The Booming Latin American Economy, Part Two

Latin America’s economy has been booming for more than a decade, averaging 3.7% annual growth over the last ten years . It weathered the 2008-2009 economic crisis and Great Recession far better than developed nations and returned to growth faster, enjoying a 5.9% rise in economic growth in 2010 and 4.3% in 2011.

Economists expect Latin America’s GDP to expand by 3.2%to 4.0% this year . Many countries will do even better, and some will do worse.

Country By Country

Of course, Latin America’s economic growth and strength vary considerably among the different nations. Here is a sample of what is happening in the region.

Argentina

Once a Latin American economic darling, it is now a falling star. In 2012, its economy grew by just 1.9% and incurred its first primary deficit in 16 years. Argentina also has a high inflation rate, 11% so far this year (the private sector says it is closer to 25%), which has slammed domestic consumption, as havea 7.3% unemployment rate and a depreciating currency.Government policies have hurt foreign trade.

Nevertheless, while economists see no change in Argentina’s inflation or unemployment rates, they do expect the country’s GDP to grow 3.2% this year and 3.1% in 2014 due primarily to improvements in the global and Brazilian economies.

Brazil

The significant slowdown in economic growth of this Latin American powerhouse is one reason Argentina is struggling financially—the two are regional economic partners. What affects Brazil affects Argentina. What is affecting Brazil? Two years of economic stagnation, including a 0.9% growth rate in 2012 and a rise in unemployment from 4.6% in 2011 to 5.4% in 2012. The Brazilian Real fell 8% in 2012. image001

But Brazil is far from down for the count. Its economy should grow by 3.5% this year thanks to the improving global economy, new competitiveness measures, low unemployment, falling interest rates, strong domestic consumption, and private investment.

A $66 billion economic stimulus plan enacted in 2012—including tax cuts and lower electricity prices—should also have an impact this year. Domestic consumption remains strong, industrial production is rising, income inequality is falling, and the global economy is improving, which will have a direct and positive impact on the Brazilian economy.

Public spending is also growing as Brazil prepares to host the 2014 World Cup and the 2016 Summer Olympics, which should help to further stimulate the economy. Importantly, Brazil has also been growing its international reserves from $38 billion in 2002 to more than $370 billion today. If the world economy should suddenly go into a downturn, Brazil has the money to spend its way out of economic trouble.

Chile

This country is a Latin American economic superstar. Strong domestic consumption and investment activity helped drive a 5.5% jump in economic growth in 2012, its inflation is at just 1.5%, it has a 6.1% unemployment rate, and low public debt. Domestic demand grew more than 7% last year and investment rose more than 12%. The economy should grow 4.5% to 4.9% this year. Economists consider Chile the greatest value in Latin America. image002

Like many other Latin American nations, a commodity—in this case, copper—has long been a significant source of the nation’s wealth. That would seem to be a problem in this decade whose theme includes falling commodity prices. But a major market for Chilean copper is China and once the Chinese economy resumes its historical growth in mid-2014, Chinese demand for copper will also grow and Chile will benefit. Copper probably won’t reach its highest high price this decade, but it will do well, which means Chile should prosper.

Of considerable importance, Chile has been saving its copper export revenues and using that money to fund a 2012 economic stimulus plan and to recover from natural disasters, like the February 2013 earthquake. Currently estimated at $14 billion , the national “stabilization fund” is Chile’s safety net if the European Union’s economy takes another nosedive or the world economy stumbles or falls again. The government can use its own money to stimulate its own economy with public works projects and other strategies.

Colombia

For decades, Colombia was known for its massive drug cartels. In recent years, it has been besieged by one weather-based national disaster after another.Yet, its economy has been growing on average 4.5% annually for more than ten years and its unemployment rate has been falling. In 2011, the economy grew by 6.6%.

Colombia is another Latin American economic star, in part because it has been investing in itself. Industrial production, foreign exports, and domestic consumption have all been strong.image003

In 2012, the country’s economic growth slowed to 4%, domestic demand fell, its unemployment rate rose from 9.6% to 12.1%, and this year the country has been hit by strikes in its important mining and coffee industries. Nevertheless, Colombia is expected to continue its economic growth, albeit at a more moderate rate of 4.0% in 2013 and 4.3% in 2014.

How is that possible in a decade when commodity prices are falling? The government is launching an economic stimulus plan that includes public works projects and lower energy prices. Inflation is stabilized at around 3%. The government is actively working to end the country’s financially-draining 50-year civil war. Colombia is also a founding member of the Pacific Alliance, which means it is actively working on economic growth through regional and global trade . . . and the global economy is expected to continue improving this year.

Costa Rica

This politically-stable eco-tourist destination is a quietly strong economic force in Central America, one that has enjoyed consistent economic growth, slowing only in 2009 in the midst of the worldwide economic crisis. Its GDP grew 4.7% in 2010, 4.2% in 2011, and 4.8% in 2012. image004

Costa Rica has long been an agricultural exporter of bananas, beef, coffee, pineapples, and sugar, but in recent years it has increasingly exported industrial products and high value-addedservices and goods like microchips and medical equipment. Currently, agriculture accounts for just 7% of the country’s GDP, with industrial exports providing 25%, and tourism generating 68%. Incentives in its free trade zones lure substantial foreign investment. It also boasts some of the highest education levels in Latin America. (It abolished its military in 1949 and divided its national defense budget between education and healthcare. )Costa Rica has the highest standard of living in Central America.

But there are problems. Costa Rica’s unemployment rate rose from 6.5% in 2011 to 7.9% in 2012. Its poverty rate (people earning less than $115 a month) has stubbornly remained at 15% to 20% for almost two decades. It is also the go-to country for Nicaragua’s legal and illegal emigrants, some 300,000 to 500,000 strong, which is putting increasing strain on the country’s extensive social services and welfare programs.

Nevertheless, the economic outlook for Costa Rica remains strong, particularly because its economy is not trapped in the previous decade’s commodity theme. It has export sectors, like Technology and Healthcare, that should do well in a decade of Risk.

Dominican Republic

This Caribbean nation is very much of a mixed economic bag. On the plus side, it has a growing economy with a GDP that rose 7.8% in 2010, 4.5% in 2011, and 4.0% in 2012. Agriculture is no longer the largest employer. Yes, the country still exports sugar, coffee, and tobacco, but now the services industry, particularly telecommunications and tourism, plus the country’s free trade zones employ more workers and will benefit from this decade’s theme of Risk. The nation’s GDP reflects this shift. Agriculture now generates just 6.1% of the country’s GDP, industry provides 31.9%, and services generate 61.9% of GDP. Other good news includes the country’s inflation rate, which dropped from 8.5% in 2011 to 3.7% in 2012. image005

On the minus side, the Dominican Republic has a 14.7% unemployment rate and a much larger under-employment rate.Commercial banks charge an exorbitant 15.5% prime lending rate, which hinders domestic consumption and the growth of private business. Income inequality is egregious, with the wealthiest 10% of Dominican Republicans receiving nearly 40% of the country’s GDP, while the poorest 50% of the country gets just 20% of GDP.

The nation’s fiscal deficit jumped from 2.6% in 2011 to 8% in 2012. It also has a significant trade imbalance, importing nearly twice ($18.2 billion) the goods that it exports ($9.467 billion). Equally troubling, the Dominican Republic is overly-dependent on the U.S., to which it ships 60% of its exports.

On the one hand, over the last decade the national government began structural reforms that helped to modernize the economy and promote global trade and investment. On the other hand, the Dominican Republic’sfinancial waste,inefficiency, andcorruption are an economically damaging combination.On the one hand, the country has reasonable tax rates, which promote domestic consumption. On the other hand, 34% of the country lives below the poverty line.

Ecuador

This small South American nation is coming into its own thanks to consistent economic growth that should see a 4.0% rise in 2013 and a 4.2% rise in 2014. The Ecuadoran government has invested heavily in both public infrastructure, which has helped to grow the economy, as well as in social policies. Unemployment is one of the lowest rates in Latin America, at 5.7%. Thanks to price control measures, inflation is falling, from 5.1% in 2012 to 4.5% this year and a predicted 4.3% in 2014. image006

There are some problems, too. Ecuador is too dependent on its oil industry and the revenues it generates. When oil exports and prices go down, so does Ecuador’s economy.In the previous Commodity-themed decade, the world’s oil sector enjoyed ten years of high prices. The Risk theme for this decade, however, is bringing commodity prices down. Yes, continuing global demand will keep oil prices strong, but expect them to fall further, which means Ecuador’s economy will also fall unless the country takes action to diversify its economy and exports.

Other problems include Ecuador’s fiscal deficit, which is growing, Foreign Direct Investment is greater than investment by national companies, and the country’s export rate is falling.

Next year should bring happier news thanks to stronger domestic consumption, continuing oil demand, and a projected rise in Ecuador’s export rate.

El Salvador

The smallest country in Central America cannot get a break. The densely-populated, highly industrialized nation was devastated by civil war in the 1980s, which finally ended in1992. It is now riddled with violent street gangs (“maras”) and drug cartels. It has one of the highest murder rates in the world.

El Salvador’sGDP grew just 1.4% in 2010, 1.5% in 2011, and 1.5% in 2012. It is importing more ($10.44 billion in 2012) than it is exporting ($5.8 billion in 2012). Its external debt has risen to $12.84 billion. Unemployment stands at approximately 6.9%. Far worse, 36.5% of the population lives below the poverty line. One-third of the nation’s families depend on money sent them by relatives working in other countries, particularly the U.S.image007

Every time El Salvador’s economy starts to recover and grow, the country is hit by an extremestorm and flooding or an earthquake: Hurricane Mitch (1998), earthquakes (January and February 2001), Hurricane Adrian (May 2005), Hurricane Stan (October 2005), earthquake (2005), Tropical Storm Ida (2009), Tropical Storm Agatha (May 2010), Tropical Storm Alex (June 2010), a Tropical Depression (2011) which brought record-breaking rainfall, earthquake (2012). El Salvador also has some active volcanoes. Santa Ana erupted in October 2005. These natural disasters kill hundreds and sometimes thousands of people; leave thousands, oftenhundreds of thousands, homeless; destroy infrastructure, farms, and businesses; and create a huge drain on the national economy.

This decade’s theme of Risk should benefit an industrialized nation like El Salvador, but the constant natural disasters and the human misery and economic havoc they wreak will instead keep El Salvador down for the count.

Mexico

This is one of Latin America’s economic giants. News stories may be full of tales of drug cartels and violence, but the Mexican economic engine keeps chugging upward.

GDP grew 3.9% in 2012 and is expected to grow 3.8% this year and 3.4% in 2014. Inflation is stabilizing: it stood at 3.8% in 2012, it should rise slightly in 2013 to 4.0%, then fall again to 3.4% in 2014. The economy is generating between 900,000 and one million new jobs annually.Unemployment is falling: in 2012, Mexico saw its lowest unemployment rate since 2009. At the start of 2013, it stood at 5.0%. Prior to the Great Recession, it averaged 3.7%. image008

Spurring Mexico’s economic growth onward is national tax reform, strong domestic consumption, a booming stock market, and increased production. Unfortunately, this decade’s theme of Risk raises some problems: Foreign Direct Investment in Mexico will slow and commodity exports like agricultural products and oil (it is the sixth largest oil producing nation in the world) won’t bring in the high revenues of the previous Commodity-themed decade. Fortunately, Mexico also has strong Technology and Industrial sectors that, along with other sectors, could lureMexican investment money, which would support economic growth.

Mexico has other problems, including a growing trade deficit. But its export rate is rising and so is its production. The escalating drug and crime-related violence in the country has impacted the tourism industry, which is a significant source of revenues for the country. Nevertheless 23.4 million people from around the world visited Mexico in 2012. Mexico is critically over-dependent on the U.S. for revenues (approximately 80% of Mexican exports go to the U.S.), but the flip side is that as the U.S. economy improves in 2013 and 2014, so will Mexico’s economy.

One of Mexico’s greatest strengths is a cheap labor market close to the U.S. Why is that important? Many U.S. companies have grown disenchanted with off-shoring production to Asia, particularly China, because shipping goods from Asia back to the U.S. is expensive. It is much less expensive to ship goods from Mexico. Lexmark and other U.S. companies are moving their production facilities from China to Mexico. This U.S. shift means more jobs in Mexico.image009

Other good economic news includes Mexico’s population growth, which is plummeting, from seven live births per household in 1970 to two live births per household today. That means a future of minimal unemployment rates. Approximately 650,000 people will be entering the labor force annually, instead of the 1.3 million today. Those people will be working, earning incomes. That means fewer people dependent on welfare support, which will remove a significant strain on the Mexican economy. Mexico’s standard of living will improve significantly. The further growth of the country’s brand new middle class will generate a significant rise in domestic consumption.

Mexico stands on the edge of a tremendous economic boom which is coming very soon . . . if it can solve its two biggest problems: crime and corruption.

Nicaragua

This is the second poorest country in Latin America , afflicted by vast unemployment, poverty, and corruption.

Yes, its economy grew by 4.5% in 2010, 4.7% in 2011, and 3.7% in 2012 , its exports grew by 18% in 2012, and construction rose by 30% last year , but approximately 46% of Nicaraguans live below the poverty line, the country has an under-employment rate of around 46%, an unemployment rate that rose from 7.3% in 2011 to 7.4% in 2012, and an inflation rate of 6.62%. Its public debt is 70.5% of its GDP. Nearly $1 billion came into Nicaragua in 2012 in the form of “remittances,” money sent by family members working in other countries to their families in Nicaragua. image010

The country’s economy is heavily dependent on Venezuela—the Bolivarian Alliance for the Americas (ALBA) has loaned the Sandinistas $2.19 billion so far —and Venezuela is in trouble (see below). Nicaragua has signed onto the Central American-EU Association Agreementto expand its exports, but the European Union remains in a world of economic hurt. The country could benefit from this decade’s theme of Risk if it invested significantly in economic sectors like Technology and Transportation, but it is probably too poor and corrupt to do so.

Nicaragua’s economy is projected to grow this year and next, but that money won’t affect the vast majority of nearly six million Nicaraguans. Don’t expect to see a strong middle class in this country any time soon.

Panama

In contrast, this Central American country has been doing a lot of things right. When he took office in 2009, President Ricardo Martinelli launched a $14 billion public investment program that includes everything from $5.3 billion to expand the Panama Canal—which will quadruple its revenues to $4 billion annually—and construction of the country’s first subway system ($1.2 billion) in the capitol, Panama City, which is enjoying a real estate boom. image011

The result? Two consecutive years of double-digit economic growth, including a 10.7% rise in GDP in 2012. A strong services sector—from banking and logistics to tourism—makes up more than 75% of that GDP. The construction sector grew 30% in 2012. The economy will remain strong in 2013, with a projected 8.5% rise in GDP. Unfortunately, inflation has also grown with the economy, reaching 4.6% last year.

The tourism and real estate sectors are expected to continue growing, and the opening of a mammoth copper mining project in 2016 should pump even more money into the Panamanian economy.

While Panama has the second worst income distribution in Latin America and 39% of the population lives below the poverty line, poverty was cut by 10% between 2006 and 2012 and the unemployment rate fell from 12% to 4.4%.

This decade’s theme of Risk should benefit several of Panama’s economic sectors, including Banking and Construction. Starting in 2016 with the opening of its new copper mine, Panama should also benefitfrom China’s strong demand for copper.

Foreign Direct Investment will fall in this decade, which could be a very good thing for Panama and the rest of Latin America, because it will (hopefully) force them to increase their investments in themselves.

If Panama focuses on itself and continues its public infrastructure projects, promotes tourism, further diversifies its economy, and strengthens its exports, it will continue to do well.

Peru

This once volatile nation has become a Latin American superstarwhose economic growth is on target for rivaling or even surpassing that of Brazil over the next decade. image012

Peru’sGDP grew 6.3% in 2011 and 6.5% in 2012 due primarily to domestic demand. (Thenumber of new vehicles registered in the country rose 39% last year.) The trade sector grew 6.9% in 2012 and the construction industry grew 5.3%. Inflation was held to 4.7%. Income tax revenues increased 6.5% in 2012. Domestic demand grew more than 7% last year. Private investment rose almost 14%, while public investment grew 20%.

Peru’s GDP is expected to continue its strong growth, posting a 6.3% rise this year and 6.1% in 2014. Inflation is also expected to be cut nearly in half, to 2.7% this year and 2.8% next year , which will strengthen domestic consumption even further.

The country is spending over $9 billion on road development and improvement projects by 2016 , which is generating jobs and will provide significant support to trade, particularly regional exports. Yes, three of Peru’s main exports are commodities—copper, gold, and zinc—but at least two of those three should enjoy strong demand in this decade. The country also has a cushion of $67 billion to help it counteract any negative global economic developments.

Overall, Peru is doing everything right to take advantage of this decade’s theme of Risk.

Venezuela

Venezuela has a lot going for it. One of Latin America’s economic giants in the previous century, the oil-rich nation struggled in the Great Recession but bounced back much faster and stronger than its major trading partner—the United States.

Venezuela has enjoyed more than two years of economic growth, with a 5.5% rise in GDP in 2011 and 5.6% in 2012. It has strong domestic consumption (a vital component of a mature economy), the banking system is increasing its private credit, the government raised the minimum wage, and it has funded important public investment projects like the Gran Misión Vivienda Venezuela (the Great Venezuelan Housing Mission) which are helping to grow the construction sector. image013

Unlike so many other Latin American nations, Venezuela has an extensive road network to support its internal, regional, and international trade; it is constructing subway systems in its three largest cities; and it has begun building a railroad network to meet its goal of a railway that connects most of the nation by 2020. Thanks in part to public infrastructure projects like these, unemployment fell from 9.4% in 2011 to 7.6% in 2012.

For more than a decade, former President Hugo Chavez dedicated 60% of government revenues to social programs that have, among other things, helped to eradicate illiteracy, greatly increased the country’s college enrollments, significantly reduced gender inequality, cut the infant mortality rate by 12% and the children-under-five mortality rate by 49% (since 1990), and reduced the number of people living in extreme poverty (less than $1.25 a day) from 29.8% in 2003 to 6.8% in 2011.

Unfortunately, for all of its strengths, Venezuela is also beset with a number of challenges, starting with31.6% of the population whostill live below the poverty line ($2 to $5a day).

The oil-dependent nation—oil represents 95% of the country’s exports, 45% of the Federal government’s budget revenues, and 12% of the country’s GDP —must also contend with the end of the previous Commodity-themed decade and the rise of the current Risk decade. Venezuela’s enormous oil dependence is becoming a liability.image014

Yes, global oil demand in this decade will be strong, but we won’t return to the huge demand and highest high prices of the previous decade. In fact, oil prices will be dropping lower, and so will Venezuela’s revenues.

Venezuela’s greatest challenge, however, is its combination of inflation, currency control and devaluation, and rising debt which are gouging the national economy and thwarting efforts to alleviate poverty. Inflation, for example, hit 26% in 2011, rose another 21% in 2012, and is expected to climb even higher in 2013, which slows domestic consumption and makes it harder for Venezuelans to afford the things they need. This problem is exacerbated by increasing shortages of goods, particularly food and drugs, and services.

The government’s price controls, for example, mean that agricultural and industrial producers can’t sell their goods at profitable prices at home and abroad, so more and more of them have stopped producing anything.The government’s nationalization of 21 different industries, including agribusiness, construction, and finance, has further reduced private investment and entrepreneurship in the country, cut production, and reduced its non-oil exports. image015

President Maduro has already started trying to resolve some of these problems by actively soliciting the Foreign Direct Investment former President Chavez distrusted. He is also trying to improve Venezuela’s relationship with the United States.

Other countries have faced these challenges and come out the other side with strong mature economies, and Venezuela can, too. To begin, the government must focus on promoting private investment and enterprise and stabilizing the currency. Otherwise, the country can expect recession and a GDP that only grows 1.3% this year and 2.4% in 2014. [Look for a future article on Venezuela’s problems, some solutions, and economic predictions, coming soon.]

In Part Three, we’ll discuss challenges to Latin America’s economic growth and some predictions about its economic future.

Author Bio: Frank Liz is the founder of the Adimir Institute of Financial Education, a futurist, an entrepreneur, a teacher, and an author. He wrote the best-selling book The Millionaire Within You and the forthcoming Starving For Answers: How Climate Change, Ignorance, and Greed Are Creating a Century of Hunger . . . and What We Can Do About It Now. He has taught 30,000 people around the world how to invest successfully in the stock market.

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