South America- A Second Reckoning?

Politics will define economics across countries in South America, many of whom face elections this year.

South America is far away for Indians. The domestic media barely covers international affairs, let alone the dynamics of this continent, so far from the Indian imagination. But as I highlighted in an earlier piece, we do share few things in common: a colonial past and the tropical weather. We may add football to the list of commonalities, since as an audience, Indians were enthusiastic about the football world cup. Whether this augurs well for the Indian football landscape or is a one-time affair every four years, remains to be seen.

In a globalized world, however, when countries such as United States are seemingly becoming protectionist, others like China are strategically opening up to the world. India must become more globalized to benefit from an interconnected world. There is a need to understand the different regions including South America, their economies, politics, cultures and people — particularly to establish a long-term relationship, and to grow their trade with India.

With this in mind, it is important to unpack this little known but large region. In my earlier two pieces, I captured the essence of trade between India and the Latin American markets and followed up with Latin America’s relationship with the Chinese. In 2018, the continent is going through an election year for key countries.The dream of the football world cup for all Latin American countries came to an early halt, but there is no love lost — South Americans have won more than 40 percent of the world cup titles since its inception. Still, exciting times lie ahead for South America’s political and economic developments.

Election Watch

In Mexico, Andres Manuel Lopez Obrador (popularly known as AMLO) won the Presidency hands down. He fought against corruption to secure a majority in the Congress, and the nation has now placed its hope on him. But the election margin isn’t as big to allow him to formalize any big constitutional changes. He will be challenged to fight menace of violence and corruption, in a way that his policies do not derail the stability of macro-economic policies.

In Brazil, the election is due in October, and is considered to be one of the most important in the recent years. However, the political environment is far from being coherent. A range of issues contribute to this incoherence: from parties yet to clarify who their candidates are, to whether ex-President Luiz Inacio Lula Da Silva’s is eligible for a re-election, or if he will throw his weight behind another left-leaning candidate. Pension reform is one of the key but controversial economic reforms yet to pass under the current leadership of Michel Temer. This will be a hot potato for the incoming President. Distrust in the political system is such that the electorate is in mood to give an outsider a chance, hence one can expect to see new faces. And the choices range from the far Left to the Right, making it difficult for a centrist to win the election.

Instances of violence, political or otherwise, has been arbitrary in the continent. The guerrilla group called Revolutionary Armed Forces of Colombia (FARC) was involved in killing the attorney general’s staff and Ecuadorian journalists in Colombia. In El Salvador’s, increasing crime continues to sustain the country’s infamous reputation. Nicaragua has suffered the most political violence: its exports declined by more than half in first six months of 2018 and the US is trying to pass a bill to continue sanctions on the country. Foreign embassies issue safety instructions to their citizens on a regular basis, and this is set to continue.

Economy Watch

In the last six months, expectations for better economic conditions dipped making Latin America one of the weaker performing regions globally. In a June 2018 survey, Mckinsey Global said that the biggest impediment for better economic conditions range from changing trade policies to the global sentiment, which adversely impacts the region.

Brazil has been facing recession for the last five years, however, is high on the radar of businesses. Its GDP growth picked up in 2017, and was expected to grow it further in 2018, but latest projections have downgraded it yet again. The country has experienced a recession during the 1980’s and early 1990’s, but has comeback strongly after recessionary cycles. Hence, it is expected to recover over the next few years, albeit more slowly than on previous occasions. Many businesses are optimistic about Brazil’s future potential while Chile is their next best bet.

Chile and Peru, the top copper-producing countries have been negatively impacted by the ongoing slump in copper prices. Peru’s economy showed progress in recent months with an uptick in most segments of the economy, but the unceremonious exit of their president in March, followed by the finance minister in June may create some political turmoil. Mining investments during the first half in Peru, and FDI inflows and mining exports in Chile have seen significant increase, thus cushioning the economies from other risks.

Other major countries including Argentina and Colombia have thrown caution to the winds, given their unfavorable political scenarios on one side, and economic turmoil on the other. Argentina and International Monetary Fund (IMF) signed a standby-agreement for USD 50 Billion funding till 2021. The country needs to adhere to fiscal commitments made to IMF for the next few of years. IMF seems to be pleased with the progress made so far. Argentina’s subsequent rating upgrade to ’emerging market’ status will help it attract funds from foreign investors, and is looking to significantly bring inflation down by 2019.

Colombia has chosen a new finance minister who has supported the privatisation of state-run oil companies. But it remains to be seen what the new government will do under the President-elect Ivan Duque, a business-friendly politician who is expected to lower corporate tax and re-examine the peace deal with FARC.

Countries such as Panama, Dominican Republic, Guatemala and others will possibly grow at a faster rate than Brazil and others, but then they will grow from a lower GDP base and will not improve the continent’s absolute GDP growth by much. The Dominican Republic and Guatemala, due to their geographic proximity to the U.S, enjoy the positive effects of America’s strong economy.

Costa Rica, chose a new leader, so political turmoil is not anticipated currently. It is expected to see GDP growth similar to Peru (in the 3-4% range) for 2018. The Ecuadorian President, Lenin Moreno, will also have more flexibility on economic matters as he consolidates his political power. Renewed financing from the World Bank, and consolidation in domestic oil industry coupled with investment agreement with the United States, will benefit the country in the short run.

Venezuela’s crisis deepens as inflation reaches around 25,000% annually. Nicolas Maduro held on to his presidency this year, an election which the West has rejected emphatically. Venezuela’s inflation is sky-rocketing and neighboring countries are feeling the heat. Colombia alone has taken a million Venezuelans over the last few years. Ecuador and other countries have been receiving distressed Venezuelans, who are unable to find economic opportunities in their home country. This runs counter to the predominant narrative that immigrants are heading to Western economies. Latin America shows that a lot of this migration is happening within the region itself, and not knocking the doors of developed world.  

Most Latin American countries are likely to grow their GDP in low single digits during 2018. Brazil, the biggest South American economy has attracted more than half of USD 110 Billion in Chinese money in the last 15 years. The continued business optimism despite Brazil’s domestic challenges reminds one of the adage, ‘Among the blind, a one-eyed man is the king.’ Brazil is the beacon of light in a relatively more volatile Latin American region. However, with country’s economy heading for another low-growth year, it is far from being a light house.