They say Latin American optimism owes more to firm global demand for commodities and exceptionally low interest rates. True, external conditions are benign, but how justified is the fear that Latin America will crash if global conditions sour?
The fear may be overstated. Latin America’s governments have managed this boom differently from the past. Fiscal policy has been restrained and uniform. The real country differences arise in the reform area. The past offers little insight about how this cycle will ultimately unwind.
The most notable feature of this cycle is the absence of fiscal profligacy. Net debt issuance has declined sharply. Yield-starved debt holders recently learned that Venezuela’s massive oil windfall will be used for debt service, replacing planned new issuance. Argentina, another country known for its anti-market rhetoric, will buy back hundreds of millions of dollars of external debt in the coming years under the terms of its restructuring. Colombia has allocated its entire fiscal surplus to buying back external debt. Most governments have outperformed fiscal targets.
Next year’s congested election schedule will test, but not reverse this commitment to fiscal austerity. Brazil, Peru, Mexico and other governments with strong political business cycles in the past have so far resisted conspicuous consumption, despite the temptation of record low interest rates.
The other feature of this cycle is the diversity of reform. For example, countries like Panama have taken advantage of benign global conditions to undertake deep economic reforms at a moderate political cost. Venezuela, a less conventional but no less prolific reformer, has emphasised political reforms to entrench executive power ahead of an eventual decline in oil prices, and been rewarded in the polls. Finally, there is a fringe of countries, which includes Ecuador, whose reform agendas, political as well as economic have become mired in political gridlock.
This diverse experience means that the days when Latin American fortunes rose and fell with external conditions are well behind us. Today’s reformers will win, because reforms have equipped them for tougher times. Panama and Venezuela will fare better than many expect, albeit for very different reasons. The laggards will be found among the countries, whose governments have been too weak to consolidate political power or economic fundamentals. Overall, this story from Latin America is a positive one for locals and external investors alike.
Dr.Jan Dehn, Ashmore Investment Management.
