Latin America Faces a Dark Uncertain Future
Just a few months ago, I wrote about Latin America’s new challenges for the near future.
Undoubtedly, the region was adrift back in May, and that situation has gotten worse since then.
Latin America had experienced high levels of uncertainty due to its unstable economic and political realities. Now, it seems to be entering a period of transition and no one wants to risk a good forecast about the future.
Since May, the Chavismo in Venezuela has lost support to the point that such a loss has now been reflected on recent elections results.
In Argentina, Cristina Kirchner has been booted out of power and is now facing the first of many legal challenges for her actions as president of Argentina.
In Brazil, the rising wave of discontent has now morphed into an impeachment process against the current president, Dilma Rousseff, and similar legal challenges against the president of the House of Representatives, Eduardo Cunha. Cunha himself is the person that gave the green light to the impeachment procedures against Rousseff.
In Central America, multiple violations against Costa Rican territorial sovereignty by the regime in Nicaragua resulted in a resolution in favor of the Costa Rican government and against Daniel Ortega’s illegal invasions. The Hague Court condemned the Nicaraguan government to pay for damages caused to Costa Rican property.
Since the last presidential election, Costa Rica itself has also become a prey of its political elites. Cronyism has gone up to levels never seen in the past. The supposedly unifying figure of president Solis turned out to be a ghost of elections past. His cabinet is composed by bureaucrats with little or no experience in managing public office as well as relatives of past political figures, who have violated all oaths to uphold the constitution.
In a recent example, president Solis’ hand-picked person to head the national intelligence agency (DIS), broke immigration laws as he provided visas to Syrian nationals that entered the country from its northern border.
The advent of the Chinese recession has not helped Latin America to hold its status as an attractive investment target. The region depends mostly on the sale of raw materials to generate income, but the Chinese economic situation slowed down the purchase of raw products used in the manufacturing industry. India and Russia have also been affected by the economic downturn, so even Latin America’s alternative markets have not been able to help the region keep afloat.
In recent developments, Brazil has gone from being downgraded to junk investment status to being removed completely as a investment option by rating agencies. The largest country in South America, which could otherwise be the engine of economic prosperity has suffered the consequences of being under a socialist regime for the past 20 years. Rampaging corruption and government mismanagement of public funds resulted in foreign capital running away from the country.
As if all this were not enough, the Federal Reserve raised US interest rates for the first time in nine years; and a the second rating agency withdrew Brazil’s investment grade; while Argentina removed exchange controls and opened the door to a devaluation of its currency. The last two events are sufficient to cast a shadow over the prospects for the economies of the region in 2016 and open at least a period of instability.
Rising interest rates in the US reduces investor appetite for riskier markets and increases the financing of public and private debt in the region. Yesterday, a new negative outcome took place as prices of raw materials hit a new low.
In this context of weakness, and following the fall of global demand, a devaluation of 30% of the currency of one of the major grain producers in the world provokes a severe distortion in the market, which also affects other industries such as the automotive, tourism and real estate.
New forecasts by Harry Dent forecast a collapse of the Chinese real estate market which will begin next January. According to Dent, the fall of property prices in China will unleash a domino effect which will extend worldwide.
Uruguayan economist Aldo Lema, managing partner of Vixion Consultants, wrote yesterday that this scenario opens a “very complex” future, with a significant negative impact in the short term activity across the region known as Rio de la Plata.
The worst is that the devaluation of the currency is far from having reached its end. Despite a recent weak politically-driven currency revaluation in Brazil, the real continues to plunge against the dollar and the euro, the same fate that is awaiting the Argentianian peso.
“To restore the previous level of competitiveness to capital controls the peso should be exchanged at a rate of 17 per dollar and if we talk about competitiveness relative to its trading partners it should not fall below 16.10 pesos,” said in a note Alex Fuste, chief economist at Andbank.
“In Latin America, the economy is now placed in the background of politics,” said Neil Shearing, chief emerging markets economist at Capital Economics.
To make matters worse, Fitch’s decision to downgrade Brazil to junk grade -a decision that Standard and Poor’s adopted in September, has immediate consequences for many mutual funds, which are required by statute to stay only in those markets with the quality seal of at least two rating agencies.
The fear of regional authorities is that a “herd” behavior of capital funds will be adopted against Latin America after the Brazilian backlash. The immediate result of that outcome will be a significant increase in government debt funding.
Governments in the region may be forced to raise interest rates to curb deflationary pressures, that result from a weaker currency. “Maybe the benefits of a weak currency are not seen until the second half of 2016,” said Shearing.
As a result of such turbulence, the Economic Commission for Latin America and the Caribbean said yesterday that the economy of South America will fall 0.8% next year, far from the 4.3% grow rate expected in Central America or the 2.6% increase that is being forecast for Mexico.