It's happening to emerging markets everywhere. Slower growth seems to have taken hold of the world's ascendant economies. The reasons for decline are manifold: sluggish developed-world growth; internal policy woes; structural constraints; geopolitical developments; weak commodity prices; and the list goes on. Heralded not so long ago as economic engines through the crisis years, emerging markets' neo-slowing has been a big disappointment. Latin America is no exception; a trip there two weeks ago confirmed that sentiment has soured. What's up?
A region-wide barometer of conditions tells the tale. The Economic Climate Index provided by the Vargas Foundation has sunk to a multi-year low of 85, where 100 is the "neutral" point. Scan broad data, and they generally agree. Year-to-year GDP growth for the seven largest Latin American economies has fallen steadily in the past four quarters from over three per cent in the spring of 2013 to just above zero in the second quarter of this year. By all measures, that's a precipitous decline, and it has led pundits to downgrade forecasts for most countries. Of all the possible issues, what is reining in Latin American growth?
The answer isn't easy; it varies economy by economy. Actually, the geographic zone has its hot spots, its not spots, and economies in the middle with specific stories of their own. Let's start with the more challenging stories. Venezuela's woes are well-known. The collision of oil-funded subsidies, sliding oil production and price-weakening are wreaking havoc with the economy. Argentina remains a nation of great but unrealized potential, as it struggles under a debilitating policy legacy and recent moves that suggest no material change in policy direction in the short term. But these cases were well known.
Regional growth has been strongly influenced by the deteriorating performance of its behemoth, Brazil. In the wake of event-led construction and past infrastructure projects, Brazil's growth has slowed alarmingly. Policy uncertainty has muddied the waters for investors at a time when they are badly needed. The Global Competitiveness Index currently ranks Brazil 120th of 144 countries for the quality of its infrastructure, and the ranking is falling. Roads, ports and air score particularly badly, harming Brazil's reputation as a place to do international business.
Even so, there are good-news stories. Mexico has succeeded in attracting large inflows of foreign investment despite global weakness, and the breadth and surprising success of its reform agenda is likely to stoke those flows further. Moreover, higher US growth certainly hasn't hurt, paving a path for a steady acceleration in activity. Colombia is also benefiting from greater openness and extensive infrastructure spending. In fact, it is more concerned about managing growth in a sustainable way.
Then there are the economies in the middle. Weaker commodity prices have caused investors to shy away from resource projects in Chile, Peru and other countries across the region, raising concern about near-term growth and longer-term projections. Resource projects are likely following a well-scripted strategy: when prices fall, it is best to pull the plug on projects in hopes that all parties to the deal will come back to the table and offer easier terms that make the project more viable. In the mean time, countries face more moderate growth, the uncertainty around the timing of medium-term activity, balance of payments and currency implications, and the impact on public finance.
This scene generally puts the region's countries into two camps. First, there are those that are structurally prepared or preparing to accommodate higher activity. And second, those that are grappling with significant structural impediments and policy sclerosis. Higher global growth will definitely benefit the former. The latter are more likely to get left behind.
The bottom line? Latin American economies looking for more growth are not likely to find it within the region; there are simply too many significant structural impediments. Those closer to and better prepared for current global growth engines are already doing better. More peripheral economies will catch on. And those with critical roadblocks will take time to harness their share of activity in the nascent growth cycle.