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The End Of Commodity Driven Economic Growth In Latin America

250px-06.Plaza_de_la_Independencia_de_GranadaEconomic growth and investment in Latin America has been driven for decades by the exploitation and development of natural resources which allowed the region to become a major source for commodities. The general rise in price for trade goods including food stuffs, energy and minerals was caused by the rapid industrialization of China. This development proved to be an enormous catalyst for growth for Latin America. As the Chinese economy slows to a rate of expansion of 7% and maybe even less, the robust demand for commodities around the world, has leveled off and has been declining rapidly since 2014.

Sanhattan, The Financial District In Santiago de Chile.

Sanhattan, The Financial District In Santiago de Chile.

South America became especially dependent on the expansion in commodities. Growth for the continent averaged 4.1% in the decade from 2002 to 2012. The ranks of the middle class swelled and more than 60 million people were raised out of abject poverty. It looked like a number of nations were going to reach the status of being first world in their economic development. The country of Chile alone, had done so earlier. Nations like Argentina, Colombia, Mexico, Panama and Uruguay were making major strides in the evolution towards economic modernity.

The price for commodities had increased in valuation by 300% during the years 2003 to 2011. It led to a boom in exports for the region. This situation has now been reversed. There is now a surge in imports for the region.

The Itaim Bibi Financial District, São Paulo, Brazil

The Itaim Bibi Financial District, São Paulo, Brazil

Brazil the industrial giant of South America with a population of over 200 million was experiencing rapid change, as the prospect of entering developed status as an economic power beckoned. As the second largest economy in the Americas after the United States, it looked like the country would soon dominate South America. Although Brazil remains the seventh largest economy in the world with a nominal GDP (Gross Domestic Product) of $1.9 trillion USD (United States Dollar), growth has stopped as the country tips into recession.

The Brazilian Real has lost 30% of valuation against the American dollar, in that past year alone. The GDP is expected to shrink by 1.2% this year and unemployment is rising rapidly. Charges of corruption against government officials and the scandal at Petrobas, the country’s largest oil company have hampered efforts of economic reform.220px-Latin_America_regions.svg

The economy of Latin America as a whole slowed to just 1.3% last year. In 2015, it is expected that growth will slow further to under 1%. This will mark the fifth year of declining growth. The region is decelerating faster than any other emerging market. In the future, the new average may be as low as 2% no more than 3%. This would significantly reduce the likelihood of a number of nations in the region, joining the status of being economically developed in the short term.

Along with the ongoing slide in the price of commodities, the region has also been witness to a precipitous decline in investment since 2011. This has been reflected in Latin American financial markets. Stock markets throughout the region have leveled off, reflecting the lack of growth in the overall economy. There has been a rapid deprecation of at least 20% on average in relation to USD, with the major currencies in Central and South America since the summer of 2014. It is another result of the new economic realities of the region.

The Federal Reserve Bank Of New York Has Over $1 Trillion In Assets.

The Federal Reserve Bank Of New York Has Over $1 Trillion In Assets.

The Federal Reserve Bank (Fed) the equivalent of a central bank in the United States, has become a major factor in the valuation of Latin American currencies. Increasingly investors in the region are keeping their holdings in dollars. If the Fed goes forward with higher interest rates, it will instigate even further currency deprecation in the region, as well as raising borrowing costs.

In the first quarter of 2015 it is estimated that Latin America as a whole has declined in GDP by 0.05%. This is largely the result of the ongoing fiscal crisis in Argentina, the recession in Brazil and the near collapse of the economy in Venezuela. Analysts have suggested that the economy in that cash strapped nation, contracted by 6.8% in the first quarter. The slowdown in global growth has arrived in Mexico as well, with the economy of that country very much tied to the slowing growth in the United States. The GDP there dipped from 2.7% in the last quarter of 2014 to 2.5% in the first quarter of 2015.

Puerto Madero, Buenos Aires

Puerto Madero, Buenos Aires

Argentina faces a painful time of readjustment. The country has been mismanaged for years by a corrupt and inefficient government. The inflation rate is now surging ahead at a double digit rate, with unemployment becoming an increasing problem. The ongoing dispute with international creditors with Argentine debt, has turned off most outside corporate and individual investment in the country.

Venezuela is facing a dramatic decline of 7% this year in GDP and an inflation rate of 95%. Due to a lack of foreign exchange reserves and economic mismanagement, the country is experiencing massive shortages not only in necessary inputs for manufacturing, but in consumer products as well. The survival of the present socialist government under President Maduro is now in question, in the face of these deteriorating conditions. Although the country has abundant oil reserves, the present low price has hammered the present configuration of the economy.

Latin America

Latin America

The stagnation has not been evenly spread throughout the region. A number of South American nations due to lower public debt, floating exchange rates, and more fiscal prudent policies will manage the transition to lower area growth much better. In addition to Chile, this would include Colombia and Peru. Economic expansion in these countries will continue, but at a slower pace.

The GDP in Chile expanded by 2.41% in the first quarter of 2015. Growth had averaged 5.30% from 1987 to 2015. The most important sector in the economy is services, which explains why the country has been able to maintain growth as a number of neighbors have not. Both domestic demand and exports have expanded in 2015.

The economy of Colombia expanded 2.8% in the first quarter in 2015. Growth has averaged 4.32% in the years 2001 to 2015. The biggest and fastest growing sector of the Colombian economy is services. It accounts for 53% of the GDP in the country. It explains the resiliency of the economy in the face of a regional slowdown.

Peru although still growing, it is doing so at a more moderate pace of 1.7% in the first part of 2015. The GDP expansion has averaged 3.45% from 1980 to 2015. The country retains one the fastest growing economies in the region. The service sector comprises 60% of the GDP of the country. Wholesale and retail trade are the leading parts of this portion of the economy.

Lima, Capital City Of Peru

Lima, Capital City Of Peru

The problem for much of Latin America, is how the wealth generated from commodities was used in the region during the years of plenty. The countries as a whole did not invest as extensively in infrastructure and manufacturing, following more closely the Asian model. The region as a whole, spent enormous sums of money on imports and funding an internal binge with consumer goods. The Latin American model has less future sustainability.

To return to faster growth Latin America must deal with the years of excess and debt. The majority of countries in the region can no longer rely on fiscal stimulus and monetary policy alone, to bring about a return to prosperity. Stronger and better organized banks and better managed national budgets, along with a greater abundance of foreign exchange, helped during the last crisis when it arrived in 2008 and 2009. This time reforms need to focus on increasing diversification of their domestic economies and developing more trade, not only within the region but internationally.

Central Business District Of Rio de Janeiro.

Central Business District Of Rio de Janeiro.

Productivity in existing industries has stagnated for years. Wages cannot rise under these conditions. Nor will there be enough growth to deal with the rising unemployment, especially among the youth. The low savings rate of less than 20% of GDP in Latin America, is another determent to future expansion of the economy. This compares unfavorably to the 30% level in Southeast Asia. It prevents greater investment in business and partly explains the lack of funding for technical improvements in plant and equipment. Investments in infrastructure is just 3% in the region as a whole. This amount is only half what India spends and a mere third what China invests.

It will be difficult for many of the nations involved to initiate the necessary reforms, in the face of the headwinds of a slowing global economy and the economic dislocation created by the collapse in commodity prices. Growing expectations of the rising middle classes and among the poor, will force political changes in a number of countries within Latin America. The present and future governmental leaders of the region will be judged more on results rather than just rhetoric. The choice is ultimately going to be for reform stimulating more growth, or for a continuation of outdated policies which will lead to stagnation and decline.

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