Our Latin America Economic Outlook Turns Negative For 2016 On Low Oil Prices And Brazil’s Pains
Economic activity across most of the region deteriorated in the fourth quarter of 2015 and the beginning of this year, in part because of heightened volatility in financial markets and a further drop in commodities prices, particularly oil. Furthermore, rising interest rates in the U.S. are putting pressure on central banks in the region to hike their own benchmark interest rates in order to contain inflation expectations despite sluggish domestic demand. As a result, Standard & Poor’s has once again cut its regional real GDP growth forecasts for Latin America. We now forecast regional real GDP to fall by 0.2% in 2016 (compared with a 0.5% expansion previously; see “Growth Will Likely Remain Weak, Though The Effect On Latin American Ratings Will Be Mixed,” published Dec. 8, 2015, on RatingsDirect) and to expand by 2.1% in 2017 (compared with 2.4% previously).
Lower regional GDP growth primarily reflects a weaker outlook for Brazil, the region’s largest economy, where ongoing political instability is further exacerbating difficult global conditions. We now estimate that real GDP in Brazil fell by 3.6% in 2015 (from 3.2% previously), and we forecast it will contract by an additional 3.0% in 2016 (from 2.0% previously), before expanding by 1.0% in 2017 (from 1.2% previously). Brazil’s pains were also the biggest contributor to our lowering of the 2015 regional real GDP estimate for Latin America, to a 0.5% contraction from a 0.3% decline previously.
- We have lowered our 2015 regional real GDP estimate for Latin America to a 0.5% contraction (from a 0.3% contraction previously). We have also lowered our forecast for 2016 to a 0.2% drop (from a 0.5% expansion previously) and revised our 2017 forecast to 2.1% growth (from 2.4%).
- The political situation in Brazil has deteriorated, and inflation ticked up to 10.7% at the end of 2015 from 6.4% at the end of 2014, prompting us to revise down our real GDP forecast for the country–causing a strain on the region overall. We now estimate that real GDP fell by 3.6% in 2015, and we forecast a 3.0% contraction for 2016 and 1.0% growth for 2017.
- We have also lowered our GDP forecasts across most other Latin American economies and adjusted our exchange-rate outlooks to reflect weaker currencies than we had previously anticipated (see tables 1-5), in light of lower commodities prices.
Table 1 | Download Table
|Latin America: GDP Growth And Standard & Poor’s Forecasts|
|–Baseline scenario–||–Downside scenario–|
Table 2 | Download Table
|Changes in Standard & Poor’s Baseline GDP Growth Forecasts From Base Forecasts|
Brazil: The Sharp Recession Will Continue In 2016
Brazil is the primary point of pain in Latin America. Data available for the final quarter of 2015 suggest that the Brazilian economy deteriorated further in that period, after real GDP fell by 3.2% year over year in the first nine months of the year. We now estimate real GDP contracted by 3.6% last year, versus our previous expectation for a 3.2% contraction previously. We estimate that in 2015 industrial production fell more than 8.0% last year, and retail sales declined over 4.0%. We have also revised our real GDP forecast for 2016 to a 3.0% decline from a 2.0% contraction previously, and we expect 1.0% growth for 2017, down from 1.2% previously.
Political uncertainty in Brazil, as a result of additional corruption scandals and an ongoing impeachment process against President Dilma Rousseff, continues to weaken the economic outlook. Fixed investment, which fell by 12.7% year over year in the first nine months of 2015, will likely remain weak until impeachment either concludes or succeeds. Inflation has also risen beyond our initial expectations, in part because of the effects of weaker foreign-exchange rates (the Brazilian real depreciated 49% against the U.S. dollar in 2015) and also because of hikes to regulated prices, such as electricity. This, combined with rising unemployment, which increased last year to 7.5% in November from 5.9% in January, will keep consumer spending subdued, after falling 3.0% year over year in real terms in the first nine months of 2015.
Mexico: The Recovery Is Still Proceeding, Though At A Slow Pace
Mexico, on the other hand, is looking better among the Latin American economies. We estimate that real GDP in Mexico expanded by 2.5% in 2015, a slight improvement from our previous 2.3% estimate, thanks to strong private consumption. We still expect the gradual recovery in economic activity to continue in Mexico in 2016 and 2017, though at a slower pace than we previously thought, largely because of the blow of lower oil prices to exports and oil-related tax revenue. We now forecast real GDP to expand by 2.7% in 2016 (versus 3.0% in our previous estimate) and by 3.2% in 2017 (versus 3.6% previously). The main source of real GDP growth will continue to be strengthening household spending, which expanded by 2.9% year over year in the first nine months of 2015. A reduction in gasoline and electricity prices will keep inflation low throughout 2016. The main drag on GDP growth will be a sharp cut in public investment, as the government reduces fiscal spending to offset the impact of lower oil-related revenue.
Argentina: After An Auspicious Start, The New Government Opts For A Gradualistic Adjustment Approach
In its first 50 days in office, the Mauricio Macri Administration scored high points in several economic and finance areas. For one, it nearly eliminated capital controls, which–despite gloomy predictions by many of political opponents, occurred almost seamlessly, i.e., without the Argentine peso spinning out of control. Since then, however, the Administration has made few meaningful policy announcements other than its intention to reduce inflation and the fiscal deficit, albeit gradually, over the next four years. This and the fact that the peso remains relatively overvalued cause us to be more cautiously optimistic than we were last December. In our view, Argentina’s real GDP will have a better chance of taking off starting in the second half of 2016 if policy adjustments in the first half of the year are quick rather than slow. However, based on the most recent policy announcements the Administration has made, economic adjustment is likely to be more gradual than we initially anticipated. Therefore, we are cutting our 2016 and 2017 growth forecasts by one percentage point of GDP, to 0% and 2%, respectively, relative to December.
The Andean Economies And Chile: Rising Inflation Tempers Our Outlook
We have also lowered our real GDP forecasts for Chile and most of the Andean economies. Unfavorable weather conditions, associated with the “El Niño” phenomenon, have pushed food prices significantly higher across the region. This, combined with pass-through effects of weaker exchange rates on inflation, has compelled central banks to pursue tighter monetary policy, which will keep domestic demand relatively subdued. However, with the exception of Colombia, we still expect a modest recovery in growth across this region in 2016.
In the case of Colombia, we estimate real GDP expanded by 2.9% in 2015 and forecast growth of 2.6% in 2016 (versus 3.2% in our previous estimate) and 3.3% in 2017 (versus 3.6% previously). The reopening of the recently expanded Cartagena oil refinery will be an important source of growth in 2016. However, the significant drop in oil prices will cause lower exports and investment, as well as higher inflation, as the weaker exchange rate increases prices of several goods and services.
In Chile, we estimate real GDP expanded by 2.1% in 2015, and we forecast growth of 2.3% in 2016 (versus 2.8% previously) and 2.8% in 2017 (versus 3.4% previously). Household spending picked up in the second half of last year–a trend that is likely to continue this year. However, we expect that rising inflation will encourage the Chilean central bank to implement tighter monetary policy, which will temper the recovery in private consumption. In addition, export growth will remain weak in light of lower copper prices.
In Peru, we estimate real GDP expanded by 2.8% in 2015, and we have kept our 2016 and 2017 forecasts unchanged at 3.4% and 3.8%, respectively. An increase in copper production, as investments in expanding mining output mature, will offset the impact of lower prices. Delays in fixed investment into key infrastructure projects were the main drag on GDP growth last year. However, several of these projects are likely to move forward this year, especially after the April 10 presidential election, which we think market-friendly candidate Keiko Fujimori is likely to win.
Table 3 | Download Table
|Latin America: CPI Inflation And Standard & Poor’s Forecasts (Year-End)|
|(% change year over year)||2014||2015||2016||2017|
Table 4 | Download Table
|Latin America: Exchange and Interest Rates And Standard & Poor’s Forecasts (Year-End)|
|–Exchange rate (US$)–||–Policy rate (%)–|
Table 5 | Download Table
|Latin America: Exchange Rates And Standard And Poor’s Forecasts (Average)|
|–Exchange rate (US$)–|
We have determined, based solely on the developments described herein, that no rating actions are currently warranted. Only a rating committee may determine a rating action and, as these developments were not viewed as material to the ratings, neither they nor this report were reviewed by a rating committee.