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Consumer index Updated: 08 Sep 2018

Commodities: a headache for Latin American economies

The commodities boom has reached its end, impacting strongly on Latin American economies. Fiscal balances have been affected by lower currency revenue, currencies have devalued significantly, with the subsequent fall in the value of exports, and the exchange rate effect has led to a rise in inflation.  It has also had a negative impact on GDP growth that could become more pronounced if prices fall further in 2016.

Fotografía de ‘Commodities’- un dolor de cabeza para las economías de América Latina

Uncertainty over oil prices

In the commodity market, oil plays a key role. On 10 December, the Brent crude price dipped below US$40/bbl and according to Goldman Sachs, it could fall to US$20, although other estimates indicate that it will remain at current levels or even start recovering from next year. Regardless, the fact is that the path that oil prices will follow in 2016 is anything but certain. Mexico, Venezuela and Colombia are particularly affected by this situation, as oil is these countries’ main export and revenue driver.

In Mexico, for instance, until 2014 oil revenues accounted for around 30% of total public sector revenues, while in 2015 this figure will be around 18%. Similarly, oil exports accounted 11% of total exports in 2014 and 6% in 2015. However, the main impact is reflected in the trade deficit.  2013 and 2014 saw a trade surplus of US$8,600 million and US$1,100 million respectively, while in the first ten months of 2015 there was a deficit of US$7,600 million. The exchange rate has also weakened by 26% in the past 15 months to last November, with the current account deficit rising to 3% of GDP.

The situation in Colombia is similar. The exchange rate has devalued by over 32% at year-end 2015, directly impacting inflation, which stood at 6.77% in 2015. The country’s fiscal revenue has been particularly affected, reducing consumption and public investment (in 2012 the government received 20 billion pesos in oil revenue, while in 2015 the figure had dropped to 3 billion).

The value of exports has decreased dramatically and the current account deficit has grown to over 6% of GDP in 2015, according to BBVA Research.

Copper and soy prices cause problems for the tax office

The plunge in copper prices is hitting the Chilean and Peruvian economies hard, as copper is their main export. The metal is now trading at around US$2.0/lb. Some business owners think that if the price of copper falls below US$1.8, 30% of Chilean production might need to be halted.   Local analysts also warn that if prices remain at current levels the fiscal deficit could rise to 4.5% of GDP in 2016, the highest level since 1990, as the tax office would be losing around US$2,500 million.

In Peru, lower prices are causing a slump in mining investment (currently c.20% of total private sector investment), that suggests a scenario of lower growth.  Expectations are centered on the commissioning of two large copper facilities (the extension of Cerro Verde and Las Bambas). According to BBVA Research, when these projects are fully operational total production will increase by 45% compared to 2015.

Like all other commodities, the price of soy, Argentina’s main export, has fallen substantially, impacting the country’s currency revenue and triggering a slight net decrease (close to -0.2% of GDP) in the fiscal balance due to the reduction in export taxes. Prices are expected recover slightly in 2016, reaching an average of around US$336/ton in the last quarter.