The Latin American Economic Context

In the last two years the Latin American region presented relatively low GDP growth rates, around 2%.

This is far removed from the prosperous scenario seen from 2004 to 2012, when the rates reached over 5% in many years, according to CEPAL – Economic Commission for Latin America and the Caribbean. In 2014, the region had a 1.3% GDP growth, the second worst performance in the last 10 years (in 2009 the region showed a -1.8% GDP growth, a reflection of the world financial crisis).

The countries that most contributed to the slowdown in the economy performance of the region in 2014 were Brazil, Argentina and Venezuela. Brazil, the largest country with around 50% of participation in the region’s GDP, had almost a zero growth of 0.1%, Argentina grew only 0.5% and Venezuela dropped 4.0%. Other important countries in the region such as Colombia achieved a GDP growth rate in 2014 of 4.6%, 2.4% for Peru, while Mexico and Chile registered 2.1% and 1.9% respectively. However, almost all of these countries, with the exception of Mexico, have shown decreasing GDPs in the last two years.

Latin American GDP growth

It was the first time that Latin America grew less than the average of the 34 countries of The Organization for Economic Cooperation and Development (OECD).

Brazil is in bad shape, with political and economic problems in addition to inflation. Argentina also faces political and economic problems, and Venezuela has had serious problems with internal supply, high inflation and political issues.

The deceleration of the economy in the region – decreasing steadily since 2010, when it reached a high 6.1% GDP growth, can be explained by the following factors:

  1. In the most important countries, much of the growth in 2010 was due to the increase in middle class purchase power and relative stability of public accounts. Also, prices of commodities were high and China grew 2-digits per year – China is a huge market for Latin American companies.
  2. For the domestic market, factors like the ascension of middle class and stability of public policies failed from 2011-2014 and generated a very small growth in the period. For 2015, the World Bank is forecasting a worse scenario, with a GDP growth for Latin America of merely 0.4%. According to the bank, the region is practically in recession.
  3. During the same period, prices of commodities like iron, steel and oil, decreased substantially. Part of the problem is the slowing Chinese economy, but also, in the case of oil, it was strongly influenced by the industry context.

In addition to this unfavorable scenario, Moody’s Investors Service has downgraded Brazil’s government bond rating from Baa2 to Baa3, a clear signal that the country has delivered less than expected in terms of economic performance.

Another important index that reflects the economic instability in Latin America is the Emerging Markets Bonding Index – EMBI+, produced by JP Morgan, which tracks emerging markets, government debt and corporate debt asset classes.

As a consequence of all these factors, market capitalization of Latin American public traded companies in the region suffered a substantial decrease, as shown in the chart below

The region has to learn how to deal with the new external context: lower growth of emerging economies, less dynamism of developed economies and lower prices of raw materials. All these factors greatly affect the economic growth and development of the region, which require significant changes to aspects such as investment levels and productivity growth with a long-term perspective.

Country risk - EMBI +

Almost all the main countries in the region have risen in terms of risk (except Chile).

Companies’ Market Value

Market capitalization of Latin American public traded companies in the region suffered a substantial decrease.