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2019-11-29Macro `n Cheese

Latin Spring…or Autumn?

Political & economic turmoil is not unusual for Latin America. It is a region of outliers—both in the past and present. In this post, Macrobond New York reviews the state of the region and its most troubling economies.

Revolución is a drag

Starting with the basics: This chart shows the real GDP growth for Latin America is contracting by more the -1.5%. That is almost entirely due to the economic collapse of Venezuela. If we exclude Venezuela, Latin America has been steady around 1 percent real GDP growth, a rather unimpressive figure for a still-developing region.

The commodity boom of the early 2000s and 2010s lifted the region’s economic prospects. Real year-on-year GDP growth soared in the range of 4-6%, driven in large part by a booming Brazil. Since 2015, Venezuela has been a major drag on the region’s economic growth, pulling down the regional aggregate by 1-2 percentage points.

*Note: Our estimate of Latin America includes Argentina, Brazil, Chile, Colombia, Mexico, Peru and Other (Bolivia, Ecuador, Paraguay, Uruguay, and Venezuela)
 

Convergence? More like moving in circles

Compared to growth in the 2% range for the US, this would suggest Latin America is falling further behind its big northern neighbor. This scatter chart shows the GDP per Capita of Latin American countries relative to US GDP per Capita at Purchasing Power-Parity. Real year-on-year GDP growth is on the y-axis.

Venezuela’s economic collapse cannot be much over-stated. In the 1950s, Venezuela’s per-capita income was approximately 90% of US per-capita income. By 1980 it was closer to 50% after years of moving sideways. Today, GDP per capita is just above 20% that of the United States.

However, Latin America’s economic woes are more than Venezuela’s economic collapse. Argentina, Brazil, and Mexico are poorer today relative to the United States than they were in 1980, too. Peru and Colombia have made some progress (if you squint). Among the major Latin American economies, only Chile has made substantial progress in developing towards the living standards of the United States, from per-capita income of approximately 20% in 1980 to over 40% today.

Macrobond moment: The arrows indicate the direction of time, and are an optional setting for scatter charts.

 

Inflation: Do Cry for Argentina

It’s difficult to talk about Latin American macroeconomics without a section on inflation. Inflation-targeting regimes have been adopted by central banks around the world over recent decades, and many countries in Latin America have been part of this trend.

Yet even for Latin American countries with inflation targets, the region has generally overshot their target. This differs from emerging market countries in EMEA and in the Asia-Pacific, where inflation has been under target. However, in the last year, Latin American inflation has averaged below target, driven mostly by inflation under-shooting in Brazil.

Macrobond moment: Using Macrobond’s Scalar analysis along with a categorical chart can be a good way to display information across countries and nicely punctuate a presentation full of line charts.

 

One notable exclusion from this sample of LatAm countries is Argentina, which is currently struggling with inflation over 50% year-on-year. This has led the Central Bank of Argentina to raise its policy rate to over 60%. Ouch.
Hence, when looking at the regional inflation aggregates as well as the regional policy rate aggregates, it is useful to look at two samples of major LatAm countries – one including Argentina, and one excluding it. In the chart below, we compute a GDP-weighted aggregate for both policy rates and inflation, both with and without Argentina. The case of Argentina is such an outlier that is skews the narrative for the region overall. Without Argentina, Latin America is experiencing slowing inflation, down to 2.3% and falling policy rates to 4.8%. However, with Argentina included, the story is nearly opposite—both inflation and policy rates are rising for the region.

 

Latin America & IMF: Frenemies

Two important metrics used to evaluate sovereign risk are a country’s import cover ratio and external debt ratio.

The Import Cover Ratio is calculated as FX Reserves divided by the 12-month moving average of imports. The result measures how many months of imports a country could pay for in the event of some currency crisis, so a higher import cover is better than a low one. This is particularly relevant for countries that rely on dollar-denominated imports like oil.

External debt as a percentage of GDP measures the amount of debt a country owes to foreigners as a percentage of overall domestic output (other variants of this measure use GNI, which measures a country’s total available income). This debt to foreigners is often denominated in foreign currency, too, like USD. A higher ratio of external debt typically indicates a higher level of sovereign debt risk.

In the event of a crisis, with slim foreign currency, reserves may have to make tough (impossible?) choices between vital economic imports and paying their debts. Since foreign creditors are not the most sympathetic political characters, a low import cover and high external debt levels may indicate elevated risk of sovereign default.

A little debt trouble here, a little FX trouble there, and before you know it, you have a balance of payments crisis—hello, IMF!

Within Latin America these two indicators point to elevated sovereign risk for Argentina and Chile and lower sovereign risk for Brazil and Peru.

Macrobond moment: You can add regions to this table by right-clicking “Change region and duplicate” on a variable within Series list. Your analyses will automatically be applied to the newly added data and it’ll be included in the table in the right format.

 

Charts and commentary by: Tarek Saed, Wadsworth Sykes, & Alex Pelle

 

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Disclaimer

We don’t usually have views and opinions about economic and financial states of affairs, (not ones that we express publicly as a company, anyway). We do believe, however, that people can and do appreciate a variety of perspectives. What you’ve just read is the perspective of our resident chief economist. While we think he’s very smart, Macrobond Financial does not expressly endorse the views he presents here. And, as the old adage goes, you shouldn’t believe everything you read (not without finding the data, performing a few analyses and presenting it in a nice chart). We want to make it clear that we are not offering this information as investment advice. That being said, if you have the application you can easily check everything that’s mentioned here, and decide for yourself. If you don’t have the application, now you have a great reason to get it.