“We expect LatAm growth to turn the corner in 2017; fiscal consolidation is needed across LatAm but is subject to politics,” that’s the view of HSBC’s Latin America Economics Research team as expressed in the bank’s third-quarter Latin American Economics research booklet.
HSBC’s Latin America Economics Research team believes that the continent’s economic growth is set to pick up next year. GDP growth for 2017 is now expected to be 1.7% or 1.9% excluding Argentina and Venezuela. This year the continent’s GDP is projected to contract by 0.9% according to HSBC’s forecasts or -0.3% excluding Argentina and Venezuela.
Inflation for the region as a whole is expected to be 52.2% for full-year 2016 or a more subdued 5.3% for the continent excluding Argentina and Venezuela.
Latin America will return to growth in 2017
Latin America has been adjusting to the negative external shock that came with the end of the commodities supercycle since 2015. The region’s GDP has shrunk for the past few years, but now growth is projected once again as businesses get to grips with the new economic environment. Unfortunately, governments can’t provide the fiscal response needed to oil the recovery. Budgets are under pressure and to counter this, the research team at HSBC note that rather than cutting spending, Latin American governments are thinking fiscal consolidation regarding spending better rather than spending less. There is a lot of room to improve the quality of spending via automation or better use of human capital.
Governments in the region are having to walk a tightrope. Fiscal policies for the past few decades had a pro-cyclical bias that have now resulted in fiscal positions that limit the ability of governments to invest counter-cyclically. Fiscal accounts have had no time to adjust to the changing macro-economic environment. The bursting of the commodity super cycle has left many Latin American countries facing large primary deficits for 2016 and 2017. In some cases, headline deficits will be above 6% of GDP, not leaving much space for counter cyclical fiscal policy. A great example of this, as highlighted in HSBC’s research report, are government announcements of measures to adjust public expenditures that are quickly followed by expansionary decisions:
“Take Brazil, for example. The interim administration passed a constitutional amendment that would limit the growth of expenditures to the rate of inflation, while conceding on several issues that will increase the target deficit. These included granting a grace period for the amortization of states’ debt with the central government, increased social subsidies, and plans to increase government employees pay gradually until 2019.
There is a similar story in Argentina. On the one hand, authorities have reduced subsidies for electricity, gas, transportation, and water, with potentially significant fiscal savings. On the other hand, several fiscal measures more than offset these savings, such as the reduction in the tax on exports, the reduction on the non-taxable minimum for the income tax, the increase in social subsidies, and the increase in pensions.”
Notable exceptions are Mexico and Chile. The Mexican government has set out on a plan to reduce the fiscal deficit by 0.5% of GDP each year, while in Chile the government has laid out a targeted increase in fiscal revenues to be reached before the introduction of state-wide education benefits.
Overall, Latin America is slowly getting to grips with the world after the commodity super cycle. Politicians are making some positive fiscal changes in various countries but it will take time for these changes to work through the system. 2017 will be a key economic year for the continent.