IN 2012, when Latin America was enjoying a burst of rapid economic growth and social progress, the IMF and World Bank decided to hold this year’s annual meeting in the region—something they had not done since 1967. They chose Lima, the capital of Peru, one of the region’s economic stars. Such decisions are always hostage to fortune, which in this case has been cruel.
Over the past few months most of Latin America’s currencies and stockmarkets have suffered a battering. The IMF now expects the region’s economy to contract slightly this year (see chart). With emerging markets in general heading downwards, and the world economy poised uncertainly between China’s slowdown and an impending rise in interest rates in America, the mood of many of the 12,000 attending the meeting is as grey as Lima’s thick, low winter clouds. As the event began, the IMF trimmed its forecast for global growth.
What went wrong in Latin America? The short answer is China’s slowdown, which has punctured commodity prices and, with them, exports from and investment in South America.
In some cases the woes are mainly self-inflicted. Brazil and Venezuela kept spending even after the commodity boom began to subside. Both are now suffering deep recessions. Exclude these two and Latin American countries will grow by 2.6% this year on average, according to the IMF.
From the Panama Canal north, the region’s economies are tied much more closely to the United States than to China. Mexico, Central America and the Caribbean are net commodity importers. Growth there is steady, if mostly unspectacular.
Well-managed economies in South America, such as Peru, Chile and Colombia, are adjusting gradually to a harsher world. They are still growing, albeit at only 2-3%, because they have been able to apply a modest amount of monetary and fiscal stimulus. Currency depreciations should eventually pave the way for recovery. But in the short term they have stirred inflation. The central banks of both Peru and Colombia raised their interest rates last month; Chile may follow.
How quickly might recovery come? In Latin America weaker currencies always bring a squeeze in imports before a rise in exports, warns Alejandro Werner, the IMF’s senior official for the region. And the structural reforms—more flexible labour markets, better infrastructure and business conditions—the region needs to boost productivity take time. Nevertheless, he forecasts a modest rebound next year.
That depends in part on the outside world. “External demand has to come to the rescue if the slowdown is not to be too pronounced and prolonged,” says Augusto de la Torre, the World Bank’s chief economist for Latin America. Given the sluggishness of world trade, that may take a while.
Recovery depends, too, on a return of confidence. Chile has closed its current-account gap, but investment remains weak because of political uncertainty. Most forecasters expect Brazil to pick up towards the end of next year, but that requires a credible fiscal squeeze. Having borrowed to finance expansion in the good times, many Latin American firms must retrench too. The IMF finds that the ratio of debt to equity in a sample of 450 non-financial companies in five of the region’s bigger economies has risen to 6.5, from four in 2011.
Latin America is not as fortunate as it imagined. Poverty is on the rise again. But it is not the bad old region of the past, of volatility and hyperinflation. The slowdown has not led to financial crises. There are still pockets of growth—not least in Lima, where the annual meeting is taking place in a shiny new convention centre.
This article appeared in the Finance & economics section of the print edition under the headline "Grey days"
