Latin American and Caribbean nations are expected to return to economic growth this year after two consecutive years in the negative column. But when analysts talk about the prospects for 2017, the words they use are slow, shallow recovery and subdued growth.
The U.N.’s Economic Commission for Latin America and the Caribbean — ECLAC — estimates regional GDP growth will reach 1.3 percent this year, compared to a contraction of 1.1 percent in 2016. Commodity prices are still relatively low but improving, the Chinese economy has slowed, and global growth rates are fairly anemic — with uncertainty in major markets from the United States to the euro area.
Charles Cheng, vice president of TM Cell, a Doral-based distributor of cellphones and other electronics in the Americas, isn’t expecting a stellar year, either: “This year we’ll probably see for the first time what I would call a mediocre year for the cellphone business.”
But part of that has to do with the cellphone business itself. The market is becoming saturated in Latin America. For the first decade after its 2004 launch, all TM Cell knew was continuous growth. It never had a single down year.
Last year, the company — which distributes Alcatel-branded, iSwag, and ADATA products as well as its own Logic brand and MyKronoz Swiss smart watches throughout Latin America and the Caribbean — sold 3 million handsets.
“Since 2014, the market has been getting rockier,” Cheng said. To succeed now, he said, “it’s a matter of moving faster than the competition. It’s all about being one step ahead.” As cellphone penetration in the region increases, the company has become more sensitive to economic ups and downs in regional markets.
This will be a year of adjustments in Latin America and the Caribbean as regional governments try to encourage the green shoots of recovery at the same time they endeavor to make the fiscal accommodations necessitated by lower commodity prices for their most important exports.
But there are some bright spots: The economies of Panama, the Dominican Republic, Peru, Bolivia, Costa Rica, Guyana, Honduras and Nicaragua are all expected to grow by 4 percent or more. However, poor performances by Venezuela, Brazil and Ecuador are expected to pull down the region’s total.
Powerhouse Brazil has probably hit bottom, but its recovery is still fragile.
The Venezuelan economy continues in free fall. It’s expected to shrink by 3.7 percent on the heels of an 8 percent decline in 2016, according to ECLAC. Annual inflation is estimated at a whopping 741 percent.
“It’s really an economy that has already gone over the cliff,” said Jason Marczak, director of the Latin America Economic Growth Initiative at the Atlantic Council’s Adrienne Arsht Latin America Center.
The U.N. economic commission’s 2017 “World Economic Situation and Prospects” report says there are still significant downside risks in the region: “These include a sharper-than-expected deceleration in China, the adoption of protectionist measures by the new administration in the United States and renewed financial market turbulences.”
For Salvadoran hotelier Fernando Poma, executive vice president of Real Hotels & Resorts, 2017 is shaping up as a year when caution seems prudent: “We’re waiting to see how things play out this year, but I would say I’m on a little bit of a stand-by basis.”
Much of the uncertainty centers on the direction the White House will take on Latin American policy. Still unknown is the impact of a potentially inwardly-focused foreign policy; President Donald Trump has said he’s determined to build a wall on the Mexican border and to reopen NAFTA negotiations to get a better deal for the United States. His protectionist bent is raising questions not only in Mexico, but across the region. And it could prompt Mexico to look more toward its Latin American neighbors and China for future trade and commerce if the United States erects more tariff and non-tariff barriers.
Already, Mexico is looking at the possibility of giving freer access to corn from Argentina and Brazil in case it needs to find an alternative to exports from the United States, which supplies Mexico with 98 percent of its corn.
Mercosur and the Pacific Alliance, trading blocs that used to be at odds with each other, are also talking about how they might be able to work together. Argentine President Mauricio Macri, whose country is a member of Mercosur along with Brazil, Paraguay, Uruguay, and Venezuela (suspended), is a big proponent of market integration with the Pacific Alliance, which includes Mexico, Chile, Peru and Colombia.
China also has broadened its engagement in the region in recent years, increasing not only investment levels but also becoming a significant player in trade in goods and services. “In some ways the United States is handing China a golden opportunity right here in our hemisphere,” Marczak said.
But for Doral-based TM Cell, it’s not so much adverse conditions in its Latin American markets that are affecting business as much as competition — and that competition is coming from China.
“We’ve noticed that more and more of our customers are buying directly from China. It’s creating problems for a lot of Miami-based companies,” Cheng said. “Before, any Latin importer would come to Miami as a first choice.”
Huawei, the Chinese telecom multinational based in Guangdong province, for example, has begun to set up its own offices in each Latin America market, essentially cutting out the middleman. Cheng hopes Miami’s advantage will continue to be access to a large pool of good employees who know the region and speak Spanish or Portuguese.
Despite current challenges, Susan Segal, president and chief executive of the Americas Society/Council of the Americas, says she is feeling upbeat about the region. “It’s not only about today’s growth numbers. It’s also about a sense of optimism,” she said.
Jerry Haar, a professor of management and international business at Florida International University, agrees: “What you don’t see in the rankings is the whole notion of a country’s business culture.”
Colombia, for example, won’t be topping the growth charts this year, but it gets high marks for the ease of doing business. ECLAC estimates the Colombian economy will grow 2.5 percent this year after suffering through a tough 2016 when it was battered by El Niño and falling crude prices.
But there are still a few clouds on the horizon. Despite recovering oil prices, oil output and reserves continue to slump in Colombia, which hasn’t made any major oil finds since the 1990s.
Ongoing corruption scandals, including the tentacles from the still-unfolding corruption investigation of Brazilian construction giant Odebrecht, may hamper infrastructure investing, said Camila Pérez, director of macro-economic analysis at Fedesarrollo, a Bogotá-based economic think-tank. Odebrecht not only worked in Colombia but throughout Latin America and the world.
But the rest of the story, Haar said, is that “Colombians are incredibly entrepreneurial; they show up for appointments, they have excellent business schools, and they are welcoming.”
In November, the government and the country’s oldest and largest guerrilla group signed a peace pact putting an end to a tumultuous era that stretched over a half-century and claimed more than 22,000 lives. But even before the peace pact was approved, Colombia enjoyed a reputation as a good place to do business. The World Bank ranked the country second in the Americas for ease of doing business.
“It’s a very attractive market for us,” said Cheng about Colombia. “It’s not as regulated as other countries, and the government is trying to be accommodating.”
While Colombia’s peace deal has made the country more amenable to investors, it may not be the economic rocket fuel that some are hoping for, and with presidential elections looming in 2018, many investors may be waiting to see how the peace deal fares under a new administration.
Most of the security gains that come with peace are in rural zones that used to be the stomping grounds of the Revolutionary Armed Forces of Colombia, or FARC. “Those areas don’t contribute very much to the GDP,” Pérez said. “So we’re not going to see growth double or anything like that. ... The impact will be very moderate.”
Medellín was once one of the most dangerous cities in Colombia, but Real Hotels & Resorts will open a 165-room Marriott there soon. The company, based in El Salvador, operates 22 hotels in nine Central and South American countries as well as the InterContinental Hotel at Doral in South Florida.
When Real went into the Colombian market about a decade ago, the Bogotá market was vastly underserved. “Bogotá is a city of [eight] million people, but 10 years ago, there were no large branded five-star hotels,” Poma said. “It has changed radically over the last 10 or 12 years.”
Real now has two hotel properties in the capital — the JW Marriott Bogotá and the Marriott Bogotá — and also runs a Marriott in Cali.
There are still a few negatives in Colombia, Poma said. Among them: high taxes and currency devaluations, which have taken the exchange rate from 1,800 pesos to $1 four years ago to almost 3,000 pesos to $1 now.
“A company producing in pesos is now earning much less in dollars,” Poma said. “Debt in pesos also is expensive.” But the devaluations cut both ways: “If you’re going to invest and build something new and have dollars, it’s much cheaper.”
Overall, Poma is bullish: “Colombia is a different country now. A lot of safety issues are now under control, and Colombia has a lot of potential for growth.”
Here’s a look at how some of the economies in the Americas are expected to fare in 2017:
Argentina: After a recession last year, Argentina is expected to see 2.4 percent growth in 2017.
Since taking office in December 2015, Macri has unveiled a massive investment program, mainly for Argentina’s transportation and energy sectors. Not only would plans such as doubling the size of the national highway system and upgrading ports and airports perk up the economy, they would also improve Argentina’s competitiveness.
“They’ve bottomed out. People are bullish on Macri,” Haar said.
Argentina also recently approved a new public-private partnership (PPP) law to encourage investment, and both Argentina and Brazil have adopted more outward-looking economic models.
But Argentina has a long way to go. It still ranks low in the World Bank’s 2017 “Doing Business” report. It’s in 20th place, below Ecuador, among the nations of the Americas and ranks 116th in the world for ease of doing business.
“This is the legacy of the Kirchners,” Haar said. The late Néstor Kirchner and his wife, Cristina Fernández de Kirchner, both held the Argentine presidency. Fernández is currently facing charges of fraudulently administering state funds and also is being investigated on other corruption charges.
While Standard and Poor’s said in a recent report that business-friendly initiatives undertaken by the Macri administration are encouraging, it also said that the new PPP law alone won’t be enough to guarantee the success of the government’s infrastructure program. “This is because we believe that the new law must accumulate a positive track record and reverse the pernicious impact of Argentina’s anti-business policies during the past 15-20 years,” the S&P report said.
“Argentina is starting to have access again to capital markets,” Segal said. “The more liquidity, the more interest private equity has.”
Brazil: In 2015 and 2016, Brazil endured its deepest recession on record. Things are still messy, but Brazil is digging its way out and is expected to return to positive growth this year.
Saddled with high public and private debt, a squeeze on credit and high unemployment, Brazil is expected to eke out economic growth of .4 percent this year. Inflation also seems on a downward track from the 6.3 percent at the end of 2016 and could well come in under the government target of 4.5 percent this year.
Brazil is methodically working its way through the Odebrecht corruption scandal, which has reached the highest levels of business and government. During plea bargaining procedures, Odebrecht employees and directors have accused a third of President Michel Temer’s cabinet of receiving kickbacks and bribes and other politicians from members of Congress to mayors also have been named.
The accusations come at a time when the Temer government is trying to push through important reforms from a social security overhaul to labor legislation reform.
“Temer understands the need for a strong private sector, labor reform and micro-reforms to make it easier to do business in Brazil,” Segal said.
Brazil’s middle class suffered significant social losses during the economic crisis, There are still concerns and protests over whether Temer is pursuing the right path. Brazilians also continue to rail against public corruption.
But both consumer and business confidence are starting to show improvement.
“Big companies can’t walk away from a country that has a population of more than 200 million,” Haar said.
But Cheng, the Doral businessman, said TM Cell is still worried about Brazil because of the uncertainty. “It’s a huge market but there are a lot of regulatory hurdles. Every time we think we’ve got it figured out, it changes and we have to start again. It’s very fluid.”
Chile: Chile has been hammered by low prices for its copper and other commodity exports, but growth is expected to accelerate slightly in 2017 to 2.1 percent.
However, the second administration of President Michelle Bachelet has been fraught with problems. “She hasn’t been able to fulfill ambitious promises whether it’s on education or tax and labor reform,” Marczak said. “There’s a real desire for change in Chile.”
Voters will get a chance to decide in elections scheduled for November.
The country on the tip of South America has long been one of the continent’s most prosperous and has “carved out space for itself as a free-trade leader and positioned itself as a gateway to Asia,” Marczak said.
Even though Chile has experienced lackluster growth in recent years, “Chile is coming off a very high base and the expectations are also very different” from other countries in the Americas, Segal said.
Ecuador: The small South American nation is just emerging from a bruising presidential race where ruling-party candidate Lenín Moreno won a thin and contested majority. Even as his rival, former banker Guillermo Lasso, protests the outcome, Moreno will don the presidential sash on May 24.
But by all accounts, Moreno will have his work cut out for him. During his decade in power, President Rafael Correa poured millions into roads, schools and hospitals, which made him one of the region's most popular leaders. But critics say it has left the country deep in debt.
Ecuador ended 2016, with a $6 billion fiscal deficit and, according to ECLAC, an economy that shrank by 2.1 percent. And while Correa boasts about the country’s relatively low public debt, analysts say many of the problems remain hidden.
One example is oil. Starting in 2009, the government began selling its future oil output. According to El Comercio newspaper, the country has pre-sold 1.2 billion barrels of oil through 2024 — depriving the next two administrations of a key resource.
“The growth that we have seen... is built exclusively on a model of debt that’s not sustainable,” said José Hidalgo, the general director of the CORDES economic analysis firm.
While ECLAC and others expect to see Ecuador register modest growth this year, Hidalgo isn’t so sure. His firm believes that an economic surge late last year and early this year was due almost exclusively to government spending to bolster Moreno’s presidential bid. Now that the campaigning is over, the country will have to tighten spending.
That will be tough for Moreno, who has promised to boost welfare payments by 200 percent, build free and subsidized housing, and generate hundreds of thousands of jobs. If he hopes to accomplish that, Ecuador will have to attract foreign investors, who have, so far, been wary of the country’s socialist policies.
“The question remains,” Hidalgo said, “will the next president be able to generate investor confidence?”
Mexico: The rhetoric surrounding the wall and North American Free Trade Agreement “are creating a high amount of uncertainty in the Mexican economy,” Marczak said.
But he said it has also served as a wake-up call that Mexico needs to further diversify its economy and forge stronger commercial relationships with Brazil, Argentina and other Latin American economies.
NAFTA negotiations are expected to begin late this year.
Even though the Mexican presidential elections are 14 months off, how the U.S.-Mexico relationship plays out could have “a tremendous impact on the outcome,” Marczak said. Acrimonious relations, he said, could add fuel to the candidacy of populist Andrés Manuel López Obrador, who heads the Movement of National Regeneration.
The leftist has campaigned on both sides of the border as the only candidate who can stand up to Trump. If López Obrador wins, Marczak said, it “could inject new volatility into the Mexican economy.”
Trump also has talked about imposing a border tax on Mexican exports, but Marczak says he doesn’t think a border adjustment tax would have “resounding support” in Congress.
What’s more, Haar said, a border tax would do little toward creating more jobs in the United States. Components of an item often move back and forth across the border several times in the manufacturing process. For example: “Sixty-seven percent of a Ford Taurus that is booked as a Mexican export has been produced from components made by union laborers in the United States,” he said.
Panama: In recent years, Panama has been one of Latin America’s most dependable economic performers. That looks like it’ll be true for 2017 as well. ECLAC estimates the economy will grow by 5.3 percent, the best in Latin America.
The Panama Canal expansion opened for business on June 26, 2016, and by May, it had welcomed its 1,000th Neopanamax ship. Such vessels are too big to fit through the lanes of the original Panama Canal. The expansion also has been averaging more than five transits per week of liquified natural gas (LNG) vessels — a new market segment for the canal.
“As the new lane continues to reshape global maritime trade and its true impact becomes more and more apparent, we will continue to offer new growth opportunities to our customers and cargo destinations around the world,” Panama Canal Administrator Jorge L. Quijano said.
Many of Panama’s Central America neighbors have been hurt by lower prices for agricultural and metals exports, but Panama is a growing logistics center, a financial center and a haven for retirees.
However, for a hotel company like Real, Panama is currently a bit challenging. “A lot of hotels have gone into the market in the last five years. Now the market is slowly absorbing all that overcapacity,” Poma said.
Peru: Coming on the heels of 3.8 percent growth in 2016, ECLAC expects the Peruvian economy will continue to expand and finish the year with 4.1 percent economic growth.
[Peru] is becoming in many ways a model economically,” Marczak said. “It has stability, relatively sound fiscal management and a president who understands broader economic engagement.” President Pedro Pablo Kuczynski, who took office last July, is an economist with lengthy government experience who also has held positions with the World Bank and International Monetary Fund.
Like Chile and other Pacific Alliance members, Peru is looking at how it can further expand engagement with China.
Venezuela: Once again in 2017, Venezuela maintains its reputation as the region’s economic basket-case. Bank of America expects the country’s GDP to fall about 3 percent this year, even as others project a sharper decline and annual inflation is estimated at 741 percent.
The crunch comes as draconian price and currency controls have gutted the economy and led to widespread social and political unrest. The cash crunch has forced the socialist administration of President Nicolás Maduro to dramatically reduce the imports of basic goods — including food and medicine — as it continues to make debt payments, including more than $2 billion in payments this month to Petróleos de Venezuela bond holders.
“Imports remain at very depressed levels so far this year, even if they are off October 2016 lows on a seasonally adjusted basis,” Bank of America wrote. “This is a sign the government plans to honor coming debt obligations in our view.”
But the policy is generating chaos. Rolling food shortages have sparked massive lines, a thriving black market and soured the national mood. The administration never held regional elections last year, presumably because the administration knew it would lose. Although Maduro has suggested he will hold presidential elections in late 2018, the conditions are far from certain.
Earlier this month, the comptroller’s office barred Henrique Capriles, the mayor of Miranda state and a two-time presidential candidate, from running for office for 15 years. The decision fanned the flames of opposition protests.
But analysts say a rebound in oil prices — if paired with some market reforms, including dismantling the multi-tiered and corruption-prone exchange rate system — could give the economy, and Maduro, some breathing room.
By Mimi Whitefield and Jim Wyss- www.miamiherald.com - April 23, 2017