Crisis and Opportunity: An Update on Latin American Economies

March 2019 -

Amid the many headlines about immigration issues and the political, economic and humanitarian crisis in Venezuela, it can be easy to overlook the historic strength of the ties between the United States and its neighbors to the south, and the two regions’ long-standing economic importance to each other. In 2018, Mexico was the second-largest destination for U.S. exports, ranking behind only Canada, and was also the second-largest source of U.S. imports, after China. Brazil, too, ranks among the top 15 U.S. trading partners. And though hardly as well known as the U.S. pact with Mexico and Canada, the U.S. also has free-trade agreements with all of the countries of Central America as well as Chile, Colombia and Peru.

Latin America has an important stake in the U.S. trade war with China, already the top destination for exports from several Central and South American countries, says José Antonio Ocampo, a board member of Colombia’s central bank, Banco de la República, and a professor at the School of International and Public Affairs at Columbia University in New York. While ongoing tensions between the two economic superpowers present opportunities for Latin America, the conflict also injects significant risks, Ocampo says. And ongoing economic and human displacements caused by the Venezuelan crisis loom large throughout Latin America.

OUTLOOK turned to Ocampo, who also chairs the Committee for Development Policy of the United Nations Economic and Social Council, to gain perspective on Latin America’s economic prospects and its importance to the U.S.

OUTLOOK: Who are the main trading partners for the U.S. in Latin America today?

José Antonio Ocampo: The largest U.S. trading partner by far is Mexico, because of geographic closeness but also because of a long history of trade agreements, starting with North American Free Trade Agreement (NAFTA), and now its replacement, the United States-Mexico-Canada Agreement (USMCA).

For other countries in Central America, and for countries in the northern part of South America, such as Colombia, the U.S. is the top market, and it is the largest trading partner for Latin America as a whole. The region is a major exporter of agricultural and other commodities to the U.S. as well as of manufacturing products, particularly from Mexico. It is also a major importer of U.S. capital goods and intermediate goods.

OUTLOOK: Looking at Latin America overall, which are the strongest economies, and which are struggling?

Ocampo: Let’s start with the two largest economies, Mexico and Brazil. Mexico is weakening a bit. After several years of growth in the neighborhood of 3 percent, this year most projections say 2 percent. Brazil is also on course for 2 percent growth, but on a different trajectory – after going through the greatest recession in its history, the Brazilian economy is recovering.

Next, let’s talk about the three strongest medium-sized economies: Chile, Peru and Colombia. Peru is probably the strongest of the three, but both Peru and Chile grew at 3 percent to 4 percent last year, and Colombia was close to 3 percent. Most projections forecast that those three countries will perform about as well this year.

Of the remaining two countries among the seven largest in the region, Argentina is still struggling to recover from recession, and, of course, Venezuela is going through a major crisis.

OUTLOOK: How deep is the Venezuelan crisis, and what’s the outlook for the country?

Ocampo: It’s the worst economic crisis of any Latin American country in history. It’s actually one of the most severe in recent world history, among countries that are at peace. For something comparable, you’d have to go back to the breakup of the former Soviet Union. One basic problem we have in analyzing specific economic conditions is that we don’t have access to reliable data. But according to all the estimates, Venezuela’s gross domestic product has already fallen something on the order of 45 percent to 50 percent. There are very diverse projections for 2019. The International Monetary Fund (IMF) predicts the Venezuelan economy falling by another 5 percent this year, but I think that’s too moderate. The Economic Commission for Latin America forecasts a 10 percent decline, but it could be more. Others project a 20 percent decline, which is possible.

The country’s humanitarian crisis may also worsen in the short term – in part because of current U.S. sanctions, which have cut the country’s oil exports to the U.S., and access to trading with U.S. firms and financial markets.

Venezuela will continue to have difficulties importing even very basic foodstuffs and medicines. Francisco Rodriguez, a prominent Venezuelan economist, has called for an oil-for-food program, similar to what the United Nations put in place in Iraq in 1995 after the first Gulf War. It would allow Venezuela to export oil to the U.S. under the condition that the proceeds go towards food and medicine and other necessities. Russia, in particular, seems to be providing humanitarian aid to Venezuela, but the problems and needs are massive, even for the very basic necessities, so the possibility of the crisis getting worse and more people being forced to leave the country is very high. Rodriguez estimates that current humanitarian aid meets only about 3 percent of Venezuela’s actual needs.

OUTLOOK: How is the Venezuelan crisis affecting other Latin American economies?

Ocampo: Trade between Venezuela and neighboring Colombia collapsed three to four years ago, and Venezuela has ceased to be an important trading partner for all of Latin America. Going back to the 1970s, Venezuela, with its enormous reserves, sold oil to Caribbean and Central American countries, including Cuba, Nicaragua and some of the small islands, on very favorable terms. That has collapsed because Venezuela’s oil production is half or less than half of what it was five or six years ago.

Another major impact is outward migration of labor to other Latin American countries. According to UN statistics, through last year, some 2.5 million people had left Venezuela. That’s a huge number by any standard, but as a proportion of Venezuela’s population of about 30 million, it’s astounding. These numbers are growing, and the people are generally arriving in terrible conditions. About half of these migrants, 1.3 million, are in Colombia, but they are spreading throughout South America. Colombia has been extremely welcoming, allowing migrants to get work permits and recently allowing Venezuelans to enter with expired passports. This openness is putting a strain on Colombia’s labor market and social spending, though.

country-by-country 2019 projected GDP forecast

OUTLOOK: What are some of the most important commodities exports for Latin American countries, and what’s the outlook for commodities?

Ocampo: In mining, iron ore is important for Brazil, and you have also nickel, gold and copper from several countries. Of course, agriculture is a huge export industry. Coffee is a very important export for several countries. Fruits and vegetables are very important for Chile, Peru, Costa Rica and others. Mexico is also a major exporter, particularly of avocados, and Colombia is now the second largest flower exporter in the world, with the U.S. being its most important market. The decline in coffee prices over the past couple of years has hurt the region, but other commodities may be partly benefiting from the trade war between the U.S. and China.

China is now the number two trading partner for Latin America; for several countries, including Brazil and Chile, China is now the top destination for exports, and many others are looking at the possibility of exporting more to China. That’s a huge change that has taken place over the past 10 years.

OUTLOOK: Which commodities, in particular, are being impacted by the trade war?

Ocampo: China has been raising duties on U.S. soybeans, reducing U.S. exports and resulting in a boom of soybean exports from Brazil to China. This is also true of corn exports and possibly of other products. Commodities account for about 85 percent of Latin America exports to China.

China has been raising duties on U.S. soybeans, reducing U.S. exports and resulting in a boom of soybean exports from Brazil to China... Commodities account for about 85 percent of Latin America exports to China.
OUTLOOK: What risks does the U.S.-China trade war represent for the region?

Ocampo: The major danger would be if the trade war starts to seriously affect China’s economic growth. That could hurt Latin America directly by limiting its ability to export to China, and indirectly by depressing commodity prices. That’s less of a danger with oil, because oil is such a massive global market, but it could certainly apply to other commodities such as soybeans, copper and iron ore.

Another risk comes from what economists refer to as trade deviations, meaning that when sanctions disrupt regular trade routes, exporters look for other buyers. Sometimes, those favor Latin America. This is the case of soybean and corn exports from Latin America to China that I already mentioned. There are other cases, of different magnitudes. For example, Colombia is increasing exports of aluminum products to the U.S., an opportunity because of U.S. tariffs against Chinese aluminum. But trade deviations can also occur in the opposite direction. For example, there is a lot of talk that, because the U.S. has put high tariffs on steel imports from China, China is dumping steel into Latin American countries, which hurts the region’s domestic manufacturers.

OUTLOOK: Would it be better for Latin America if the trade war continues or ends?

Ocampo: If the trade war escalates and the Trump administration continues raising tariffs – and China responds – you could see a lasting collapse of confidence in the U.S. market as a supplier of soybeans to China, for example, and in China as a supplier of aluminum to the U.S. Those developments would continue to help soybean exporters in Brazil and Argentina, and exporters of aluminum products from Colombia, and would contribute to economic growth in those countries.

But in a larger sense, a trade war between the two largest economies in the world (and the two largest trading partners for Latin America) has generated a lot of uncertainties that could have a long-term impact on global trade. If an end to the trade war favors better economic growth for both the U.S. and China, that would be good for Latin America.

Moderate Recovery
OUTLOOK: How did Mexico fare under the new USMCA treaty?

Ocampo: The best analysis I have seen is that the changes are not terribly significant. One component of the agreement is that the value chains have to be more North American in content, so manufacturing in North America would rely less on Asian intermediate goods. Because more components must come from the U.S. and Canada – higher wage countries – there may be some impact on Mexico in terms of higher prices for the goods they manufacture. But nothing I’ve seen indicates big changes in Mexico’s trade with the U.S.

OUTLOOK: Will the treaty have a spillover effect on other Latin American countries?

Ocampo: Actually not, for one basic reason: Mexico’s value chains involve very few intermediate goods produced in other Latin American countries. In other words, there’s not much existing trade of this kind that could be disrupted.

OUTLOOK: What about monetary policy in the region? Is there significant variation from country to country?

Ocampo: Among the largest Latin American economies, Brazil, Chile, Peru, Colombia and Mexico have fairly orthodox monetary policies, but currency volatility is a recurring problem throughout the region.

Argentina has been much more volatile due to its long periods of instability. It’s problems trying to control inflation, resulting in very high interest rates.

Last year, the most important shock was the drop in the Argentine peso, which led to emergency support from the IMF amounting to the largest IMF package in history. Brazil and Mexico also experienced some episodes of volatility in 2018, depending also on political conditions. Chile and Colombia are more stable, though Colombia suffered a major depreciation in 2014 when oil prices collapsed. Among all Latin American countries, Peru stands out as particularly stable, mainly because of efforts by its central bank to control foreign exchange volatility.

Net Migration , share of population

OUTLOOK: What affect is U.S. immigration policy having on Latin America these days?

Ocampo: Latin America has a large number of migrants already in the U.S., both regular and irregular. Remittances from migrants is a major source of income for many Latin American countries, and that’s been booming lately, which means the U.S. labor market is going strong.

According to all the numbers, new migration from Latin America into the U.S. has been falling, and not only because of U.S. immigration regulations. Some countries, such as El Salvador, already have large portions of their population in the U.S. and simply have fewer migrants to send right now. Migration to the U.S. is also falling because many Latin American countries, as I described earlier, have been doing fairly well, making their citizens less likely to leave for the U.S. Central America has been the fastest-growing subregion of Latin America for several years.

Also in this issue:

  • Interest Rates and Economic Indicators
  • CoBank Commits $300,000 in Support of Midwest Flood Relief

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