High rates and inflation will continue to be a problem for Latin America in the coming year. But problems such as productivity, lack of investment and even the threat of adverse weather also come together, with the appearance of the El Niño phenomenon. Four analysts gave their vision for the next 12 months in Mexico, Colombia, Peru and Chile.
Since the pandemic, nothing has been the same in Latin American economies. The appearance of this global black swan disrupted ways of working, technologies, generated inflation, fueled trade wars and is producing a reorganization of production chains that has not yet been fully configured.
Under this scenario, month after month the GDP of several Latin American countries slowed down and even some, like Peru, entered into recession.
In general terms, the prospects for Latin America are quite modest. The latest Preliminary Balance of the Economies of Latin America and the Caribbean 2023, from the Economic Commission of Latin America and the Caribbean (ECLAC), anticipates this trend and projects a growth of 2.2% for this year, while for next The GDP growth rate is estimated to be 1.9%, maintaining the low growth dynamic.
“For 2024, a lower growth rate is expected than that observed in 2023, which will accentuate the dynamic of slowing GDP growth and job creation. The world economy, for its part, continues to show little dynamism in terms of the growth rate of GDP and trade. Although inflation has decreased globally, interest rates in the main developed economies have not been reduced, so financing costs have remained at high levels all year and are expected to remain so for the next few years. [...] The global economy is expected to experience growth of 3.0% in 2023 and 2.9% in 2024, estimates that remain below the historical average of 3.8% observed between 2000 and 2019”, ECLAC refers in its latest balance sheet.
To have a clearer picture about the future of some Latin American economies next year, AméricaEconomía spoke with economists and specialists. Below, we present their perspectives:
COLOMBIA AND THE CHALLENGE OF INFLATION
Without a doubt, the protagonist of this 2023 in the Colombian economy was inflation, which reached close to 14% in the first months of the year, a figure not seen for 40 years, generating uncertainty among investors and the increase in rates. of interest.
“This year, gross investment in Colombia will fall 24%. We have never seen that setback, not even during the pandemic. The impact that this generation of uncertainty has had is truly impressive. On the other hand, the reference rate rose from 4.75% to 12.75% in less than a year and a half. The highest rate since 1999. Despite this, Colombia is not going to end 2023 in a recession, fortunately. If you look at the October figure year after year, the economy is decreasing, but it will end with growth in 2023 of 1.2%, well below what it had been, but still positive,” says Valdemaro Mendoza, co-founder and deputy CEO of the investment platform Tyba by Credicorp Capital .
According to Mendoza, in 2024 inflation will return to the target range, while the reference rate will end at 8%. “It is not a panacea, but it is better than being at (a rate of) 12.75%. The unemployment rate, which reached 17% during the pandemic, should end below 10% in 2024,” he comments.
In terms of economic growth, the executive affirms that this will depend a lot on whether or not the government manages to fix its execution problem. And the fact is that the budget underexecution of the Petro administration - which in October of this year reached 70% - is costing the Colombian economy dearly.
“35% of the country's GDP is explained by public spending. When you have an execution of 30 points, it directly affects economic growth,” he notes. “This is the first left-wing government in the history of Colombia and I had to learn to handle the reins. On the other hand, the conversation that President Petro had. "That was not strong, it fell apart and lost much of its ability to approve anything in the chambers."
Regarding oil, Mendoza points out that this industry is not so important for economic growth, but it is for State funding. “During 2024 they will not give new exploration contracts to oil companies, but that is something that does not depend on the president, he does not need approvals from Congress to block these explorations. The issue is how to balance public spending and that is precisely the dilemma. To protect the environment, you get less money from oil, but you committed to more social aid that was going to be financed by oil. Then they will not exist, that is the reality. What is my base case? They are not going to allow more exploration and at the same time the labor reform that the government presented is not going to pass,” he warns.
CHILE: AFTER THE FAILED CONSTITUTION, PRODUCTIVITY
The South American nation wakes up after a long constitutional process that lasted four years, after on December 17, citizens rejected for the second time the proposal to change the Constitution.
“We must take into account the uncertainty related to the constitutional debate that influenced companies' investment decisions. There has been a debate regarding the reform promoted by the government, both tax and pension, and that also has some impact on investment. However, there is something more structural and a problem that the Chilean economy has had for a long time and has been going through several governments and that is that since approximately 2007 or 2008, the productivity of the Chilean economy has been falling rapidly and when this happens the investment rate is very weak and it is inevitable that the economy will perform poorly,” explains Enrique Paris, dean of the Faculty of Economics and Business at the Santo Tomás University .
Likewise, the academic details that the problem of productivity, there is a component of work related to the quality of human capital and technology. “Chile has been a country that has stood out in Latin America. Since the mid-80s, it opened its economy and incorporated different productive areas for export. We are world champions exporting salmon, fruits, vegetables, wood, we export everything. However, for many years the volume of this export has stagnated because we are not being more productive. That is, with the same resources with which we produced 100 before, we continue producing 100. We are not producing 105 and that is where productivity appears, which is everything that is not explained by the fact of putting in more capital or work. There is a time when you get nothing by adding 20 more machines to a factory. It will produce a little more, but it may not change,” he says.
The challenges of one of the most dynamic economies in the region are not minor. Looking ahead to 2024, there is talk of GDP growth of around 2%, a favorable figure taking into account that 2023 would have closed with a practically zero increase (0.1%), according to Cepal. Regarding inflation, Paris points out that it should be within the target range of 3% by the end of next year.
“It is an economy that has to solve problems. I hope that the fiscal pact can move forward with an increase that - apparently - is going to be high or moderate in the country's tax burden. There is no political agreement for a profound tax reform, but with an increase in the tax burden it will be possible to finance public goods and social reforms and, above all, a set of initiatives agreed to stimulate growth and, particularly, what have been called the permits that enable investment for the Chilean economy.
On this last point, the dean of the Faculty of Economics and Business of the Santo Tomás University refers to permitting, another threat that, through long bureaucratic processes, discourages potential investors and that has been reducing Chile's competitiveness.
“I don't like the permit thing because it has a negative charge. Permits are very important because it is necessary to regulate how the investment is made. However, objectively it has been shown in many investment projects, for example, in large real estate projects, that years go by in which investors are entangled in permits that delay that investment and that have an effect on the growth potential," Paris acknowledges. .
Along these lines, the construction sector has been one of the most punished, with nearly 70 construction companies bankrupt in 2023. According to the latest report from the Regional Construction Activity Index (INACOR), there was an annual drop of -9.3 %, directly impacting the manufacturing industry, which provides materials and inputs to the works.
“If in 2025 progress has been made in this (permitology) and part of these obstacles is unblocked, we could be talking about a slightly higher growth, but above all with a possibility that the growth potential of the economy is greater than the that we have today,” says Paris.
PERU AND THE BATTLE AGAINST RECESSION
The Central Reserve Bank (BCR) of Peru has already confirmed that 2023 will be a year of GDP decline, with a contraction of 0.5%. And this year, the Latin American country governed by Dina Boluarte has not had it easy. Since the end of 2022, a complicated first quarter was anticipated due to social conflicts and the rains and floods caused by El Niño Costero, which impacted the poor performance of the Peruvian economy in the first semester.
"Unfortunately, in the second half of the year we have not had a government that is technical and strong enough to apply the economic measures necessary to get us out of the recession, which is reflected in increasingly lower growth projections of the Peruvian economy for 2023 by from international organizations and research centers,” says the economist and author of the book Marginal, Peruvian economy for non-economists , Hans Rothgiesser .
On the other hand, according to Rothgiesser, private investment has not yet taken off because the government does not define itself and does not address the important issues that the private sector is demanding. “Nor does it exhibit the necessary guarantees for greater investments. We recently saw how armed criminals broke into a gold mining operation and law enforcement reacted late. In addition, we must consider that the world economy is recovering more slowly than planned and international metal prices will most likely continue to decline,” he says.
For now, the main challenge to face is the lack of trust among the Peruvian business community. “The potential is still there: natural resources, human capital, etc. The problem is that since the beginning of 2021, the expectations of businessmen in the Peruvian economy are negative. The Central Reserve Bank measures this every month. (...) The problem is that the current government does not inspire confidence. The Minister of Economy is not convincing. Some talk about removing it. However, there is no one to replace him with,” says Hans Rothgiesser.
For now, the El Niño phenomenon continues to be one of the main threats to GDP growth in the first section of 2024. Recently, the Minister of Economy, Alex Contreras, announced the approval of a budget of 7,000 soles (more than US $1,860 million) to adopt the necessary measures and preventive actions against this phenomenon.
For its part, the International Monetary Fund (IMF) has warned about the significant repercussions of El Niño on the economic growth of this country, either due to floods (in the north) or droughts (in the south). Some of the risks that most concern the fund are possible inflationary pressures. "As inflation declines and growth slows, authorities will be required to cautiously adjust monetary policies," he said last October.
Another pending item on the country's agenda is crime and violence, which have become the main source of concern for the average citizen, but also for the business community. “For Peruvian companies, this implies greater uncertainty and higher operating costs since they are forced to use resources that they could invest in something else (technology, raising salaries, etc.) to improve operational security. This makes recovery even more difficult,” says the Peruvian economist.
In economic matters, Dina Boluarte's government has been characterized as “lukewarm.” “He has announced large figures in public investment works and temporary employment programs, which are part of a somewhat outdated strategy to boost aggregate demand. A fairly popular strategy among Peruvian economic ministers in recent decades. It is being wasted to use this recession to carry out major pending reforms or to dismantle the barriers to investment that previous governments left us, particularly in the mining sector,” says Rothgiesser.
MEXICO: NEARSHORING COMMANDS
Unlike its Latin American peers, Mexico (along with Brazil) was the exception to the rule and has had a good economic performance in 2023. Thus, ECLAC includes Mexico in the group of large economies that would grow the most this year with a GDP expansion of 3.6%.
Looking ahead to 2024, the North American country faces the next presidential elections. “The election cycle is something we already routinely observe every six years. In the last stage, greater spending is carried out, obviously for a political issue, but this definitely helps economic growth and performance. Despite all the negative forecasts that were made a year ago or at the beginning of 2023, the American economy has also had an excellent performance and being Mexico's main trading partner, it will always have a positive effect on what is going to happen. ”says Alejandro H. Garza Salazar, founding partner and director of AZTLAN Equity Management .
And in recent years, the Mexican and American economies have been quite coupled, especially in the field of foreign trade. “Mexico has had a very significant acceleration in its trade with the United States, to the extent that in 2022, for the first time it will surpass China as the United States' first trading partner in the last 20 years. This expansion continues in the Mexico-United States bilateral trade relationship and has been a boost to the Mexican economy and shows that this synchrony between both economies is increasingly seen,” notes Garza.
However, there are issues to be addressed such as national security and migration. “To the extent that Mexico has a better economic performance, it has more employment, more formality, there is also more development of these illicit activities that do not benefit anyone, such as human and drug trafficking,” says Garza.
This year, nearshoring has played an important role in the evolution of the Mexican economy and even the Mexican Ministry of Economy argues that this effect is what has helped prevent the famous recession that everyone expected in the United States. .
For Garza, in 2024 the good performance will continue. “We continue to see that nearshoring will continue to be a factor in the increase in foreign investment in terms of installation of industrial and productive capacity. We see that this expense is going to be carried out due to the issue of the 2024 presidential elections and we believe that it is going to be a record year. Although it is very difficult for the Mexican economy in the very short term to emerge from this underperformance in terms of GDP growth compared to the other economies of Latin America, I believe that it will be a year in which we will continue this positive trend to continue closing that gap” says the executive of the investment firm.
