Latin America’s prospects and the Trump factor

What’s the economic outlook for Latin America in 2017? Last month, the International Monetary Fund (IMF) forecasts a gross domestic product (GDP) increase of just 1.2% for the region this year, a downgrade from its earlier forecast but in line with recent estimates from other reliable sources.

In an ever-changing political and economic environment, uncertainty has become one of the key variables in decision-making for Latin America. The region will be affected by the course set by the new US president and its government, among other factors. Even though its influence is highly debated in the media, we believe China’s economic growth and, particularly, variations in commodity prices will have a much more direct impact on Latin America’s foreign trade. They will also determine the macroeconomic evolution across the region’s 26 countries and dependent territories.

Brazil, Argentina and Mexico are the main three economies, representing more than three quarters of the overall GDP in Latin America. The IMF expects no more than 0.2% growth for Brazil but 2.2% for Argentina, with stronger growth for Chile and Peru also lifting the median rate for the region.

In this context, the political changes experienced by Brazil with last year’s election of Michel Temer and Argentina with Mauricio Macri’s win in November 2015 are in line with governments willing to do business to establish strong world trade relationships. As a consequence, this will turn both countries into the region’s economic engine with a positive effect on their neighboring countries.

Emerging from the prolonged recession of recent years Brazil and Argentina, along with Ecuador are forecast to move back into positive, if modest, growth this year although high unemployment rates and private sector debt in Brazil remain a cause of concern.

The outlook for Mexico is influenced by the country’s strong dependence on pricing for its oil. With this sector currently representing 13.3% of the country’s revenue, today’s figures are at their lowest since 1990. Moreover, it should be noted that more than half of Mexico’s exports go the US. As such, the decisions of president Trump stand to directly impact on Mexico’s economy and the continuing volatility of its currency, the peso (MXN)

The general trend across the region of improvement is broken by Venezuela, which is experiencing an extremely complex situation. The country’s economic woes are likely to deepen this year, with hyperinflation likely as the rate further accelerates to around 700% and the economy set to shrink by 6%.

As a result, 2017 introduces a different scenario than that experienced last year. During 2016 Latin America’s GDP went down as commodity prices moved lower. As a consequence exchange rates immediately devaluated, which caused inflation to rise and triggered interest rate rises in response from central banks. At the same time, many investment plans were put on hold; especially those related to the mining and oil and gas industries.

Positive trends

In 2017, circumstances are now favorable to growth acceleration; helped by the fact that no major electoral process is expected this year. This year’s forecasts are determined, firstly, by the above-mentioned commodities cycle, which is now moving into much healthier conditions than last year. This is reactivating the investment plans of many clients in primary sectors and, consequently, the region’s GDP is being positively impacted.

Second – and connected to the previous argument – is China’s sustained pace of economic growth and demand, which will also impact positively on forecasts. Third is the strategy that US will follow. The Trump administration has pledged to launch a massive investment plan for the infrastructure sector – a figure of US$1 trillion was mentioned during the election campaign – which would increase America’s GDP and could only be beneficial to its southern neighbours.

At the same time, this increase in GDP would also give further impetus to inflation -already at a four-year high of 2.5% – in a country with almost full employment. This, in turn, would support or even accelerate the pace of steady further US rate increases announced by the Federal Reserve. A priori, this would lead to the dollar’s appreciation and harm US exports; so we do not know how the monetary authorities would react to such a situation. Naturally, this trend would affect the Latin American countries since their economies are extremely dollarized while their own exchange rates would be also affected

In summary, we are facing a reasonably positive macroeconomic scenario except for the potential volatility. The next question to be asked is what are the concerns of our clients, the corporate treasurers? We believe there will be five major focus areas:

• Interest rate volatility. This already happened last year: 2016 showed upward adjustments, so 2017 should bring downward movements. This trend will slow down as the Federal Reserve pushes US interest rates higher.

• Exchange rate volatility across Latin American currencies. This is also not a new trend as significant changes have been occurring for more than a year. The uncertain elements in the macro scenario should lead to continued volatility during most of the year. Many countries in the region have relatively dollarized economies and should, as a result, minimise the effect this would have on non-dollarized economies.

• The need to obtain funding for new investment plans within both the commodity and infrastructure sectors in several countries. These are ambitious plans that generate the need for a mass attraction of capital in countries where it is not easy to obtain long-term financing loans to fund capex plans.

• The need to diversify funding sources instead of using corporate funding exclusively. In this context, solutions linked to trade finance and supply chain finance (SCF) are positioned to experience a strong boost this year.

• Lastly – and probably the most important – cost cutting within financial operations will be a hot topic in the region. Even though this is not particularly new, it has attracted more attention over recent months due to the need for adjustments and the significant costs increase experienced by banks’ corporate clients.

A variety of options is available to corporates considering cost-cutting initiatives, with the following likely to be among the most prevalent:

• Regionalisation of operations in multinational companies (MNCs), to generate synergies by sharing resources across countries.
• Increasing use of electronic channels with financial providers that make it possible to reduce operational costs.
• Rationalisation of financial services toward using fewer banks as a potential savings measure.
• Cost reductions within payment methods: this is especially important in economies where cash payments are a major element, due to their informality and the population’s low take-up of financial services. Cash management has become more expensive over the past two years creating the need of conducting an in-depth reengineering process of financial operations to reduce costs.

For banks active in the region such as BBVA, corporate clients are the core of their activity and we feel their concerns as our own. We are working with them on a partnership model to help them turn their goals into reality – and in all the areas discussed above solutions are available that enable us to deliver results.

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