2015 Will Be A Difficult Year For Latin America

Economic growth in Latin America will continue to suffer in 2015 as the U.S. Federal Reserve raises interest rates and China continues with its internal adjustments.

The End of the Commodity Super-Cycle

As the U.S. Federal Reserve prepares to start increasing interest rates, presumably by mid-2015, economic variables have already started to adjust to what is going to be a different global economic environment next year. As had happened briefly last year when markets started to speculate that the Fed was going to begin reducing the amount of its monthly purchases of U.S. Treasuries and mortgage-backed securities, commodity prices, as well as Latin American currencies, have acknowledge the change in direction.

For now, the most affected countries in Latin America will be those that are net exporters of petroleum, countries like Ecuador, Colombia, Mexico, and Venezuela. Argentina and Brazil are net importers of petroleum and refined products and they are both trying to attract large amounts of capital to finance conventional and non-conventional petroleum projects Those two countries will also suffer the consequences of the drop in petroleum prices, as capital investment decisions are adjusted downward. However, not all is bad news for these countries’ external sectors and consumers, as many of them are net importers of gasoline and other petroleum products. The drop in the price of petroleum will benefit trade as well as consumer spending. In Mexico, the government will benefit due to its policy of high gasoline prices irrespectively of how high or low the price of oil is, and it imports about 40 percent of the gasoline it consumes.

For Chile, Uruguay, Paraguay, Bolivia and the Central American countries prospects of lower petroleum and gasoline prices are positive, as these countries are net importers of petroleum. However, all of these countries will continue to suffer if the rest of the commodities continue to follow oil lower. For now, the price of other commodities, i.e., soybeans, copper, gold, etc., have come down, but remain relatively high. If these commodities are able to avoid a meltdown à la petroleum, then growth prospects will not deteriorate as much as for those countries that depend mostly on oil.