Economic recovery, balancing national budgets and controlling inflation are just some of the challenges facing Latin American countries in the coming year. After a less than dynamic 2015, it is hoped that 2016 will see a return to economic growth, though this is one objective which will not be easy to achieve.
There are many factors, both internal and external, that make it hard for the economy to perform well: heavy exchange rate depreciation; a potential fall in foreign investment after the Federal Reserve’s recent interest rate rise; the slump in commodity prices; the weakness of the Chinese economy; the spike in inflation and a loss of confidence, among others.
BBVA Research forecasts indicate that Gross Domestic Product (GDP) of the region will grow by only 0.3% in 2016, with the Pacific Alliance countries (Mexico, Chile, Colombia and Peru) performing best, with a joint increase of 2.4%, whilst the Mercosur continues to show negative numbers (-0.3%), affected in particular by the poor performance of Brazil.
Argentina: put the brake on inflation
With a change in government, Argentina’s big challenge is to steady foreign exchange markets. It took the first step along this road when it put an end to the dollar clamp and then removed export taxes on certain industrial and agricultural goods, which will enable Central Bank reserves to increase. However, it has another equally important test to come, which is slowing inflation and avoiding devaluation being translated into domestic price increases. It also has the major task of finding a solution to its debt problem stemming from the so-called “vulture funds”.
Mexico and Chile: awaiting reforms
Mexico and Chile face the challenge of pushing forward with the reforms proposed by their respective governments, which include energy, in the case of Enrique Peña Nieto; and tax, education, labor and constitutional reforms in that of Michelle Bachelet. These two countries are also charged with trying to balance their nations’ books within the complicated outlook presented by 2016, due to the drop in raw material prices, in particular oil in Mexico and copper in Chile.
Colombia and Peru: El Niño
Colombia and Peru will have the common challenge of mitigating the impact of the weather phenomenon ‘El Niño’ in the early part of the year, which will directly impact on food prices, with a consequent increase in inflation. They also face momentous political tests, such as the signing of the peace agreement in Colombia between the government of Juan Manuel Santos and the guerrilla group FARC (Revolutionary Armed Forces of Colombia) and its subsequent implementation; and the imminent change of government in Peru in July, after this April’s presidential and parliamentary elections.
Brazil: economic crisis
Brazil, the region’s biggest economy, starts 2016 with the formal loss of its investment grade rating. Its major challenge is to regain confidence and produce policies which will allow it to recover growth and stabilize its fiscal position, since its deficit as a percentage of GDP is around -8.0%, the highest in the entire region.