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Latin American countries in 2019: the weak link? 1/8/2019

Since several years, economic growth in Latin America is lagging behind. Do the recovery in Brazil and new governments in Mexico and Brazil will change the game in 2019. Nothing sure yet.

TRANSCRIPT // Latin American countries in 2019: the weak link? : January 2019

FOCUS

 

François Doux: Focus on Latin America There is a new political landscape in several countries following last year’s presidential elections in Mexico and Brazil. This year, it’s Argentina’s turn.

François Faure, hello.

 

François Faure: Hello.

 

François Doux: First question: what is the economic situation in Latin America in early 2019?

 

François Faure: It’s relatively difficult, because like many emerging countries, the region is suffering from the strong dollar, falling commodity prices – particularly metals and oil – but also from the current and future tightening of US monetary policy. As regards Latin America in particular, we are seeing a downturn that started around three months ago and which is being confirmed in the surveys, except perhaps in Brazil where things are a little better.

 

François Doux: As regards international trade, how will these countries be affected?

 

François Faure: They will be affected mainly by the Chinese economic situation. China is a major market for many countries in the region: 20% of exports for Peru and Brazil export and in Chile the figure is 25%.

 

François Doux: So how will these countries be affected by the tougher international trade terms imposed by the USA?

 

François Faure: In two ways. Firstly, Mexico is a special case: its new agreement with the USA and Canada should be ratified by the countries’ parliaments. It’s still very hard to say whether this will hurt Mexico and in particular its auto sector, because the agreement is expected to cause a redistribution of production sites, which could depress Mexican production.

On the other hand, there are China’s retaliatory measures against US agricultural products which, if they are maintained, could benefit Brazilian and Argentine grain producers.

 

François Doux: What about the tightening in external financial conditions?

 

François Faure: Conditions have become much tighter, mainly for Argentina. For the region’s other countries, it hasn’t been as bad. However, the IMF’s simulations in October 2018 showed that the impact on growth could be significant for all countries. Between 0.5 and 1 point of GDP depending on the country in the next year.

 

François Doux: The external environment, as we know, is less supportive. So will the two incoming presidents, Messrs Bolsonaro in Brazil and Obrador in Mexico, have any room for manoeuvre in terms of monetary and fiscal policy to counteract it?

 

François Faure: Overall, the answer is no. I think that monetary and fiscal policies will remain, if not tight then at least very cautious, to maintain broad macroeconomic balances. However, we can nuance that in terms of monetary policy in Brazil and fiscal policy in Mexico. In Brazil, monetary policy has been loosened because of the fall in inflation. And if President Bolsonaro manages to push through his famous pension reform, monetary policy could be loosened a little more.

 

François Doux: In Mexico, President Obrador has detailed around 100 measures. Have they clarified the fiscal policy situation at all?

 

François Faure: Fiscal policy is likely to be a little more expansionary because there are lots of measures to support the incomes of Mexico’s poorest people. Retired people will see a sharp rise in their pensions. An increase in the minimum wage is also planned and grants will be distributed more widely to students. This will automatically boost demand and therefore growth in the short term. In the medium term, the reform of the energy sector is likely to be the most important one, because oil production has fallen sharply in the last few years. We are expecting a pretty large investment plan, which would increase the growth potential of not just for the energy sector but for the whole economy.

 

François Doux: So we should keep an eye on the Mexican economy in 2019 but also the Brazilian economy and, of course the elections in Argentina.

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