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The Hangover: Latin America Recovers After Shot of Success

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From the Winter 2015/16 Issue “Latin America On Life Support?

By Ricardo Ávila

BOGOTÁ, Colombia—When Lima, Peru, hosted the joint annual meetings of the World Bank and the International Monetary Fund last October, it was supposed to be the ideal occasion for showcasing the new Latin America. At least that was the intention of Peru, probably the region’s most successful economy, whose government spared no expense receiving the more than 12,000 delegates, which included finance ministers and central bankers from 188 countries.

The venue was flawless. A convention center was inaugurated just days before the meetings; the impressive, newly constructed Grand National Theater hosted events; and the Peruvian Central Bank building housed delegations. Even the city’s challenging traffic was manageable thanks to the combination of a national holiday and an additional civic day that meant thousands of motorists left the capital for a long weekend just as the motorcades invaded.

The only variable that was impossible to manage was the weather—gray and cold, typical of spring in this part of the Southern Hemisphere. Locals know the color of the sky as panza de burro, or donkey’s belly. As it happens, that natural backdrop proved most appropriate for a region that hardly looks sunny at all anymore. Gone are the days when the enthusiasm about Latin America was common and analysts proclaimed its 600 million inhabitants had entered a new phase of long-term prosperity. The end of the so-called commodities supercycle means governments from south of the Rio Grande to Patagonia are facing hard times and that millions of those they govern are feeling the pinch.

The extent of the damage was clear in Lima when the IMF revealed its World Economic Outlook. Even in a mediocre environment where global GDP is expected to expand a bit over 3 percent in 2015, the numbers for Latin America were dismal. The region’s economy is expected to contract 0.3 percent this year and to grow by less than 1 percent in 2016. This perspective places at risk the zone’s most important achievement in this century. According to the U.N. Economic Commission for Latin America and the Caribbean (ECLAC), the poverty rate in Latin America shrank from 44 to 29 percent from 2002 to 2012. Almost 70 million of its citizens left the ranks of the poor thanks to better jobs and higher incomes. The World Bank reports the middle class grew more than 50 percent during the same period.

Now, the recession is taking its toll. Unemployment in Brazil is almost three percentage points higher than a year ago. Economists say thousands of families have been propelled back into poverty because of lower incomes and a higher inflation rate. The region’s largest country, which accounts for almost 40 percent of its GDP, looks again like an unfulfilled promise. Not only is consumer and business confidence at a very low point, but President Dilma Rousseff is fighting for her political survival after corruption allegations regarding the oil giant Petrobras infected the ruling Workers’ Party. Coming back into vogue is the old expression, “Brazil is the country of the future and will always be.”


But it’s unfair and deeply inaccurate to lump all Latin American economies in the same basket. Alejandro Werner, a Mexican who serves as the IMF’s Western Hemisphere director, insists that the region is heterogeneous and that it would be a mistake to think all nations behave similarly. Guillermo Perry, a former Colombian minister of finance and chief economist for the region at the World Bank, says he believes there are at least three clear groups of countries in the region. While some are doing badly, others are having very decent numbers growing at more than 4 percent per year and should continue to expand even if emerging economies globally are decelerating.

The first group is comprised of the deeply troubled nations. In this category we find not only Brazil but also Venezuela, which is a true economic disaster. After contracting in 2014, the IMF says it believes the country’s GDP will shrink an additional 10 percent this year. While official figures are not available, most observers say Venezuelan 12-month inflation rate may be at or near the world’s highest—at least 96 percent as of July. Common goods are scarce or even nonexistent while its government blames almost everybody for the situation, failing to accept that the new plunging level of oil prices requires vast internal adjustments.

Ecuador is also in trouble due to its dependence on oil exports and its adoption of the dollar as its currency after fighting hyperinflation at the beginning of the century. Although the greenback has given this smaller country a degree of stability, its room for maneuvering is still quite narrow, and the risk of a liquidity crisis is growing each day.

Argentina doesn’t look much better. Despite being rich in resources, it will probably pay the price of 12 years of Kirchnerismo—the dynasty of husband and wife who ruled from the Casa Rosada in Buenos Aires. Two major headaches for the new government are an increase in public outlays that has been difficult to sustain and a legal dispute in a New York court regarding bonds that were restructured several years ago. The IMF is forecasting bad times for the Argentines this year and next. The IMF predicts that Argentina’s GDP will grow a paltry 0.4 percent in 2015 and shrink by 0.7 percent in 2016.

The second group of nations includes those hit by lower commodity prices who will nevertheless manage to sustain positive growth numbers. In this category, economists count Chile, Peru, Mexico, and Colombia—founding partners of the Pacific Alliance, an integration and trade scheme that is still viewed with enthusiasm in the international arena. With a growth rate projected to oscillate between 2 and 3 percent per year in 2015 and 2016, it is difficult to be highly optimistic about this group. Still, there remains an expectation that recovery will come fast once the global outlook improves and individual countries are able to diversify their exports after devaluations of their respective national currencies. The Pacific partners are considered to have the best economic management teams in the region and tend to behave responsibly in good and bad times. Other countries, particularly Bolivia, Uruguay, and Paraguay, should also be included in this group, though each case is unique. But all have suffered because of exports concentrated in primary products, from natural gas to soy beans and cattle prices, which have been hit hard by global markets.

In contrast, Central America and the Caribbean should outperform the rest. Most of the nations in this third group are net oil importers, benefitting from lower costs for hydrocarbons to be used at home, while taking advantage of the recovery in the United States either through increasing exports or higher tourism revenues. It is not uncommon to find these economies growing at 4 percent or more per year. Panama, which is completing the expansion of the canal that will allow it to accommodate larger ships, should find its economy expanding more than 6 percent in 2015.


This outline should serve as a reminder that there is more than one Latin America. While in some latitudes the challenges seem all but insuperable, in others there are still interesting business opportunities that attract foreign capital.

Colombia is undergoing a major infrastructure development program financed by the private sector that would allow it to grow faster than its peers. The prospects of a peace agreement between the government and the FARC—the oldest guerrilla group in the hemisphere and one of the two that remain active—should bring more investment to rural areas affected by a 50-year-old internal conflict. The road ahead isn’t easy, and the country has had to adapt to a new reality. In 2013, oil generated 23 percent of government revenues and many public programs received more money than ever before. According to next year’s budget, that proportion will fall to 3 percent, forcing the government of President Juan Manuel Santos Calderón to impose what the finance minister calls “intelligent austerity.”

The message from the IMF and World Bank in Lima is that the region must complete its homework. Luis Alberto Moreno, president of the Inter-American Development Bank, says this is the time to achieve reforms aimed at improving productivity. The former Colombian ambassador in Washington, who has been at the helm of the institution for more than a decade, says that the earlier and now largely evaporated resource bonanza that brought increasing investments, exports, and fiscal revenues also generated unwarranted complacency. Too many difficult tasks were postponed, because no one wanted to spoil the party.

Now, much remains to be done if individual countries want to get back on track. To grow at 5 percent or more per year, issues such as the quality of education or the efficiency of the justice system must be addressed. On their to-do list for the region, development experts also name labor market regulation, financial market access, and improvement of the tax systems.

Rules and procedures must also be revised to create an environment more friendly to business and investment while ensuring competition and defending consumer rights. Addressing the need for a more sustainable framework is also necessary in an area rich in natural resources and that is deeply vulnerable to climate change.

It is clear that the global economy is a reason for concern too. Not only are uncertainties in China and their impact on the region high on the agenda but also the effect of any policy and monetary decision that may be adopted by the U.S. Federal Reserve Bank. Volatility could become a major problem with accompanying effects on capital flows and access to international financial markets.

Having said that, the narrative of the region’s difficulties has changed. While some leaders still like to blame someone else for their nations’ misfortunes, most accept that good internal decisions are the key to success. For a region that in the past loved to demonize the World Bank and the International Monetary Fund as the architects of Latin America’s failures, that is quite a change.

During the Lima meeting, many delegates tasted for the first time pisco sour—the drink that combines the grape-based liquor with egg whites and sugar cane syrup. More than a few discovered that the sweet cocktail, being so tasty and easy on the palate, could give way to a major hangover especially after the second or third glass.

Today’s Latin America resembles that image. During the boom years, almost everyone had a taste of prosperity, but some countries decided to act responsibly and behave well while others repeatedly drained their glasses. Now that the party is over, everyone is coping differently.



Ricardo Ávila is editor-in-chief of the Bogotá financial daily Portafolio.

[Photo courtesy of Luis Alberto Alvarez Pérez]

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