The widespread and generally accepted claims that Latin America passed the test of the 2008 crisis is being re-evaluated as growth in the region falters. Immediately after the 2008 crisis, Latin America returned to growth and, and as part of the emerging markets story, grew strongly – at least initially. Latin America attracted record levels of inward capital – through international markets, flows into domestic markets and foreign direct investment. However, data from Standard & Poor’s show that while Latin America was quick to return to positive growth following a brief contraction (-3.6% in 2008 and -1.3% in 2009) its strong performance in 2010 (GDP growth of 6%) may have been somewhat misleading in terms of post-crisis trend growth. Subsequent growth has slowed and is noticeably lower than in the pre-crisis years.
“There has been significant slowdown in the region post the crisis,” says Roberto Sifon-Arevalo, managing director of sovereign and international public finance ratings at Standard & Poor’s, who attributes this to three main factors: “First, the impact of the crisis on commodity prices; the lower pace of growth from the region’s two leading economies – Brazil and Mexico; and third, a lot of the momentum pre-crisis had been generated from macro-economic reforms, which gave the economies a short-term boost. From now on, growth will [need to be generated by micro-reforms] and those reforms take a bit longer to pay off.”
Many economists argue that those micro reforms have yet to be initiated in the region’s largest economy, Brazil. The performance of Brazil is central to the region’s prospects and its immediate post-crisis rebound of 7.9% growth in 2010 was a large part of the regional bounce. However, growth remains sluggish, reforms postponed until next year – after elections – at the earliest and the deteriorating fiscal situation is threatening a downgrade.
At the World Economic Forum in Davos, Luciano Coutinho, the president of state development bank BNDES attempted to brush off a downgrade, which would be damaging economically, financially and politically. “I don’t see reasons for Brazil to have a downgrade, there aren’t objective reasons,” he was quoted by Bloomberg as saying. “The government has shown commitment to stability, to maintaining tighter fiscal policy.”
However, Coutinho’s confident assertion is not backed up by the rating agencies. In October 2013 Moody’s lowered its outlook to stable from positive, citing a deteriorating debt profile and evidence of slow growth, while in June last year Standard & Poor’s placed Brazil’s rating on negative outlook. “The Brazilian government is compensating for the lack of growth by using expansionary fiscal policy – through the use of [entities] such as BNDES and others,” says Sifon-Arevalo. “When we placed Brazil on a negative outlook in June we were looking to see a pick-up in economic growth or a change in [fiscal] policies. So far we haven’t seen that materialize; 2013 growth came in below our expectation and 2014 isn’t [looking] great either – our forecast is lower than in 2013. The fiscal side is also tied up with the election. It’s difficult to imagine a change in policy in an election year. So we continue to see no improvement and we will continue to monitor.”
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