The Americas’ Summit Despair Valley
The Americas Summit in Panama featured symbolic handshakes between the US President and historic foreign adversaries including the Cuban and Venezuelan leaders, but continued the sour economic mood from the preceding Inter-American Development bank meeting with negligible GDP growth and commodity turnarounds forecast. Financial markets remained in a funk through Q1 with only Argentina up among equities and corporate bond defaults in several countries as Brazil was cut off with Petrobras’ debacle. The IIF captured the poor sentiment in March research titled “a year of reckoning” and blamed policy mistakes for the drag rather than global raw materials prices and higher external borrowing costs. The Pacific Alliance—Chile, Colombia, Mexico and Peru—will outperform with greater cross-border capital and trade integration against the low bar set with Argentina’s and Venezuela’s stagflation and Brazil’s near investment grade rating loss, it predicted.
Currency depreciation has been the main adjustment response in the absence of 2008-like scope to conduct counter-cyclical fiscal and monetary policy. Brazil will end the standing swap program as the real settles below 3/dollar and Venezuela has introduced a private trading platform off to a meager start although the clearing rate is more aligned with the informal exchange. Ecuador’s exports and public spending have been battered by oil price correction, while Chile has benefited from reduced imports and subsidies. Argentina must rebuild institutions and economic management as President Fernandez leaves the scene, still refusing any holdout creditor deal as another scheduled New York bond payment was blocked. Brazil in addition to regaining budget discipline must improve the business climate, and Mexico and other Pacific Alliance members must implement as well as launch overdue structural reforms. Corruption and income inequality have fostered rising social tensions after a decade of relative calm in the hemisphere and must be addressed to preserve political and competitive gains, according to the IIF.
On trade the US is gaining market share at China’s expense while EU commerce is flat. In Asia Latin American exporters have diversified to India and Korea, With the Federal Reserve due to raise interest rates soon, most central banks are on hold or set to tighten, the latter led by Brazil where the benchmark could touch 14 percent by year-end. The fiscal deficit there hit a decade-high of 6.5 percent of GDP and new Finance Minister Levy will be hard-pressed to achieve the 1.5 percent primary surplus target, less than half the previous norm.
The average current account deficit will level to 2.5 percent of GDP and mid-size Colombia and Peru should be the growth leaders at 3-4 percent on infrastructure investment and tax cuts. Productivity lags other regions, with only Mexico embarking on far-reaching reforms which will hardly budge its bottom World Economic Forum ranking on organized crime. Chile under returning President Bachelet has tried to restore the country’s reputation for bold steps, but has floundered with increased corporate taxes and a nepotism scandal involving her son. Peru’s President Humala has encountered resistance to business-friendly proposals with elections due next year and his spouse wishing to keep the summit view in the family.
