Southern Cone struggling to fend off global economic slowdown

In the context of a possible global recession and mounting trade tensions and uncertainty, the economic situation in Latin America’s Southern Cone is notable for its contrasts.

Most observers agree that the next few years are likely to see slow growth at a global level and Latin America is not immune, with GDP growth in Brazil and Mexico expected to be below 1% this year while Argentina is forecast to contract.

A period of low commodity prices, coupled with political uncertainty and sometimes irresponsible fiscal policy, has hurt those economies that have not been able to transition away from a model based on selling primary materials. The trade war between the US and China, meanwhile, has weighed on the latter’s spending power, impacting most developing economies around the world.

In the Southern Cone, however, the reality is varied, with countries facing very different circumstances.

Argentina

Speaking to BNamericas, Standard & Poors managers for sovereign ratings in the Americas, Joydeep Mukherji and Lisa Schineller, said the ratings agency expects Argentina to default or miss debt payments in 2020, regardless of which political party comes to power after this year’s elections.

However, once some of the political uncertainty clears and a new administration outlines its policy goals, at least some of the country’s uncertainty-related economic troubles will begin to recede.

“From the point of view of a strengthening growth story in Argentina, we would highlight a commitment to turn around fiscal weakness” which has persisted during the previous and current administrations, Schineller said.

“Clarity on rules of the game, clarity on monetary policy, a commitment to bring down inflation, some of these will weigh on growth on the near term, potentially … but will have benefits in the longer term. A credible policy package [would also help]”, she said.

Another key factor will be whether the new administration appears willing to work with the IMF, which will involve complying with some of the multilateral’s demands on fiscal policy. A willingness to work on amicable terms with the country’s largest creditors would help ease immediate investor fears.

S&P expects the economy to contract 3% this year and 1% next, regardless of the outcome of the election, with modest growth materializing in 2021 at 1.5%. Emerging market analysts at Capital Economics predict a 2% contraction this year and another 2% in 2020, with modest growth appearing only in 2021 at 1% of GDP.

Uruguay

In Uruguay, growth is expected to be disappointing this year at less than 1%.

However, GDP “is not shrinking. Which, if you think about it, in the case of Uruguay, they have not only this global [slowdown] phenomenon, but the full shock of Argentina, felt mainly through the tourism sector, which has been hurt quite a bit,” Mukherji said.

Despite a much weaker local currency than in previous years, Uruguay has been able to post positive GDP growth, which shows the resilience of the country’s economy, according to Mukherji.

This resilience can be explained partly by the fact Uruguayan banks have cleaned up their exposure to Argentina, which is usually hit by a severe crisis every 20 years or so.

Uruguay will also get a boost next year thanks to an increase in foreign investment, as Finnish firm UPM plans to build a US$2.7bn pulp mill in the country. It will be the biggest private investment in Uruguay’s history and will add to the company’s current plant in the country.

“It’s going to involve a lot of public sector investment as well as the even bigger private sector investment. New infrastructure, new railroad, new port, new roads. So, there will be a source of growth coming up, and that doesn’t depend on global conditions, as this is a long-term project, and the promoters seem to be quite dedicated to going ahead with this,” said Mukherji.

Consequently, S&P expects growth to come in at around 1.5% next year, up from 0.5% in 2019.

Chile

In Chile, GDP growth of between 2% and 3% this year and next might be disappointing for a country that grew by around 5% between 2000 and the global recession of 2008, but the figure “is still pretty respectable, you still feel it,” Mukherji said.

The bigger challenge for the country is to move towards decoupling growth from the performance of the mining industry, which involves making the non-mining economy more productive and diversifying economic output.

“They will always be driven by the commodities cycle because they are so well endowed with commodities,” Mukherji said. As a small and open economy, it’s unlikely Chile will grow at 4% or 5% while the world economy is slowing down.

“Other countries in the world, like Australia, are also driven by the commodities cycle, but there’s a gap between [the two countries], which is that the non-commodity part of the Australian economy is much more productive and much more mature,” he said.

S&P expects growth to come in at 2.4% this year and 2.8% in 2020.