and 5 percent for the Dominican Republic.

In Bolivia, the government of Evo Morales has managed to establish a stable economic growth. For 2016, in spite of social difficulties and enduring inequalities, Bolivia's economy is projected to grow by 4 percent.

In Chile, the fall in copper prices will have an adverse impact. Thus, the government of Michelle Bachelet anticipates a low level of economic growth (2.2 percent) for 2016, with a fiscal deficit of 3.0 percent of gross domestic product (GDP). This will have a considerable social impact because the economy had been growing at a rate of between 5.5 percent and 6 percent until 2014. In fact it amounts to a dramatic slowdown.

Mexico, for its part, will remain stable in the context of its difficulties and in spite of the fall in the price of oil, it is expected to have a growth rate of 2.8 percent of GDP for 2016, and a fiscal deficit that could end up around 3.3 percent (very similar to the 3.5 percent of 2015.)

In the Andean region, Colombia is projected to have an equally moderate growth rate of 2.6 percent and inflation at 4 percent. Peru continues its downturn, with growth for 2016 projected at 3.4 percent, which represents a serious drop from the high growth rates of around 7 percent and 6 percent which were recorded until 2013.

Ecuador is another economy in difficulties, unable to escape the effects of the fall in oil prices. After growth of 8 percent (2011), 5.6 percent (2012), 4.6 percent (2013) and 3.7 percent (2014), the Ecuadorian economy has been approaching recession with undetectable levels of growth recorded in 2015 (0.5 percent) and a projection of 0.4 percent for 2016.

With regard to structural issues, only Mexico has been able to escape from the curse of reliance on the export of commodities, with industrial exports amounting to 85 percent of its income. Even Chile continues to depend on copper, which accounts for 54 percent of its revenue. Mexico however, with 80 percent of its exports going to the U.S., is limited by this dependence on its northern neighbor, a mature economy which is only growing at 2-3 percent a year in a global context that remains uncertain.

The pressures of poverty and inequality suffered by Mexico require sustained economic growth of the magnitude of 7 percent to be managed effectively. Accelerating economic growth will demand creative public policy solutions from Mexico’s leaders.

In spite of the advances recorded in Chile, Brazil, Colombia and Mexico (in that order), social problems remain serious throughout the region. The concentration of wealth and inequality are among the most dramatic worldwide.

The outstanding feature of this regional economic survey is that a golden decade has passed without major structural problems being resolved, still less those of poverty and inequality.

2016 will test the capacity of Latin American leaders and institutions to deal with these economic challenges, which will create significant political pressure. To deal with these social problems, as well as the aforementioned structural ones, investment in health, infrastructure, communications and especially in education is essential. This investment is required to strengthen the entrepreneurial fiber and innovative capacity of the region, essential conditions for breaking the dependence on commodities and reducing social inequalities.