Can the major economies of Latin America continue their strong growth performance? What investment opportunities appear most sustainable in the coming years? At the Wharton Latin America Conference 2013, a panel of representatives from four of the largest financial research firms in the region provided some answers to these critical questions.
The four advisors were:
- Alberto M. Ramos, head of the Latin American economic research team in the global investment research division of Goldman Sachs;
- Luis Oganes, head of Latin American research in the emerging markets research group of J.P. Morgan;
- Alberto Ardura, head of Latin American capital markets and treasury solutions, Deutsche Bank, AG;
- and Jose Maria Farres, managing director of LATAM investors sales at Citi.
In his introductory comments, Ramos of Goldman Sachs argued that “the outlook for the Latin American region in the short term and medium term is relatively fair,” but he added that “there is a lot of heterogeneity.” Reflecting a common theme by other speakers, he said: “Latin America may be bifurcating along two different paths, where you have one group of countries that are pursuing more orthodox, conventional policies and they are doing relatively well; and another group that is pursuing populist experiments and their performance is a little bit more complicated.” The first group comprises such countries as Colombia, Mexico, Peru and Brazil, while the second includes Venezuela, Ecuador, Bolivia and Argentina.
‘A Once-in-a-lifetime Opportunity’
Ardura from Deutsche Bank agreed. “Our region has been blessed by a once-in-a-lifetime opportunity for growth,” he said, but Venezuela, Bolivia, Argentina and Ecuador are “going in the wrong direction.” The prospect of “tremendous growth” in the rest of the continent has come partly as a result of good fortune – founded on strong demand for commodities by China – and partly by design, said Ardura. Governments in the region “learned from the boom and bust years when their economies would go into crisis every five or six years. Partly as a result of one-time opportunity luck, [and] because of the huge inflow of capital given the low rate environment, [and because] cheap capital is looking for opportunities… and partly because of the commodities play. China has driven [up prices for] most of our region’s commodities” — including copper, silver and soy beans – which “has been a blessing for our economies.”
Reprising the recent history of the continent, Ramos recalled that many of the countries in the region “capitalized on the opportunity” to “overcome what were perennial obstacles to growth,” beginning in the 1990s, when commodity prices rose and global liquidity was abundant. “They used this good period to improve their fiscal policy; reduce their debt load [and] reduce from a financial viewpoint some of the [factors] that had made the region extraordinarily vulnerable to external shocks. Today, we have a lot of macro-resilience both on the fiscal side and on the monetary side, which allows the policies to mitigate the fiscal shocks. But the region is not immune, since [its countries] are integrated into the global economy. But they are resilient, and have enough room to mitigate the impact of external shocks.” Describing the current period as an era of “self-praise,” Ramos noted that “in a certain sense, we managed to change the nature of the region.”
A Shortage of Investment
What’s missing in this picture? The panelists agreed that investment in the region is insufficient — rarely amounting to more than 20% of national GDP. At a time when China is investing more than 40% of its GDP, emerging economies such as Colombia and Peru are investing between 26% and 28% of their GDPs. Brazil is the ultimate example of a country where investment is insufficient. Growth is about capital accumulation, Ramos said. “If you don’t invest, then you don’t grow. Brazil is the ultimate example of a country where investment levels are insufficient” to sustain higher levels of growth. “The challenge is to reform; to increase productivity growth, to open trade. We need capital to invest more… The agenda is not simple, but it is very well known. We don’t need to reinvent the wheel.”
On the positive side, “We were able to reduce the beta,” a clear indication that “the region today is a much more stable micro-reality” than in the past, said Ramos. “We should be able to deliver growth rates like what China and India are doing today; but it’s not easy because there are structural issues to overcome. The region is still undergoing reforms, but there are still structural impediments.”
For his part, JP Morgan’s Oganes said that Latin America’s potential growth this year is a fairly healthy 3.8% to 3.9%, compared with about 2.5% in 2012. “These kinds of numbers can be sustained without putting much pressure on inflation.” Economists vary in their forecasts for Brazil, the region’s largest economy, ranging from 3.5% on the low end to about 4% on the high end. According to Oganes, “This is good for us, but we should not get overly excited; the tide is quite high for us now. Ample liquidity; cheap money for anything. But the tide could go down, and we know many countries are going to be caught with their pants down.”
Added Oganes, “The road ahead won’t be easy, but Latin America is still attracting capital. The region is still enjoying quite a push from commodity prices. No one is expecting oil to go back to the fifties or sixties; it will probably stay close to where we are, and other commodity prices are expected to remain high. The conditions are still going to be good ones. The key is to make sure that we do enough in the region to take advantage of this.”
Jose Maria Farres from Citi stressed the importance of making structural reforms, such as modernizing infrastructure in Brazil, and restructuring the telecom and energy sectors in Mexico this year. Farres noted that Mexico’s potential growth rate of 3.5% per year contrasts with its average annual growth rate of just 1% during the last ten years. The fact that Mexico is growing at two percentage points below its potential growth rate “shows that Mexico has problems.” He added that enacting these reforms is a “problem” because of political opposition, but it is “critical” for Mexico to make them.
Although the members of the panel agreed that demand for Latin American commodity exports has played a significant role in buoying Latin American economic growth, they disagreed about the potential impact on the region of a potential slowdown in the Chinese economy. Ardura noted that the political landscape of the region is now characterized by three kinds of countries. The first is the “young democracies, some of whom are not true democracies.” This group includes Chile, Colombia and Mexico. The second group of countries has governments characterized by a combination of populism and pragmatism about economic issues. This group comprises Peru — led by President Ollanta Humala, and Brazil, led by Dilma Rousseff. The third group includes those nations that “have made very poor decisions” in favor of a populism that has led to poor economic results — Venezuela, Argentina, Bolivia and Ecuador. Oganes noted that the situation in each of these countries is somewhat unique. “The importance of the death of Hugo Chavez is that he has been the leader of the debtors club of Latin America, with his ability to finance and provide political support.” He added, “With his largesse, he provided support for other countries – such as Cuba, Bolivia and Ecuador – creating a bloc of nations that are seen as an alternative to countries that are a lot more conservative and orthodox.”
An End to Largesse?
Oganes believes that a growing number of Venezuelans “will challenge using their [nation’s] largesse on behalf of other peoples.” He noted, “The influence of this bloc – its political weight –is probably going to start diminishing, so we may see, during the next five years, a bit more of a convergence” between the bloc led by Venezuela, and the other blocs of countries which have opened themselves up to international trade and foreign direct investment. “It will happen sooner or later, because they can’t keep doing what they are doing.” Until a few years ago, Venezuela and Argentina were enjoying a good growth rate, buoyed by rising commodity prices, but lately growth in Venezuela and Argentina has been very low. Sooner or later, these countries will be forced to confront reality.
More skeptically, Farres noted that “politics and long-term structural reform are not good partners.” In other words, political considerations have impeded the ability of some Latin American governments to fully implement needed social and economic reforms. “A good example is Mexico,” Farres said. In that country, he noted, it has taken 20 to 25 years to tackle reforms in such sectors as telecommunications, education and energy despite a broad public consensus that such reforms are necessary. In Brazil, politicians still “need to realize that they need to work for the long-term good,” rather than focus on the shorter term, Farres added.
Throughout the continent, noted Ardura, “governments need to take advantage of this environment to really create the long-term structural reforms, particularly now that a larger number of people are in school or are just entering the labor market. We have to create the opportunities for those people to really become participants in the growing middle class…. Governments need to take advantage of this [demographic trend] to turn our economies around so they can progress from being based on commodities to more developed countries where the middle class can grow.”
An Over-dependence on Commodities?
Demand for Latin America’s commodity exports has been buoyed by the fast-growing economy of China, Oganes noted. China has become the number-one trading partner of Brazil, Chile and Peru, and the second-largest trading partner of Colombia and Mexico. Therefore, anything that happens to China will affect Latin America. “So it is important that Latin America not rely on commodities.” Oganes noted that there is another sort of risk on the horizon: Most of China’s growth is derived from expansion of investment, rather than consumer spending. If, as widely expected, China makes the transition toward consumption-based growth, those Latin American countries that depend on exporting their commodities to China could be at risk. “When that happens, Latin America had better be prepared,” said Oganes, because “Latin America won’t be selling as much to China, and global prices [for those commodities] won’t be as high” as a result. “Meantime, let’s enjoy the party.”
Ramos disagreed with aspects of that analysis. “The China angle is overstated,” he said, arguing instead that while China’s transition to a consumption-led economy could help lower prices for Latin American commodity exports, such price declines are not likely to happen right away. If only 45% of China’s GDP eventually winds up coming from investment — rather than the current level of 65% [of China’s GDP] — then China can “still do a lot” of investing with that much money. Even in such a case, China would still be importing enough Latin American commodities to prop up prices for those commodities. Rather than lament Latin America’s dependence on commodities, Ramos argued, “it is a great thing that Latin America is dependent on them. The important thing is the way that you manage that — not the fact that you have dependence on commodities. You have to manage it well.”