LAC 2015: a reversal of fortunes.

Author:Price, John
Position:SPECIAL REPORT: OUTLOOK LATIN AMERICA 2015
 
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For almost a decade, Latin America and the Caribbean has been divided into two camps, the resource haves and the resource have-nots. As China experienced an investment bonanza, even political misfits like Argentina, Ecuador and Venezuela grew impressively. Meanwhile, much of Central America and the Caribbean, net importers of energy and minerals, struggled to grow, and were left out of the boom cycle.

The collapse of oil prices combined with cooling industrial metals has reversed the fortunes of most economies. In 2015, it will be the U.S., not China, driving Latin America's economies. A strong dollar and overworked U.S. factories means Mexican and Central American manufacturers will expand. U.S. tourists will flock in even greater numbers to the Caribbean and American firms will go shopping abroad as assets at home grow costly vis-a-vis elsewhere.

Some analysts predict a mild recovery across South America after an abysmal 2014, but they are wishful thinkers. Almost every government in the southern continent is unprepared for the negative fiscal shock that awaits them. Oil exports and mining royalties contribute disproportionately to the coffers of most governments in the region, which grew bloated since 2005, increasing on average 14 percent per annum, measured in USD. Unraveling such largesse can be legally tricky (public sector layoffs), painful (curtailing pet projects) and socially destabilizing. Countries that have failed to invest during the boom years and neglected their institutions, including civil society, will be especially vulnerable to social unrest. Venezuela is the starkest example of a country that may politically unravel in 2015. But without high commodity rents to grease its wheels, governments in Ecuador and Bolivia are also vulnerable. Even in South America's investment grade nations--Brazil, Chile, Peril and Colombia--rising middle-class expectations will need to be quelled in light of the challenging fiscal scenario ahead.

The tragic murder of 43 students in Iguala, Mexico has shown how one dramatic incident can spark a change in the national psyche. After a decade of record growth, but only marginal improvement in quality of life, Latin Americans are fed up with the political status quo in most countries. Such social unquiet combined with the need for fiscal austerity is a formula for political strife. In countries with robust democracies, political friction will be a mostly positive force of change and reform. In...

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