The protest wave and the region's economic outlook

Economic issues are one reason people are protesting. But the protest wave may harm the region's economies.

It’s Black Friday. 

Bad news: I’m not offering a sale.

Good news: I am sending an extra free edition of the newsletter this week that would usually go to paying subscribers.

Bad news: The extra free newsletter below offers a very pessimistic take on the region’s economic situation and how protests will make it worse.

Good news: You still have one day to send feedback on this newsletter and have the chance to win a free month of paying subscription. Reply to this email or email me at boz@hxagon.com

Economic growth predictions for 2020 are weak and there is downside risk.

A few weeks ago, the Financial Times warned that Latin America faces a second ‘lost decade’. The article says that since the commodity collapse in 2014, the region has seen persistently low growth, adding: 

“The outlook for the coming years is, if anything, worse. Despite the region’s generally mediocre economic performance, in the last few years Latin America was at least able to count on the fact that the global economy was strong, markets were largely stable and foreign investment capital available — factors which cannot be guaranteed in the future.”

A blog post by economists at the Inter-American Development Bank says “the region is currently much weaker in its ability to withstand external shocks than a decade ago…. It has higher fiscal deficits, higher current account deficits and a higher proportion of its debt in dollars than it did before the financial crisis of 2008.” 

As the chart below shows, CEPAL estimates the region will narrowly avoid recession, growing 0.1% in 2019, and it will grow a miserly 1.4% in 2020. Even excluding the economic basket case that is Venezuela, the region will still be under 1% growth this year and under 2% growth next year.

One year of low growth would be bad enough, but as the FT article I cite above indicates, Latin America as a region has averaged under 1% growth over the past five years according to most estimates. The region’s two largest countries play a key role in those stats and are emblematic of the problems facing the region. 

Brazil went through a deep and extended recession in 2015-16 and the post-recession recovery was very weak, growing only around 1% each of the past two years. It had one quarter of negative growth in early 2019 and remains in a slump, even if its stock market remains near record highs. Official measures of unemployment remain persistently above 10% and inflation is higher than wage growth.

Mexico has consistently underperformed economic expectations over the past decade and entered a technical recession during 2019. The Central Bank has lowered its forecasts for 2019 to essentially zero and says it may only grow 1% in the coming year. That’s a long way from AMLO’s promise of 4% growth per year across his sexenio.

Across the region, there has been a steady downward shift in the predictions of how economies would do this year. In July, both the IMF and CEPAL had Latin America growing around 0.5% in 2019. Then Argentina’s economy slid further than expected in August and several other countries reported lower than expected growth during Q3. 

Here is some more bad news: None of the estimates for the region’s economies in 2020 made in recent months fully account for the impact of the protests and the government measures to respond to the protests. If you believe the protests will continue in many countries and expand to other countries (as I do), there is a big downside risk.

The protest wave is both caused by and affecting the region’s weak economic performance

Low economic growth is one factor behind the wave of protests. As I wrote about previously, government budgets are tight and citizens feel they are not receiving the benefits promised in past decades.

Even as protesters demand better economic conditions, the demonstrations have hit several economies in the region and may cause economic challenges in the coming year. Foreign investors are questioning the narratives about countries that once appeared stable. Companies in several countries, particularly Chile, have seen damage to facilities and have been forced to shut down offices and stores for days at a time due to protests.

In the short term, the protests and images of instability are hitting currencies. Chile and Colombia, for example, have seen their currencies fall since the beginning of the protest movement. However, the currency fall has some global causes and can’t just be blamed on protests. Brazil, even without protests, has seen its currency drop to one of its lowest points ever, forcing the Central Bank to step in and defend the Real.

Going into next year, governments will be forced to make concessions on taxes and benefits that may cause additional budgetary challenges. As I told Infobae this week in an interview, that is being seen right now in Ecuador, where the government could not cut fuel subsidies and now struggles to pass an economic reform package that can win over a broad domestic coalition and international lenders. To a lesser extent, the governments of Chile and Colombia are being forced to make economic concessions to the protest movements that hit the bottom line.

This challenge of government budgets vs citizen demands is likely to play out in several countries next year, leading to additional protests. One very likely location is Argentina. The incoming Fernandez administration will struggle to pay debts, raise funds and meet the economic promises that it made to voters. Trapped between voters who want more and a budget that demands less, Fernandez is going to face a public that did not even give him majority support in an environment where the incumbent was heavily disliked.

Other factors hitting regional economies that will extend into next year

Outside of the protest movements, there are at least five factors that have depressed growth in the region and are likely to continue into next year.

Insecurity - The cost of poor security hits overall economic growth as well as budgets for every government and company in Latin America. It cuts one to three percent of GDP growth out of many of the countries in the region.

The anti-corruption wave - Cracking down on corruption is good for the region’s long term economic growth prospects. However, in the short term, the anti-corruption wave has hit the perceptions of the rule of law in many countries. This has discouraged foreign investment and increased the costs of compliance for foreign companies operating in Latin America.

Anti-trade policies from US - In the past, the US pushed for free trade deals in the region. The Trump administration has stalled that drive, pulled out of TPP, threatened to pull out of NAFTA and placed several anti-trade policies in place including tariffs on steel and automotive parts that have taken time to roll back and placed a damper on regional trade. Globally, the US-China trade war continues without a truce, impacting the trade environment for emerging markets.

Threat of global recession - The threat of a potential downturn in the US and Europe hung over emerging markets for much of 2019 and that is likely to continue into 2020. 

Weak commodity prices - Many of the region’s largest economies remain commodity exporters. Commodity prices collapsed in 2008, ending a five year boom time in Latin America that benefited many governments in power. They collapsed again in 2014 and have not recovered in the past five years. The drop in prices for oil, minerals and food has been a key factor in the persistently low growth over the past few years. The benefits of low commodity prices (lower food and fuel prices for citizens plus lower costs to governments subsidizing those products) has been outweighed by the lost revenue to the region. 

There aren’t many scenarios that would create surprise upside growth

For businesses that want to invest in the region, the negative outlook in 2020 means there are opportunities for those who have a strong risk tolerance and a longer term vision. 

For those focused more on security issues and continuity of operations, there is not much of a positive story to tell in the coming year.

The only good news I have for you is that these things tend to be cyclical, so it will hopefully look better in 2021.