Trump, strike, drought damage year of recovery in Latin America

Trump, strike, drought damage year of recovery in Latin America

It was supposed to be a good year for Latin America. Economic activity was about to expand by 2% in 2018, the best performance in five years according to the International Monetary Fund. But the recovery began to crumble in recent weeks as volatility soared in emerging markets and looming crises in three of the region’s largest economies. Argentina’s recovery story under President Mauricio Macri stopped short last month, when the currency collapsed and the country had to ask the IMF for help. Brazil’s outlook was further muddied after a truckers’ strike stifled the economy and exacerbated political uncertainty before the October presidential election. And a trade war between the United States and Mexico became a reality this week after both countries applied tariffs to each other, a move that does not augur well for the future of the North American Free Trade Agreement (NAFTA). The presidential elections in Mexico in July only add to the uncertainty. “Definitely there has been a growing disappointment about Latin America’s growth prospects for 2018,” said Thomaz Favaro, associate director in Brazil of Control Risks consultancy. “2018 was supposed to be a resurgence.” The economic forecasts for Brazil and Argentina were lowered abruptly during the last months. Those of Mexico remain unscathed, but the risks related to the renegotiation of NAFTA abound, said World Bank economist Dana Vorisek. “In every way, downside risks in Latin America overwhelm any upside risk,” he said, adding that the World Bank will likely reduce its 2.4 percent growth estimate for Brazil this year once it takes into consideration The impact of the 10-day truck strike that ended last month. Altogether, Brazil, Mexico and Argentina represent more than two thirds of the Latin American economy. Loss of optimism There were reasons for optimism in Latin America earlier this year. Sustained global growth, rising commodity prices and low US interest rates. lay the foundations for the recovery of the region. Local events also helped. Mexico initially obtained an exemption from Trump’s steel and aluminum tariffs, and US trade officials expressed optimism about the NAFTA review. Brazil, which reduced rates to record lows, was on track to rebound after its historic economic crisis that ended last year. Argentina approved pension and labor reforms favorable to the market at the end of last year and seemed positioned for sustained growth and a fall in inflation in 2018. The collapse began when the yields of the US 10-year Treasury securities. rose by 3% at the end of April, shaking up the assets of emerging markets that for years had attracted investors seeking higher returns. Argentina was the first country in the region to fall. Affected by turbulence in emerging markets, investors lost confidence in the central bank’s monetary policy after it changed inflation targets and lowered interest rates even though there were no signs of double-digit inflation decreasing. The Argentine peso became the worst performing currency in emerging markets this year, falling more than 20%. Next piece of dominoes? Brazil could be the next piece of dominoes to fall after Argentina and Turkey, wrote on Twitter Mohamed El-Erian, chief economic adviser to Allianz SE and a contributor to Bloomberg Opinion. The recent fall of the real to a minimum of two years gives policy makers little room for error, he warned. The currency closed at 3.91 against the dollar on Thursday, down 15% so far this year. To appease the truck drivers, President Michel Temer pledged to apply diesel subsidies that will only add to the already terrible fiscal situation of the country and become another headache for who takes the helm of the country next year. “If Brazil experiences more problems in the financial market, it will depend on political events and whether the new government is capable and willing to deal with fiscal vulnerabilities,” says Quinn Markwith, an economist at Capital Economics. Firm Chile But not all Latin American countries are suffering political or economic chaos. The question is whether the problems that affect Mexico, Brazil and Argentina will be extended to the neighbors. Chile continues to be a highlight in the region, with a trajectory of sustained growth since the multimillionaire businessman favorable to the market Sebastián Piñera assumed the presidency in March. Driven by a rebound in the mining sector, the economy grew in April at its fastest pace in more than five years. Business confidence is improving and both inflation and interest rates remain low. “Do you prefer to be in Brazil or in Chile? That’s what investors should ask,” said Win Thin, head of emerging markets strategy at Brown Brothers Harrimann & Co. “There are undoubtedly some good places in Latin America, even when The three main economies of the region are going through some problems at this time. “

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