Latin America: the north-south divide

After a three-year slowdown, South America will recover in 2017, but Mexico is suffering from the impact of the shock caused by uncertainty over US economic policy. In short: there are very different dynamics between the north and south of Latin America.

A clear difference can already be seen between Mexico and South America in household and business confidence indicators. In the case of Mexico, they plummeted in December and January over doubts regarding the impact that new US policies will have, along with depreciation of the exchange rate and the concomitant risk of higher inflation. By contrast, in South America, confidence has begun to recover, particularly for households, although for the moment, levels of pessimism remain the same.

The financial markets have also reacted differently in both areas. Following the losses that came shortly after the US elections, South America’s stock exchanges have recovered significantly, doubtless helped by the increase in raw materials prices, which have counteracted the increase in long-term interest rates in the United States. By contrast, in Mexico, the exchange rate and share prices have continued under pressure, while the reach of Donald Trump’s trade, immigration and remittances policies are yet to be seen.

We anticipate both regions will grow by around 1.7% in 2018, which is weak 

This different response to the uncertainties of US policies will highlight the divergence in the growth dynamics of the two areas of Latin America. Both South America and Mexico will grow by 1% in 2017, but in South America, this will be a turning point after three years of slowdown and negative growth of -1.4% in 2016. For its part, in Mexico, uncertainty will affect investment, which along with a more restrictive monetary policy, will generate a sharp slowdown on economic activity in 2017, compared to growth of between 2% and 2.5% over the last three years. We anticipate that both regions will grow by around 1.7% in 2018, which is weak in terms of the region’s potential, which should be closer to 3%.

All in all, the risks related to this forecast are slanted downwards. Alongside the risks connected to the policies to be implemented in the United States or to the speed of the slowdown in China, there is also, on the domestic side, that of political commotion (increased by investigations into corruption in several countries) and the long-term risk involved in not relaunching the reform process to increase productivity.

Juan M. Ruiz is chief economist for South America at BBVA Research.

English version by Nick Lyne.