Publications /
Opinion

Back
Latin American economies face political crossroads in 2018
Authors
January 10, 2018

The cruise speed with which Latin American economies are starting 2018 will be constrained by low investments and weak productivity growth in the recent past. Positive global economic prospects, the regional cyclical recovery, and policy initiatives to lift productivity are presenting Latin America’s leaders the opportunity to improve that trajectory. Nevertheless, political risks loom ahead.

Latin America at a cruise speed…

Most Latin American economies enter 2018 at a cruise speed. Last year the region featured the first positive GDP growth rate since 2014, mainly reflecting recoveries from recessions in Brazil and Argentina. With exceptions - like Venezuela, a case apart of a meltdown - growth is expected to not only continue slightly accelerating, but become more diffused. Both the World Bank and the International Monetary Fund (IMF) forecast a regional GDP growth close to 2% for this year.

The global scenario for 2018 looks supportive to the region, with a synchronized economic recovery in the U.S., Europe and Japan, along which the output gap will turn positive in advanced economies (Chart 1). Commodity prices are expected to be slightly rising, which tends to help commodity exporters in the region.

PCNS

There are two main downside risks stemming from the global scenario. First, there is the possibility of a disorderly financial adjustment following the normalization of U.S. monetary policy, which would affect negatively local financial conditions and foreign capital flows (Chart 2).

PCNS

The second major risk would be an abrupt financial deleveraging in China, with spillovers on the region. The likelihood of such an event seems to have abated as declines since 2016 in the levels of credit-to-GDP gaps estimated by the Bank for International Settlements (BIS) for the country suggest that tighter regulations and investment rebalancing have succeeded in reversing the previous trajectory (Chart 3, left side), as one can notice in shrinking employment levels in overcapacity sectors (Chart 3, right side).

PCNS

Notwithstanding those external risks, the baseline scenario for the region is one of a strengthening and domestically-led economic recovery. With the help of floating exchange rates in most cases, current-account deficits have declined since their peak in 2015. Commodity exporters have gone through policy adjustments to the end of the super-cycle. Except in Mexico and Argentina, disinflationary trends are giving scope for the softening of monetary policy. Fiscal policy remains a challenge for most countries going forward but at least it is not expected to be a source of negative impulses to aggregate demand this year. Falling household and corporate indebtedness in the last few years and stable financial systems in most countries are unlikely to become stumbling blocks to recovery.

… but a cruise at a low gear

However, the cruise speed will remain constrained by low investments and weak productivity growth in the recent past. The prolonged investment downfall in the region, although currently at a slower pace, together with demographic changes and weak productivity growth have marked down potential growth in most countries (Chart 4).

PCNS

An agenda to lift investments and productivity can be pointed out as common to the region. Closing infrastructure gaps with investments would not only raise the pace of physical capital accumulation but also eliminate widespread bottlenecks that currently bind productivity increases. Structural reforms aiming at reducing labor market informality and enhancing the formation of human capital should contribute to increases in efficiency and productivity. Improving governance and curbing corruption also constitute ways throughout the region to obtain higher efficiency and returns from investment. Accruing benefits from heretofore unexplored opportunities to further regional trade and financial integration can also be added to the list.

Such an agenda will require perseverance in fiscal adjustment and adoption of investment-friendly policies. The balance in terms of policy orientation in the region has tilted in that direction, particularly with recent evolutions of policy making in Argentina and Brazil. Nevertheless, that is exactly the realm where domestic political downside risks may loom over the resurrection of investments.

It’s the politics, stupid!

The current cycle of political elections in the region is taking place under peculiar conditions, in the sense that they may entail difficulties to advance - or a risk of reversal of - ongoing reform and adjustment efforts in some key countries. That tends to reinforce wait-and-see attitudes by private investors right at a moment in which the gear of investments is to define how fast and furious the current consumption-led recovery is to go.

Brazil and Mexico constitute glaring examples of political risks coming to the forefront. In Brazil, the constitutionally mandated public spending cap approved by Congress in 2016 needs to be backed by a pension reform at a moment in which, as a side effect of ongoing corruption-related investigations, most politicians are facing popular backlash and overall election prospects are currently pointing to a political polarization between far-right and left wings, at least until some political convergence towards the center does not take shape. In Mexico, in turn, partially because of the U.S. President Trump rhetoric, prospects for an anti-establishment electoral victory have been raised. In both cases, private investments are likely to remain subdued until political waves stabilize.

Latin America needs to keep and accelerate its current navigation course

The slowdown in the Latin America economy since 2012 has been accompanied by weak and slightly decelerating potential growth, reflecting sluggish productivity, paucity of fixed investments and demographic dynamics. Conversely, the global economy prospects for the near future, the ongoing regional cyclical recovery and recent domestic policy reorientations in favor of lifting productivity and physical and human capital accumulation in key countries have opened a window of opportunity to alter that trajectory. May the exercise of democracy reinforce the crossing of such a window.

RELATED CONTENT

  • April 24, 2025
    This Policy Brief explores the evolving role of the International Criminal Court (ICC) in preventing crimes against humanity and in contributing to post-conflict reconstruction. Established to deter atrocities and ensure accountability for the gravest offences, the ICC is a testament to the international community’s aspiration for a rules-based order. Despite structural limitations — from its dependence on state cooperation to jurisdictional constraints and political backlashes — th ...
  • Authors
    Policy Center for the New South
    April 24, 2025
    The countries of the Atlantic region continue to navigate a complex series of challenges that demand urgent and innovative responses. Economic and financial instability, social unrest, and shifting political landscapes are reshaping the region’s geopolitical dynamics. Pressing issues including unemployment, poverty, violence, extremism, climate change, and migration are intensifying, underscoring the need for sustainable and inclusive solutions. Addressing these multifaceted challen ...
  • April 23, 2025
    La proposition d’autonomie, avancée par le Maroc en avril 2007 comme base de règlement du différend autour du Sahara marocain, s’impose progressivement sur la scène internationale. Bien qu’elle soit rejetée par l’Algérie et le polisario, cette Initiative a bénéficié, depuis son lancement, d’un large soutien international, en particulier de la part des États-Unis et de la France, qui ont réaffirmé leur appui à la souveraineté marocaine sur cette région. Le 8 avril 2025 ...
  • April 23, 2025
    The United States is at a critical juncture, facing a pivotal dilemma: preserving global leadership in a world it no longer fully controls. While it proclaims its primacy in the liberal international order, its actions tell a different story—one marked by tariffs, reshoring policies, and an open attempt to contain China’s rise. This strategy is driven less by long-term vision than domestic political calculus, underscoring the urgent need for strategic recalibration. ...
  • Authors
    Policy Center for the New South
    April 23, 2025
    The 11th edition of the Atlantic Dialogues Emerging Leaders (ADEL) program took place from December 8-12, 2024, in Rabat, Morocco. This year, 41 exceptional young professionals, aged 25 to 35, were selected from a highly competitive pool of over 1,300 applicants representing 134 countries. The cohort included participants from 23 nations across the Atlantic region, spanning Africa, Latin America, Europe, North America, and Asia. They brought expertise from a wide range of sectors, ...
  • Authors
    Michael Terungwa David
    April 22, 2025
    As the world commemorates Earth Day 2025 under the theme "Planet vs. Plastics," it is a timely moment to turn our attention to one of the planet’s most overlooked heroes: the soil. Often hidden beneath our feet and largely absent from climate conversations, soil plays a vital role in sustaining life, supporting biodiversity, and buffering the impacts of climate change. Honouring the soil as Earth’s silent lifeline is not just a tribute—it is a call to action. ...
  • April 22, 2025
    The African Union’s Department of Political Affairs, Peace and Security (AU PAPS) and the Policy Center for the New South (PCNS) are jointly organizing the 2nd Dialogue-Seminar on Elections and Democracy in Africa. Titled “Inclusive Governance: Amplifying Women’s Leadership in African ...
  • Authors
    Policy Center for the New South
    April 22, 2025
    The Atlantic Dialogues conference continues to serve as a premier platform for dialogue, cooperation, and bridge- building, fostering meaningful exchanges that transcend geographical and ideological divides. Since its inception in 2012, it has evolved into a dynamic space where ideas converge, diverse perspectives are shared, and innovative strategies are developed to navigate the complexities of an ever-changing world. Anchored in the foundational values of openness, inclusivity, ...
  • April 22, 2025
    في ظل التحديات المناخية المتزايدة، تبرز مقاربة "نكسوس" التي تربط بين الماء والطاقة والغذاء كخيار استراتيجي لا مفر منه. ورغم أهميتها، ما تزال مقيدَة في المغرب بعوائق بنيوية ومؤسساتية تحول دون تفعيلها الفعلي. كيف يمكن تجاوز هذه الإشكاليات؟ وما هي سبل إشراك القطاع الخاص لبناء شراكات تدعم ا...
  • Authors
    Boglarka Bozsogi
    April 21, 2025
    Fluctuating precipitation and extreme weather are long-standing features of life in West Africa, the Sahel, and the Lake Chad Basin. Communities across the region have historically adapted to these unique climatic conditions in diverse ways. However, the growing impact of climate change, coupled with challenges to food security and ecological resilience, has elevated these issues on the agendas of  regional and international policy platforms. Despite this recognition, the region fac ...