After an estimated 3.5% contraction of real gross domestic product in 2016, which followed one of 3.8% in 2015, the economy should return to positive numbers this year. Whatever growth it will be able to eke out, though, will not be much to write home about. There are a number of influences that will constrain the expansion so tightly that Brazil will do well if the real GDP gain comes even close to 1% this year. An important one is a government attempt to narrow with a cap on public spending the yawning fiscal deficit, which together with an exploding national debt has already prompted three leading credit agencies to downgrade Brazil’s rating to junk. This attempt has come in the form of a constitutional amendment limiting the increase in the country’s annual outlays to the preceding year’s inflation rate. The cap applies to spending in the current fiscal year, except for education and health costs, which will become subject to the limits starting in 2018.
Michel Temer, who became President last August after Dilma Rousseff was impeached, brushed aside fierce opposition from politicians, labor unions and Brazilians worried about the already troubled healthcare and education systems to shepherd the amendment through the fractured legislature. Internationally, Brazil will find business conditions a bit better this year than they were last, but China will remain a long way from the breathtaking growth that proved to be such a boon to the Brazilian resource sector before commodity prices, especially those of iron ore, collapsed. A new law giving foreign firms easier access to deep-sea oil fields is not going to be of much help while global petroleum markets anticipate a strong US push for energy self-sufficiency and OPEC is struggling to keep a lid on oil production. Brazil will also have to continue coping with self-inflicted handicaps such as its notoriously labyrinthine labor code, on the books since the 1930s, which has since its inception been a factor scaring off long-term investors worried about its complexity and legal risks.
Above all, President Temer, troubled by dismal popular approval ratings in the low teens, will continue to be plagued by political fallout from the probe into the Petrobras corruption scandal that is popularly known as “Operation Car Wash.” This affair, with the construction firm Odebrecht at its center, is sending out still-widening circles. It has already caused political tremors in, among others, Colombia, Panama, Peru and the Dominican Republic. At home, it will continue to shorten political lives, with charges said to be pending against scores of Congressmen and several Ministers. Battling the scandals, Mr. Temer will perforce give economic policy shorter shrift than he might otherwise. One effort currently underway is a massive privatization drive, involving railways, airports, power plants and highways, which is being undertaken to raise cash for such entitlements as pensions. Many in Brasilia are already fighting it, though, arguing that it is a national “fire sale” in which the public is being stiffed because state properties are selling for pennies on the dollar.
Mexico will almost certainly see its economic growth rate slow markedly this year, but by how much and whether or not the country will wind up in recession is virtually impossible to foretell since it depends critically on how damaging the Trump Administration’s policies will prove to be. Without a doubt, Pres. Trump will forge ahead with the “wall” he has vowed to build and will find a way to be able to claim that Mexico is “paying for it.” Clearly, also, he is determined to bring manufacturing jobs back and lean heavily on companies still contemplating to increase production facilities in Mexico, as well as to renegotiate the NAFTA accords to whittle down a US trade deficit that is in the neighborhood of USD 60 billion a year. But exactly how all this is to be accomplished is far from clear, as are the likely effects on Mexico’s economic well-being.
Mexico is not in a great bargaining position. The country sends about 80% of its exports North of the border and nearly half of these are automobiles. Mexicans living abroad, mostly in the United States, remit a cool USD 25 billion annually to their relatives and loved ones back home. That money is a lifeline for many poor Mexicans, especially when the economy is struggling. Moreover, in many ways oil is still the backbone of the economy, and a lot of it is sold to the US. In the industrial sector the car industry, in particular, has benefitted from the country’s close relationship with the US. Only months ago, investments from Kia, Toyota, BMW and Daimler were expected to push the nation’s manufacturing capacity to 5 million units a year, ten times the 1988 figure (NAFTA dates back to 1994), and the number of assembly plans was seen as rising from 17 to 20 by the end of the decade. Mexico has become the world’s seventh-largest car manufacturer and the fourth-largest exporter. The industry also furnishes some 40% of all the components used in US-assembled cars, including almost all of the seatbelts, seat covers and air bags. Its plants and supply chains support more than 750,000 jobs.
But this is not to say that Mexico is devoid of all leverage in bargaining with the US. Its exports to the US have roughly 40% US content and bilateral trade helps support more than 5 million jobs in the United States. Ripping up NAFTA would rip up established and well –working supply chains with potentially seriously negative consequences for the US. With a population of 128 million, moreover, Mexico is America’s second-largest export market for goods. Farm exports, in particular, are critical, as according to the Agriculture Department in Washington “sales of food and farm products to Mexico totaled a record USD 19.5 billion in fiscal 2014,” when such shipments made up 13% of total US agricultural exports. Last year, US farmers sold USD 2.5 billion-worth of maize to Mexican customers. Besides, aggressive US moves to cut the trade deficit with Mexico and “redefine” the relationship in other ways would do further damage to the peso, which has already lost more than 12% of its dollar value over the past year. A cheaper peso benefits Mexican exporters, as do the over 40 trade agreements Mexico has with partners other than the US. It will hardly help to moderate the US trade deficit. Also:
Not to be underestimated by anyone who believes that the art of the deal is to create win-win propositions: While the US provided USD 139 million to Mexico for security assistance in fiscal 2016 (and as much as USD 2.6 billion between 2008 and 2016), security arrangements helped not only Mexico in its war against crime and the drug trade. Under these arrangements, Mexico’s Federales have been exchanging information with the American Drug Enforcement Administration and the Bureau of Alcohol, Tobacco, Firearms and Explosives. Were the violence and the cartels to become more powerful as a result of a slashing of financial support by Washington, the effects would undoubtedly spill over into the United States. As for NAFTA, it not only cut tariffs but also enshrined legal protections for US firms invested in Mexico, protecting them from abusive Mexican regulation or confiscation.
It is quite obviously in the United States’ interest to have, in Mexico, a neighbor that is economically and politically stable, rather than the country it was before the 1980s reforms, when it was a one-party dictatorship in the grip of hyperinflation and anti-Americanism. As it is, widespread dissatisfaction with the administration of President Enrique Pena Nieto prompted voters to pummel the governing PRI party in gubernatorial elections last Summer. At the time, the big winner was the Center-Right PAN, but an economy pushed into recession by the US just as Mexico is preparing for presidential elections in 2018 could be a boon for the Left-wing populist Andres Manuel Lopez Obrador, who is getting ready for another run. President Pena Nieto’s popular approval rating has already fallen to a dismal 12%, at least in part because many Mexicans fault him for not standing up to Mr. Trump. There is an issue of Mexican pride that Washington negotiators would ignore at the peril of both countries.
So, amid all the talk of punitive tariffs on Mexican imports, a special tax on remittances to pay for the wall, the imposition of a VAT-like system on bilateral trade and changes in the rules-of-origin regulations, I take encouragement from President Trump’s saying that he wants “to emphasize that we will be working in partnership with our friends in Mexico to improve safety and economic opportunity on both sides of the borders.” Mr. Luis Videgaray, a former Finance Minister who has a doctorate in economics from MIT and is in charge of Mexico’s foreign policy, is on good terms with Jared Kushner, Mr. Trump’s son-in-law and Senior Adviser in the President’s innermost White House circle (on trade, among other things). Still, the tensions are having an impact. Foreign direct investment in Mexico, for instance, has virtually dried up since the US elections. This will probably prove temporary, but on present indications Mexico is not likely to register real GDP growth exceeding 1.5% this year, and for the time being even a recession cannot be totally ruled out.
The country remains divided in the wake of the congressional ratification of the revised peace deal that President Juan Manuel Santos signed with the leader of the insurgents known as Revolutionary Armed Forces of Colombia (FARC), Rodrigo (Timochenko) Londono, after an earlier agreement was rejected (on small turnout, by a minute margin) in a referendum. In the new deal, FARC did not have to concede some of the government’s core demands, to wit, stiffer penalties and a ban on political participation for guerrilla leaders responsible for war crimes. This is deeply irksome to those who had viewed the FARC as a beaten group of revolutionaries with which the administration should have negotiated a surrender, not any quid pro quo. Be that as it may, though, rather than seeking to ruin the accord by force the “no” camp, led by former President Alvaro Uribe, will probably make it a key topic in the 2018 presidential elections. It is apt to focus on a candidate promising to roll back as much of it as possible, while the other side may pick Humberto de la Calle, who negotiated the arrangement for the government (neither Santos nor Uribe can run, since both have served two terms).
Meanwhile, the demobilization of the FARC militants is underway, scheduled to be completed by April 30. Congress still needs to pass a number of laws and constitutional amendments to make the whole thing work, but at this point the signs are positive that Colombia, after 52 years of strife, has reached the end of the longest lasting armed conflict in the Americas. This is bound to benefit the economy this year, along with somewhat higher oil prices and stepped-up infrastructure spending. Indications are that real gross domestic product will gain by at least 2.5%. Inflation has been moderating since it hit an all-time peak of 9.0% last July. It was most recently clocked at 5.8% at the close of 2016, but this was still well above the Central Bank’s tolerance range of plus/minus one percentage point around 3.0%. Cautious CB policies should squeeze it further to not much more than 4% in 2017.
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