The Latin American Business Environment Outlook for 2016

Brian GendreauDepartment of Finance andCenter for Latin American StudiesApril 14, 2016

The economic outlook year ahead

Latin American Business Environment

The business climate

Relations with Cuba

Coping with global shocksUntil 18 months ago growth in Latin America appearedto be on a sound footing.

During 2003-14 Latin American economies had expanded at an average rate of 4.0% per year.

Income inequality declined even as it increased in the developed world.

The proportion of extremely poor people in the region fell from 25% of the population to 12% in the 2000s.

Rio de Janeiro at night

A clouded outlook Since then Latin America has struggled to adjust to threeglobal shocks:

— Slow growth in the developed world

— Low commodity prices

— A strong U.S. dollar

Slow growth in the region’s trading partners

The U.S. economy is still expanding at a trend-like pace, but growth in Europe and Japan is weak and has slowed in China.

Falling commodity prices are hurting exports

The terms of trade have turned against Latin America’s commodity producers, reducing exports and incomes. The markets do not expect a substantial rebound in commodity prices soon.

Latin America: Still dependent on commodities

Many countries in the region are just as dependent — or even more dependent — on commodity exports than they were 35 years ago.

Exports of primary products% of total exports of goods

1980 2000 2013Argentina 76.9 67.9 66.9Brazil 62.9 42.0 63.6Chile 88.7 84.0 86.1Colombia 80.3 65.9 82.4Mexico 87.9 16.5 23.8Peru 83.1 83.1 85.4

Venezuela 98.5 89.1 97.6a

Latin America 82.8 42.6 53.0b

Source: ECLAC a 2011 b includes the Caribbean

Shifting trading patterns

China — the world’s largest importer of commodities — has become a major trading partner of Latin America.

Commodity shock = loss in GDP

The countries that arethe most dependent on commodity exports have suffered the biggest decline in GDP.

Economic Outlook for the region

The outlook varies within the region

Today Latin America is split into three loose and sometimes overlapping economic and political camps: ALBA, Mercosur, and the Pacific Alliance. Economic policies differ markedly across the three camps.

ALBA* Mercosur Pacific Alliance

*Alianza Bolivariana para los Pueblos de Nuestra América

Turning away from the market

Argentina, Bolivia, Ecuador and Venezuela abandoned the market-oriented reforms and policies of the 1990s in favor of a broader role for the state, a more heavily regulated the economy, and redistributive policies.

Cristina Fernández de Kirchner, President of Argentina 2007-15

Nicolás Maduro, President of Venezuela

Sticking with the market model (mostly)

Governments in Brazil, Chile, and Peru, while sometimes taking a populist or socialist tack, have largely continued the market-oriented policies of their predecessors. Mexico is exploring reforms in its energy and banking industries.

Enrique Peña Nieto, President of Mexico

Ollanta Humala, President of Peru

Diverging economic performancesGrowth was similar across groups during the commodity boomyears, but the outlook for growth and inflation is now better in the Pacific Alliance.

ALBA: Bolivia, Ecuador, Nicaragua, and Venezuela

Mercosur: Argentina, Brazil, Paraguay, Uruguay, and Venezuela Pacific Alliance: Chile, Colombia, Mexico, and Peru

Feb 15, 2016 forecasts

Latin American currencies have fallen

Latin American currencies have fallen against the U.S. dollaras the dollar has risen against most currencies, including the euroand the yen.

Falling currencies wouldordinarily mean more competitive exports. But currency depreciation canbe inflationary, and can lead to rising debt burdens when governments and firms have borrowed in dollars.

Capital inflows to diminish

Capital flows by country$ billions

Weak economies and the prospectof higher interest rates in the developed world — especially the United States — mean that capital inflows to Latin America will fall again in 2016.

Rising U.S. interest rates: Less of a concern

Fed funds futuresWhen the Federal Reserve hikedIts target policy rate for the first time since the 2008 crisis the market was pricing in further rate hikes. Many observers were concernedthat higher interest rates in the United States would mean morecapital outflows from Latin America.Those fears have since abated.

Doing business: Getting easier

Judging from this year’s World Bank rankings, it became easier to do business in 13 out of 18 countries in Latin America last year.

Some examples of improvement

Panama Brazil ColombiaTime required to start a business (days) 6 108 105

Time required to register property (days) 30 30 13

Time required to get electricity (days) 35 58 105

Time required to enforce a contract (days) 686 731 1288

It is easier to do business in Panama (the fastest growing country in Latin America) than in other countries.

Source: World Bank

Corruption: Still a problem in the region…

Global rank ScoreChile 21 73Uruguay 21 73Costa Rica 47 54Brazil 69 43Peru 85 38Panama 94 37Colombia 94 37Bolivia 103 35Mexico 103 35Argentina 107 34Ecuador 110 33Haiti 161 19Venezuela 161 19

Source: Transparency International, 2014. A higher score indicates less perceived corruption.

…but the situation has been improving

Countries above the dotted red line have less perceived corruptionthan in 1998.

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Crime: still a concern

Narco-trafficking, gang violence, kidnappings, and street crime are all-too common In several countries in the region. In a recent Latinobarometro survey more than 45% of respondents in Argentina, Brazil, Mexico, and Peru reported that they or a family member had been a crime victim in the past 12 months.

A sea change in the political environment?

Voters in Argentina and Venezuela recently sent a strong message that statist policies in those countries would no longer enjoy popular support.

In Argentina, Mauricio Macri, the mayor of Buenos Aires was elected in a run-off election on November 22, ending 12 years of Peronist control.

In Venezuela, opposition parties gained a 2/3 supermajority in the National Assembly on December 6, delivering a powerful blow to President Nicolas Maduro and the ruling United Socialist party.

Mauricio Macri, elected President of Argentina, November 2015.

Argentina: Moving toward a more open economy

Argentina had an overvalued official exchange rate and restrictions on the amount of dollars citizens could buy. President Macri removed currency restrictions within days of taking office in December. The peso immediately fell by 29% and converged with the parallel “blue market” exchange rate.

Argentina’s two exchange rates

Dollar-sniffing dog in Buenos Aires airportIn 2013.

Venezuela: Still struggling

Venezuela has an overvalued official exchange rate and a thriving black market for foreign exchange. Price controls have led to shortages of consumer and medical goods. Capital has been fleeing the country.

Venezuela’s two exchange rates

Empty shelves in a Venezuelan store

A new regional reality Prospects for a hemispheric free trade area have

diminished as it has became clear the United States and countries such as Argentina and Brazil had little common ground on key issues.

The Trans-Pacific Partnership, signed on February 4, 2016, by twelve Pacific rim nations (including Chile, Peru, and Mexico, would reduce tariffs and provide for an investor-state dispute settlement mechanism. It has yet to be voted on in Congress.

Congress passed, and President Obama signed, legislation renewing “fast track” treatment for trade pacts in 2015, but the TPP has run into opposition in both parties.

Changing relations with Cuba

In March of this year President Obama became the first sitting U.S. president to visit Cuba since Calvin Coolidge, the latest step in a thaw in relations that began in December 2014.

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Air Force One landing in Cubafor the first time in 90 years.

A thaw in relations

On December 17, 2014 President Obama announced changes in U.S. policy intended to initiate a normalization of relations with Cuba while continuing to raise concerns about democracy and human rights.

U.S. citizens are now allowed too visit Cuba under 12 licenses covering, among other activities, family visits, educational purposes, professional research and meetings, public performances, and the export and import of information.

In July 2015 President Obama announced that the United States and Cuba would normalize diplomatic relations, and the U.S. and Cuban interests sections in Havana and Washington D.C. were converted to embassies.

Is Cuba ready for change?

The Cuban government, meanwhile, has been implementing reforms intended to allow market forces to play a larger role in the economy.

The reforms, which began in 2008, include allowing individuals and cooperatives to cultivate unused plots of land, permitting self-employment in a wide range of activities, more autonomy for state-owned enterprises, and allowing citizens to buy and sell homes.

What happens next?

The United States currently does more business with Cuba than most Americans realize. From 2000 to 2015 the U.S. exported $5.3 billion in agricultural and medical goods to Cuba.

The trade embargo, however, remains in place. Exports not specifically authorized in existing legislation are prohibited, as are visits for tourism. Human rights and claims for expropriated property remain stumbling blocks.

Questions?