Publish in Perspectives - Wednesday, June 26, 2013
While China invests more than 40 percent of its GDP, Latin American countries rarely invest more than half of that, experts complain. (Photo of Shanghai: Andrew Horne)
Countries like Brazil, Colombia and Peru need
to invest more, experts say.
LATINVEX SPECIAL
Knowledge@Wharton
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:
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.”
Republished with permission from http://www.knowledge.wharton.upenn.edu -- the online research and business analysis journal of the Wharton School of the University of Pennsylvania.