Sat | Oct 20, 2018

Latin America: The slowdown

Published:Friday | September 5, 2014 | 12:00 AM


SloPro is one of the more popular apps found on young people's smartphones.

Designed to shoot video at very high velocity and then play it back at very slow speeds, it is particularly beloved by adolescent males touting their sports prowess.

It is also a pretty good allegory of what is happening in Latin America.

The region is slowing at a frightening pace, and most people don't seem to care. Latin America's projected GDP growth rate for this year is 1.2 per cent y/y. This is half of the growth that was reported last year and a fifth of what was recorded in 2010.

Two countries, Venezuela and Argentina, are in outright recessions, while Brazil and Mexico are almost flatlining.

Chile and Peru, the traditional stars of the region, are growing at the lacklustre rate of 2.5 per cent y/y and four per cent y/y, respectively.

Colombia is the new regional tiger, with an expansion of five per cent y/y. Much of this is due to the large influx of foreign direct investment (FDI) that continues to arrive due to trade reforms and the ongoing peace negotiations.

During the first quarter of this year, almost 85 per cent of the FDI went into oil and gas. Colombian oil production is rising quickly, with a daily oil output of more than 1.1 million barrels per day. This is twice the rate that was reported in 2005.

Portfolio investment was also strong during the first quarter, with inflows of more than US$2.5 billion. This was primarily due to JP Morgan's decision to boost the weighting of Colombian TES bonds in its GBI-EM Global Diversified and GBI-EM Global indexes.

However, the massive portfolio inflows are making their way into the consumer credit market. The construction sector is ripping ahead, due to the ready availability of long-term mortgages. Capital is also pouring into consumer portfolios.

Signs of a consumer bubble are proliferating, and the country will eventually face a hangover. This will only lead to more problems for the region's GDP growth.

To make matters worse, concerns are building about what lies ahead for Brazil. Presidential elections are moving into their home stretch.

The World Cup did not become the disaster that many people imagined. The events were orderly, and the venues left a positive impression.

new direction

Most polls were showing that President Dilma Rousseff would be re-elected, perhaps even in the first round. However, the unexpected death of presidential candidate Eduardo Campos threw the race in a new direction.

The PSB decided to pass the ticket to former Environment Minister Marina Silva. Although Silva had been a former presidential candidate, she was on the ballot as Campos' running mate. His unexpected demise forced the party leadership to put her at the forefront, changing the dynamics of the race.

Campos was polling a distant third, but Silva has jumped in the polls. Her candidacy is stealing votes from Aécio Neves of the PSDB, and it now looks like she is moving into second place.

Her life challenges and background resonates well with the Brazilian masses, and some polls suggest that she could win in a run-off election.

Most investors welcome any scenario that spells the end of the Rousseff administration, but Silva could be more ideological in her approach. Moreover, she will not have the backing of a major political party or coalition. The result would be a lot of noise and little action. She wears her socialist and environmentalist colours well.

Under the best of circumstances, Silva will not be able to implement the structural reforms that Brazil desperately needs. Under the worst of scenarios, she will become a divisive figure who scares investors away.

Therefore, do not expect any major changes on the Brazilian growth front.

More alarming than the weak GDP performance is the deterioration of the region's current-account balance. Latin America's current-account deficit was US$147 billion last year. This is a sharp erosion from the US$52-billion surplus that was reported in 2006. To be fair, the shortfall, as a percentage of GDP, represents only 2.2 per cent.

This is minimal compared to the deficits reported across much of the developed world.

Nevertheless, the region's GDP has also exploded in the interim. This has been due to the unending nominal and real appreciations of the countries' currencies, as well as the credit-fuelled consumer boom - both of which are unsuitable in the medium to long term.

Applying the current-account deficit to the region's GDP in 2006 yields a ratio of almost nine per cent - an alarming and dangerous level.

Watching the Latin American economies is like previewing a vaulting hipster in slo-mo (slow motion).

The problem is that just beyond the camera's field of view sits a large 'bric' wall.

Dr Walter T. Molano is a managing partner and the head of research at BCP Securities