Courtesy of STRATFOR (subscription required), analysis of the impact of the global economic downturn on Latin America:

In its first regionwide downturn since 2009, Latin America’s economy is projected to contract by 0.3 percent in 2015 according to the International Monetary Fund’s World Economic Outlook. A confluence of factors, including a collapse in commodity prices, a strengthening U.S. dollar relative to national currencies, and weak domestic demand, is responsible for this marked decline. Consequently, many Latin American governments have seen budget revenues drop and social instability rise. While the region is more economically developed and capable of recovering from its commodity-driven decline than at any other time in recent history, the downturn will not be without political consequences.

How countries in the region have coped with this turmoil has varied widely. Factors such as different levels of economic integration with the United States and China as well as flexibility in monetary and fiscal policy have played a major role in this variation. Some countries will continue to suffer more than others in the coming year. This will prove particularly true of large and influential countries such as Venezuela and Brazil. But many more, such as Mexico, Bolivia, Paraguay and the Central American countries, will be better off.

Analysis

The region’s commodity boom, which was largely driven by China through the 2000s, has slowed dramatically since 2013. The global prices of many of the region’s primary commodity exports, including crude oil, coal, copper, nickel and iron ore, have fallen precipitously, bringing economic growth rates down for many countries as compared with the previous decade. Meanwhile, inflation and unemployment have risen on the whole. 

Compared with previous commodity downturns, such as the 1980s debt crisis, Latin American countries are in a much better position to handle the decline. They are simply no longer as vulnerable to the cyclical ups and downs of commodity markets. For example, with certain exceptions like Argentina, most countries in the region have much lower external debt ratios and larger international reserves. This gives them greater flexibility in monetary policy and greater access to private capital markets instead of forcing them to rely on austerity-driven international loans. 

Of course, Latin American states have not experienced the commodity downturn in the same way. A closer examination reveals that projected economic growth for 2015 and 2016 broadly puts states in the region into three groups: negative or negligible growth, moderate growth and high growth. 

Negative or Negligible Growth

Venezuela and Brazil lead Latin America in terms of the worst economic outlook for 2015, and they will also lead the pack in 2016. Venezuela is projected to contract by 10 percent in 2015 and by 6 percent in 2016, while Brazil will contract by 3 percent in 2015 and 1 percent in 2016. In fact, if both countries were excluded, Latin America as a region would see a much more favorable growth rate of 2.6 percent for the year. As major oil producers, both have been hurt significantly by declining crude oil prices, which have lost more than half their value in the past year. Venezuela has been particularly vulnerableto the price swing, since oil revenues make up more than 45 percent of its budget revenues and nearly all of its export earnings. 

Yet it is not simply the fall in oil and other commodity prices that make the economic outlook for both Venezuela and Brazil so bleak. Both countries are highly integrated with China’s economy, which has also slowed in recent years as it makes its own difficult transition from an export-driven economy that fed on commodities like those from Latin America to a more self-sustaining consumption-driven economy. Individually, both Venezuela and Brazil have issues as well. In Venezuela, the government’s extensive populist-driven social spending has not meaningfully decreased relative to the decline in state revenues. Anxious ahead of December legislative elections, the ruling United Socialist Party of Venezuela is willing to risk economic pain down the road by keeping spending up to maintain its popular support and hold on to political power. And in Brazil, the Operation Car Wash scandalsurrounding political corruption connected to state energy firm Petroleo Brasileiro has only deepened this year, exacerbating the country’s economic woes amid uncertainty in the second term of Brazilian President Dilma Rousseff. In the end, whatever each country does, major political instability and weak business and consumer confidence are likely to persist, prolonging economic hardship in Venezuela, Brazil and the wider region.

Two countries facing negligible and potentially negative growth for 2015 and 2016 are Ecuador and Argentina. Like Venezuela, Ecuador is extremely dependent on oil revenues for its economic health. It faces a 0.6 percent decline in 2015 and a marginal 0.1 percent growth in 2016. Argentina, while not a significant oil producer, has been plagued by high debt payments on defaulted bonds and falling trade with Brazil. Its economic growth outlook is similarly negligible, at 0.4 percent growth in 2015 and 0.7 percent contraction in 2016. A presidential election is set for the end of 2015 in Argentina, and though current leader Cristina Fernandez de Kirchner’s successor may take selective measures to liberalize the economy, the country is likely to continue to be constrained by structural issues like a protectionist and uncompetitive economy and debt payments (though the latter could see progress in negotiations with creditors under the new administration). Ecuador, in the meantime, could continue to face social instability and protests over President Rafael Correa’s attempts to change the constitution to extend presidential term limits.

Moderate Growth

Countries with a moderate (2-3 percent) projected growth rate for 2015 and 2016 include Mexico, Chile, Colombia and Peru, all of which belong to the Pacific Alliance grouping. Low commodity prices — for Mexico and Colombia, oil; for Chile and Peru, minerals such as copper, ore and gold — have hurt each of these countries. 

In the case of Mexico, however, the country’s extensive economic integration with the United States, as well as its sizable and thriving manufacturing industry, have enabled Mexico City to persevere through the commodity downturn. Moreover, each of the countries in this category has a comparatively open and business-friendly economy relative to the countries with negative or negligible growth. They also all have been able to apply monetary and fiscal stimulus measures with some success, softening the potential damage of the downturn. 

But while these factors do assuage the economic woes of these countries, they may not necessarily mitigate political unrest in the coming year. Already in 2015, each country has seen its budget revenues fall and its currency weaken substantially relative the dollar. Mexico’s strained public finances have compromised areas such as funding for security programs. Chile’s slowing economic growth hasstalled promised labor reforms this year, while Colombia could see political blowback from planned tax reforms next year. Peru has seen persistent anti-mining protests that could weaken investor confidencein the future, though they have not significantly slowed production at present. These concerns will be more politically manageable for these governments, however, making major instability unlikely for this group over the next year.

High Growth

Finally, several countries in Latin America are actually projected to see high growth rates of more than 3 percent in both 2015 and 2016. The Central American and Caribbean regions are projected to grow 3.9 and 3.8 percent, respectively, in 2015, followed by 4.2 and 3.4 percent in 2016. Whereas the Latin American countries facing negative growth have languished because of low oil prices, these countries — for the most part net energy importers — have benefited from lower import costs. The economies of these countries are largely geared toward raw materials, particularly agricultural commodities such as fruit, coffee and sugar. They are also highly integrated with the U.S. economy, with the exception of Cuba, though the latter is starting to change in this regard.

In South America, Bolivia and Paraguay are projected to grow by 4.1 percent and 3 percent, respectively, in 2015, followed by 3.5 and 3.8 percent in 2016. While both are members of the protectionist Common Market of the South (known by its Spanish acronym, Mercosur), they have been able to avoid the poor economic performance of the bloc’s larger members. In the case of Bolivia, expanding natural gas exports to Brazil and Argentina have spared it from its larger neighbors’ decline in fortunes, while Paraguay’s comparatively business-friendly policies have led to an influx of investment into its low-end manufacturing sector. This includes many Brazilian companies, which are relocating to Paraguay because of lower wages and favorable tax exemptions.

However, even the high growth countries are not immune to political instability. Guatemalan President Otto Perez Molina’s resignation over a corruption scandal earlier in 2015 is a clear example of this. Most of the countries in the high growth category are also relatively small economies that rely on commodities, albeit not oil, and so are more vulnerable to external shocks like commodity price swings or changes in external demand for their products than larger or more developed economies such as Mexico. Still, economic-driven political instability is least likely to occur in this group.