For nearly a decade the major economies of South America rode a growth wave propelled by high prices for export commodities. In 2014 the wave crashed down as commodity prices dropped. Now it is a question of who will recover quickest and best, economies like Chile on the west coast or the mega-economy Brazil.
A few years ago the prospects for South American countries were looking up. An economic wave was gathering strength from an abundance of divergent export commodities. Minerals abound such as copper, tin, zinc and iron ore along with oil and gas. Vast ranges of cash crops include fruits and vegetables along with grains like wheat. Fishing and forestry also add to the export mix.
The export potential had economic forecasters predicting high GDP growth rates for the region. Direct investment and long-term contracts from commodity-starved China did nothing to discourage the high expectations.
Then in the beginning of the second half of 2014, commodity prices began to fall. Growth in the Chinese economy began slowing down and commodity demand slowed with it. The same was true in Europe and while the US was still moving forward, it wasn’t growing at a clip to offset the global trend.
By the end of 2014, Latin America growth had slowed to GDP 0.8%. This was a far cry from the optimistic 3.5%-4% growth that some forecasters had made in 2013.
There were signs that the region was cooling off as early as 2012, but the export driven economies masked the weakness. The trade balances for many South American nations were negatively impacted by commodity prices and lower demand, and exchange rates versus the dollar also dropped precipitously. Inflation, which has racked South America’s economies for years, again began to rear its ugly head. In hard hit Venezuela, it was estimated that inflation was running at an unbelievable 68.50% in December of 2014. Even Brazil is experiencing an inflation rate of around 7.7% (February 2015).
However, one size doesn’t fit all. There is considerable difference between the problems and prospects of a mega-economy like Brazil or even Argentina to the economies like Chile, Peru or Colombia. The seeds of quickness for each individual economy’s recovery from the current downturn are being sown now. And here are two prime cases, Brazil and Chile, and they define the economic differences East and West in South America.
Brazil The Brazilian economy is as unique as its geography. Brazil is South America’s only mega-economy, and befitting a giant, abuts ten South American nations – excepting only Chile and Ecuador.
In South America, a company or indeed a nation needs a “Brazil” strategy just as China dictates globally. Unfortunately, Brazil has in many respects been its own worst enemy as the Petrobras scandal illustrates. There is now a new wariness among foreign investors concerning Brazil – foreign investment is at an 11-year low. How long this unease lasts will likely depend on how quickly the government can put its house back in order. Nevertheless, an increase in commodity and agricultural prices for exports would help a turn around.
Brazil ran regular monthly trade surpluses from 2001 to 2012. In 2013 Brazil began notching deficit and in 2014 recorded the nation’s first annual trade deficit since 2000 [$3.93 billion].
According to the latest trade figures, the situation isn’t improving. The trade gap hit $2.84 billion in February, compared to $2.12 billion a year earlier.
Exports, on a year-on-year basis, were off over 24% in February, the lowest in five years. Imports are also suffering. Imports were off over 17% at $14.93 billion in February – the lowest since January 2011.
The main reason for the trade shortfall is export prices on key commodities [iron ore 13%, oil 8.4%, soybeans 7%, sugar 5.3% and poultry 2.8%]. For example, iron ore, the export staple for Brazil, in dollar terms is off over 43% while the volume is up 10.5%. A drop in prices has hit even agricultural exports, with volumes up but values down. The exports of poultry are down 2.7% while the volume has risen 4.4%.
Brazil’s four main trading partners are China (17%), the US (11%), EU-27 (est. 20%) and Argentina (7.2%)
For Brazil, any significant improvement will begin with these four regions. China, because of the imports of iron ore and agricultural goods, is the linchpin. There have been some positive signs as the increase in imports of Vale’s iron ore at Chinese ports could help to make up some shortfalls. The US and EU markets are also critical to Brazil getting back on track. The US, for example, regularly exports $42 billion in goods to Brazil and last year ran a surplus of $12 billion. Even with Brazil’s domestic issues, the expectation is similar for this year…and with perhaps more exports to the US by volume with the lower Real versus US dollar.
Brazil’s Central Bank is forecasting a trade surplus of $4.5 billion in 2015 and $10 billion in 2016, but without significant rise in commodity prices, these projections may be well short of reality.
Chile Prospects Heating Up
The South American nations on the western coast have had a different economic experience compared to the eastern coast nations. Although the commodity basis for exports is the same, the economic impact is different.
Chile’s economic fortunes are tied to copper exports, and prices and demand have fallen. In February, copper prices were down 2.1% over January to around $5,729 per tonne ($2.60 per pound). Copper prices have fallen for seven years.
While this is bad news for the moment, the bigger picture (and economic model) is of a country still moving ahead under difficult trading conditions. The first indications that Chile may be working its way out of the slumping conditions, is the report by the country’s central bank that domestic product (GDP) rose 2.7% in January over the same period in 2014. Not unexpectedly, the rebound is pegged to a 13% increase in copper production in January, compared to the previous year. This has led economists to elevate their forecast up to a 2.7%-3.1% GDP growth rate for 2015. But there is more to the story.
According to the Central Bank, Chile posted a $2.12 billion trade surplus in the first two months of this year compared with only $431 million in the same period of 2014. Chilean exports in January-February 2015 amounted to $11.53 billion, a 2.3% drop from a year earlier, while imports totaled $9.41 billion, down 17.3% for the same period.
February’s trade surplus was $748 million, on exports of $5.24 billion - 16.6% below the value one year earlier - and imports of $4.49 billion, 15.3% less than February 2014. Chile’s copper exports are still a problem. Copper was again a factor as foreign sales reached $2.48 billion last month compared with $3.72 billion in February 2014.
While the decline in exports is slowing or in some cases reversing, the import totals are declining. This is a bad sign for exporters to Chile and South America’s West Coast in general. But there is a positive spin to this story. Chile with a diverse base – exports of fruits and seafood - is better placed to take advantage of different styles of recovery among its trade partners.
Inevitably commodity prices will rise and the commodity-based economies of South America will again be on track for GDP growth. But the economies like Chile, that have already tackled many of the structural issues stand to be the big winners.
