Latin America’s recession is expected to continue in 2016 with a 0.5% to 1% GDP contraction, but growth should resume in 2017, according to the OECD’s latest Latin America Economic Outlook.
The organisation explains that the region has not seen such a strong contraction since the early 1980s, and that even when GDP starts to grow again, it will be at too “modest” a rate, around 2% to 3% annually.
Largely due to global factors such as commodity price drops, general slowdowns in economic and trade growth and a shift in China’s consumption models, the recession is challenging Latin America’s socio-economic progress, the report adds. Ultimately, the region’s success will depend on its ability to include, educate and train young people for value-added jobs.
“Young adults make up a quarter of the population in Latin America. The ability to harness this demographic dividend of 163 million people aged between 15 and 29 is crucial. In a context of increased school enrolment, empowering youth who are eager to work while ensuring their talents match labour market demands and structures is a smart way to create inclusive growth. It will also help achieve productivity gains while reducing inequalities,” says OECD chief of staff and G20 sherpa, Gabriela Ramos.
In the medium term, the OECD warns that Latin American firms, particularly in the energy sector, face financial risks due to the large increases of corporate debt accumulated since 2008. “In a context of greater indebtedness, falling commodity prices increase the financing costs of firms specialised in these products. The countries may compound the situation yet further if they have secured external debt against the commodity produced and exported. Higher costs and lower revenues reduce profits; when combined with deteriorating assets, this can increase the risk of default,” explains the report.
Currency depreciations in many Latin American economies are also increasing risks in the corporate sector. Speaking to GTR on the sidelines of the GTR Mexico Trade and Export Finance Conference in October, Luis Fernando Mendoza, regional product head for Latin America, global trade and receivables finance, at HSBC, said: “The clients have been a lot more aware and concerned about our exchange rates, so they come to us a lot asking for support and advice. We’ve been very careful on reviewing how the clients do business in terms of which currency they use to sell and to collect – that’s something that wasn’t so critical a few years ago.”
The OECD points out that the picture is uneven across the region, with Mexico, Central America and the Caribbean enjoying a more positive outlook due to their stronger links to the US, the economy of which is expected to continue to recover.
Meanwhile, net commodity exporters in South America are facing much bigger hurdles, with current account deficits surpassing 5% of GDP in several countries. Those that depend largely on Chinese demand (namely Brazil, Chile and Peru) need to shift exports from commodities to value-added products in order to maintain that relationship.
The report says: “China’s shift towards consumption, and its changes due to the urbanisation and consolidation of its middle class, will reduce demand for many commodities (notably some metals and energy). However, the changes open opportunities for Latin American exports in agro-food and service sectors. To capture these opportunities fully, Latin America could attempt to position firms in higher value-added stages, incorporating various types of services.”
However, it warns that better regulations are needed to develop bankable region-wide projects involving China.