Much of the developing world has cheered on the steep decline in commodities prices over the past year. The nations of Latin America, however, aren’t clapping so loudly. After all, many of the countries in the region depend heavily on raw materials exports—from oil to copper to soybeans—to keep government revenue and growth afloat. After enjoying nearly a decade of increasing commodity prices, the region’s economies have been hit hard by the recent declines.
While the price of Brent crude oil has increased 24 percent from its January low of $45 per barrel, it’s going to take a much greater reversal than that to make Latin America happy again. That’s because prices fell too far and have stayed low for too long — Brent was at $115 last June — and the region has a long way to go to work through the damaging effects the decline has wreaked on fiscal accounts. Accordingly, Credit Suisse has downgraded its 2015 growth forecasts for six of the eight countries it covers in the region, in the process reducing its overall projection for the region’s real GDP growth this year to 1.3 percent from 2.2 percent.
Economic growth isn’t the only statistic that’s deteriorating. Credit Suisse has also widened its projection for the region’s overall 2015 current account deficit to 3.7 percent of GDP from a forecast of 3.1 percent a quarter ago. Venezuela’s current account deficit is forecast to be 3.3 percent this year, a notable increase from the previous estimate of 1.6 percent. Credit Suisse has also increased its projected fiscal deficit for the region to 4.6 percent of GDP from 4.2 percent. Individual deficit forecasts have widened by at least 0.5 percent in Peru, Brazil, Venezuela, Colombia and Ecuador.
Perhaps the most troubling case is that of Brazil, where Credit Suisse expects the economy to contract 0.5 percent this year instead of a previous forecast of 0.6 percent growth. A key reason for that change is falling prices for agricultural, mining and other primary products, which make up around 50 percent of the country’s exports. Because of this, fiscal revenues have fallen, which, along with an increase in administered prices such as gasoline and electricity and a weakening real, have pushed inflation above the upper limit of the central bank’s inflation target. Accordingly, the central bank is expected to raise its benchmark rate to 13.75 percent by June – a 100 basis-point increase from current levels —which will likely further hurt business and consumer confidence. “It’s compatible with a deceleration in household consumption and a strong reduction in investment, which should keep economic activity on a downward trend,” Credit Suisse’s Brazil analyst Nilson Teixeira wrote in a March 9 report.
Oil-exporting nations Colombia and Ecuador have also taken their blows. The former, recently regarded as a rising economic star in the region, is expected to see growth slow to 3.8 percent this year from 4.7 percent last year, according to Credit Suisse. Fiscal and current account deficits will widen due to lower oil prices, and the currency could weaken to 2,700 pesos per dollar by the end of 2015 from 2,560 pesos currently. Ecuador already announced $1.4 billion in spending cuts earlier this year, and it may have to cut outlays even more if it can’t find enough external financing to cover a deepening fiscal deficit. Credit Suisse downgraded its growth forecast for the country to 2.3 percent from 3 percent.
In Mexico, while the impact of lower oil prices has been harsh, the government demonstrated a commitment to fiscal prudence by cutting public sector spending by 0.7 percent in the face of declining government revenue. “We think this move speaks volumes about the government’s strong commitment to maintaining a healthy macro framework,” Alonso Cervera, Credit Suisse’s Mexico analyst, wrote in a report. On a brighter note, Mexico’s belts may not need to be tightened much more since a strong U.S. economy and a weak peso are leading to acceleration in manufacturing export growth.