B&E | Flashback 2015 : Latin America Economic Activities Report

B&E | Flashback 2015 : Latin America Economic Activities Report

By World Bank

Economic activity in the broader Latin America and the Caribbean (LAC) region contracted in 2015. Following three consecutive years of slowing growth, output in the region fell 0.9 percent in 2015, partly reflecting sharp declines in economic activity of large regional economies, such as Brazil and the República Bolivariana de Venezuela (Table 1, Figure 1). 


This reduction in output stemmed from a combination of global and domestic factors, particularly the continued slump in commodity prices. Lower crude oil prices – down around 45 percent from 2014 levels – have reduced export earnings and fiscal revenues of regional oil exporters, such as Belize, Colombia, Ecuador, Mexico, and the República Bolivariana de Venezuela. 

Figure 1: GDP growth, 2014-2015

Figure 1: GDP growth, 2014-2015

Depressed prices of copper, iron ore, gold, and soy beans have worsened the terms of-trade for commodity exporters, such as Brazil, Chile, the Dominican Republic, and Peru. A number of governments had to undertake pro-cyclical fiscal tightening, aggravating the economic slowdown. Several large South American economies have also been grappling with severe domestic macroeconomic challenges that have eroded consumer and investor confidence, further contributing to the regional output decline in 2015.

Table 1: Latin America and the Caribbean forecast summary / Source: World Bank

Table 1: Latin America and the Caribbean forecast summary / Source: World Bank

World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in other Bank documents, even if basic assessments of countries’ prospects do not differ at any given moment in time.

a. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars. Excludes Cuba, Granada, and Suriname.

b. Sub-region aggregate excludes Cuba, Dominica, Granada, Guyana, St. Lucia, St. Vincent and the Grenadines, and Suriname, for which data limitations prevent the forecasting of GDP components.
c. Exports and imports of goods and non-factor services (GNFS).

d. Includes the following high-income countries: Antigua and Barbuda, Argentina, The Bahamas, Barbados, Chile, Trinidad and Tobago, Uruguay, and Venezuela, RB.

e. Includes Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Guyana, Paraguay, Peru, Uruguay, and Venezuela, RB.

f. Includes Costa Rica, Guatemala, Honduras, Mexico, Nicaragua, Panama, and El Salvador.

g. Includes Antigua and Barbuda, The Bahamas, Barbados, Belize, Dominica, Dominican Republic, Haiti, Jamaica, St. Lucia, St. Vincent and the Grenadines, and Trinidad and Tobago.

Output in the South American sub-region experienced a particularly marked reduction in 2015.[1] With GDP falling in Brazil, Ecuador and the República Bolivariana de Venezuela, South America saw overall economic growth turn negative, to an estimated -2.1 percent in 2015, after tepid growth in 2014. Investment in Brazil has been dropping since 2013 due to investors’ loss of confidence, which was exacerbated in 2015 by the widening investigations into the Petrobras scandal. Monetary and fiscal tightening, accelerating inflation, and concerns about growing fiscal deficits also weighed on investment. The República Bolivariana de Venezuela too is in recession, with very high rates of inflation. Controls that restrict imports of vital consumer goods and intermediate inputs have curtailed private consumption and impeded manufacturing. The appreciation of the U.S. dollar has meant a loss of competitiveness for the fully dollarized Ecuadorean economy. This, together with lower oil prices, has pushed Ecuador into a recession in 2015. In contrast, Argentina saw activity rebound in 2015.[2] However, the increase in activity might not be sustainable as it was partly due to a surge in pre-election public spending, while net exports have been falling and inflation has been high. Other large economies, particularly commodity exporters, are continuing to grow at tepid rates. 

Despite strong economic ties to a strengthening United States, developing Central and North America saw growth rates in 2015 rise modestly from 2014.[3] The sub-region’s largest economy, Mexico, saw a small pickup in growth in 2015 on the back of expanding exports to the United States. However, the Mexican economy has been weighed down by low oil prices and reduced oil production. Lower oil prices have severely curtailed government revenues, and compelled fiscal tightening. 

Economic growth in the Caribbean moderated in 2015, with output expanding by 3.3 percent.[4] The Dominican Republic, the largest economy in the sub-region, experienced a contraction in mining exports, as prices fell. A surge in investment, including the construction of new public schools and two new coal-fired power plants, provided some support to output. In contrast, Jamaica saw growth pick up, amid increased business and consumer confidence, a successful IMF Extended Fund Facility program review, and stronger mining output.[5]

The sharp fall in commodity prices, predominantly due to well-supplied markets, adversely affected commodity exporters in LAC. In 2015, prices of agricultural products declined by about 13 percent, metals by 21 percent, and precious metals by 11 percent from 2014 (Figure 2). Oil prices towards the end of the year were about 45 percent below 2014 prices. This hurt tax and export revenues, and exerted pressures on fiscal balances of oil exporters (Belize, Colombia, Ecuador, Mexico, Venezuela). Similarly, the slump in copper prices, along with the continued slowdown in major trading partners, dampened investment into the mining sector, weighing on growth in Chile and Peru. 

Figure 2: Commodity Prices

Figure 2: Commodity Prices

Regional currencies continued to depreciate in 2015. Commodity exporters in the region saw large depreciations on account of the continued slump in commodity prices (Figure 3). At end of October 2015, the currencies of Chile, Colombia, Mexico and Uruguay depreciated by an average of 13 percent in nominal terms and around 9 percent in real effective terms with respect to their levels at the beginning of the year. The Brazilian real saw an exceptionally large depreciation, due to investor concerns about macroeconomic imbalances and political uncertainty. The Argentine peso depreciated 27 percent on December 17, 2015 when capital controls were lifted.

Figure 3: Exchange Rates
Figure 3: Exchange Rates

LAC currencies continued to depreciate against the U.S. dollar in 2015.The depreciation of the Brazilian real was particularly steep. Because of high inflation, the real effective exchange rates of Argentina and the Republica Bolivariana de Venezuela rose, indicating a loss of cost competitiveness.

Regional export performance improved in 2015, boosted by weak exchange rates and continued recoveries in the United States and the Euro Area. Regional export volumes of goods and services climbed around 5 percent in 2015 after remaining broadly unchanged in 2014 (Figure 4). Exports in South America expanded by about 4 percent, led by Brazil with a substantially depreciated real. Similarly, with its close ties with the United States, developing Central and North America experienced export growth of more than 8 percent. Led by strong tourism demand, the Caribbean’s exports of goods and services rose almost 5 percent in 2015.

Figure 4: Exports

Figure 4: Exports

Regional export performance improved in 2015, boosted by weak exchange rates and continued recoveries in the United States and Euro Area.

There was a large divergence in inflation performance across the region. Reduced oil prices led to lower inflation in developing Central America, North America, and the Caribbean. For example, despite seeing a 12 percent depreciation of the peso against the U.S. dollar and being an oil exporter, Mexico’s consumer price inflation reached historic lows in 2015 (Figure 5). The mild inflation rates enabled the Banco de México to maintain a record low interest rate of 3 percent for most of 2015 (Figure 6).[6]Inflation pressures in Nicaragua also eased sharply following a cut in electricity prices in April. El Salvador, which imports almost all of its oil, saw annual inflation turn negative for most of 2015. Similarly, consumer prices in Costa Rica fell in the latter half of 2015, and the central bank further lowered its policy rate to 2.25 percent in October. Also with low inflation, the Dominican Republic reduced interest rates and lowered commercial bank reserve requirements in the first half of 2015.

 Figure 5: Inflation Rate

Figure 5: Inflation Rate
Inflation rates are diverging across the countries.

Figure 6: Central bank policy rates, 2014-2015

Figure 6: Central bank policy rates, 2014-2015
Reflecting different inflation pressures, monetary policies are diverging among countries

In contrast, consumer price inflation ran at very high rates in Argentina, Brazil, and especially the República Bolivariana de Venezuela.  In Brazil, inflation reached a 12-year high in the second half of 2015. This was in part due to the one-off effect of a reduction in subsidies and an increase in administered prices, but the main reason was higher underlying inflation, as the core inflation accelerated to above 9 percent. In a series of upward adjustments, the Banco do Brasil raised policy interest rates to 14.25 percent, a nine-year high. Consumer price inflation in the República Bolivariana de Venezuela reached well over 100 percent in 2015, as policy has failed to establish an anchor for inflation expectations.7 Argentina’s.

Inflation in Colombia is under better control, but has been above the central bank’s 2-4 percent target band since mid-2015. Continued weakness in the peso, along with a poor harvest of staple crops, contributed to the increase. To guide inflation back to target, the central bank raised its policy rate in a number of successive adjustments in the latter half of 2015. Similarly, headline and core inflation in Peru have been steadily rising and have remained above the Peruvian central bank’s upper bound target of 3 percent since 2014. This prompted the central bank to lift the policy rate in September and December.

Fiscal balances are also on differing paths across LAC. Due to lower commodity and export revenues, coupled with the slowdown in growth, regional fiscal balances deteriorated, and the debt/GDP ratio increased in 2015 (Figure 7). Given the large proportion of major commodity exporters in the sub-region, fiscal balances in South America as a share of sub-regional GDP are projected to deteriorate by more than 2 percentage points in 2015. The deficit to GDP ratio for Brazil widened further, after doubling in 2014. Weak revenues, swelling interest payments, and losses on central bank dollar swaps, were responsible for the slide. The Chilean fiscal deficit doubled in 2015. Government revenues have been depressed by low copper prices. At the same time, the government has boosted public spending in line with the fiscal stimulus program launched in 2014 to counter slowing growth. In contrast, Ecuador is projected to see a narrowing of the fiscal balance in 2015, due to a series of fiscal consolidation measures. Weaker oil export earnings have led the Ecuadorian government to decrease expenditures by $2.2 billion in 2015, with cuts almost entirely on capital expenditures.

Figure 7: Fiscal indicators

Figure 7: Fiscal indicators
Fiscal balances are diverging, with balances deteriorating in South America and improving in the rest of the region.

Central and North America, and the Caribbean too saw a narrowing of fiscal deficits in 2015, predominantly due to fiscal consolidation. In Mexico, lower oil prices and production were offset by a sharp increase in non-oil revenues in the wake of the tax reform in 2014 and the increase in excise taxes on domestic fuels in 2015. In addition, the government enacted spending cuts equivalent to 0.7 percent of GDP. Supported by the 48-month IMF-supported Extended Fund Facility, Jamaica introduced new consumption taxes and reduced the public sector wage bill, as well as sharply lowering gross debt as a share of GDP. After settling a debt due to the República Bolivariana de Venezuela at a sharp discount, the Dominican Republic saw a large drop in its debt service costs and registered a substantial narrowing of its fiscal deficit.

Current account balances deteriorated throughout most of the region. Despite rising volumes of total exports, the LAC’s current account deficit as a share of GDP widened to 3.4 percent in 2015 from 2.8 percent in 2014, partly due to reduced export revenues associated with lower commodity prices (Figure 8). South America’s current account deficit is estimated to have widened 0.8 percentage point in 2015 to 3.6 percent of GDP. Developing Central and North America saw a smaller current account deterioration of 0.2 percentage point. As the exception to the trend, the Caribbean’s deficit narrowed due to elevated tourism receipts. Colombia saw a current account deficit in the first half of 2015 of more than 6 percent of GDP, due to a plunge in oil export revenues. Similarly, Mexico’s current account balance suffered from lower oil revenues, owing both to weaker prices and declining production. However, this was offset by strengthening export performance of manufactures, which represent a far larger share of Mexico’s trade and benefited from the weak peso.

Figure 8: Current account balances
Figure 8: Current account balances
Current account balances have deteriorated in a number of countries.

Gross capital flows contracted in 2015. Following the sharp slowdown in flows in 2014, gross capital flows to the region are estimated to have contracted by another 40 percent in 2015 (Figure 9). Brazil and Mexico accounted for around 80 percent of the decline. Weaker-than-expected growth prospects and increased political uncertainty, especially in Brazil, discouraged investors.

Figure 9: Gross capital flows
Figure 9: Gross capital flows
Gross capital flows declined in 2015.

All three components of gross capital flows declined in 2015, with equity issuance contracting the most, falling more than 60 percent. Bond issuance slumped more than 40 percent from 2014 levels, mainly on account of a $35 billion decline in new Brazilian bonds. Other economies took advantage of the still favorable global monetary conditions to put in place refinancing and pre-financing arrangements. In April, Mexico sold the world’s first 100-year government notes in euros, as it locked in lower borrowing costs. Colombia issued $4 billion worth of bonds. Syndicated bank lending dove by 20 percent, reflecting local banks’ lower funding needs as regional economies cooled.

The large decline in bond issuance mostly occurred among corporate issuers, particularly Brazilian corporate deals. Despite its significant appreciation, the U.S. dollar is still by far the currency of choice for debt issuance in Latin America. From January to September 2015, over 80 percent of bonds issued were denominated in U.S. dollars, slightly higher than the same period a year ago.

Sources: Global Economic Prospect 2016 / Download The Report - LINK

End-Note:

1. The South American sub-region includes: Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Guyana, Paraguay, Peru, Uruguay, and the República Bolivariana de Venezuela.     

2.  Based on official national accounts data. 

3.The developing Central and North America sub-region includes: Costa Rica, Guatemala, Honduras, Mexico, Nicaragua, Panama, and El Salvador.      

4. The Caribbean sub-region includes: Antigua and Barbuda, The Bahamas, Barbados, Belize, Dominica, Dominican Republic, Haiti, Jamaica, St. Lucia, St. Vincent and the Grenadines, and Trinidad and Tobago.

5. Higher mining output was led by increased production of alumina, boosted by higher global demand.

6. The central bank of Mexico raised its benchmark interest rate by 25 bps to 3.25 percent at its December 17th, 2015 meeting.

7.  As estimated in IMF 2015i.

8.  Based on official data.
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