1. NS4540 Winter Term 2016 Latin America: Recovery 2016
Federal Reserve Bank of Chicago, Strong Dollar Weak Dollar

2. Overview
Oxford Analytica, Latin America: Recovery Will Prove Elusive in 2016, December 30, 2015
New report by UN ECLAC shows region’s GDP contracted by 0.4% in 2015
Growth slowed for a fifth consecutive year
Growth anticipated at 0.2% for 2016
Impacts
Brazil’s forecast 2.0% contraction in 2016 partly reflects and will continue to reflect the country’s political crisis.,
0.8% forecast for Argentina depends on the new government’s success in reactivating investment
If private consumption and investment continue to contract, region’s labor markets will weaken again next year.
0.4% contraction reflects a 1.6% contraction in South America, down from growth of 0.6% in 2015 – led by negative growth in Brazil and Venezuela

3. Deteriorating Outlook I
Causes of the deteriorating outlook
Sluggish international growth
Global growth slipped to 2.4% in 2015 down from 2.6% in 2014
While global growth may increase to 2.9% in 2016 – impact on Latin America commodity exporters muted by decrease in China’s growth – 6.4% 2016 down from 6.8% in 2015 and 7.3% in 2014
Commodity prices
After falling sharply in 2015, may stabilize in 2016, but enough to be of much help in stimulating LAC growth

4. Deteriorating Outlook II
Financial Markets
Higher rates of interest in U.S. will increase the financing costs of LAC governments and companies and
Slow the inflow of capital to LAC
Currency Depreciation
Higher U.S. interest rates suggest ongoing depreciation of LAC currencies against the dollar
Despite sluggish growth this may prompt central banks, especially in South America to tighten monetary policy in face of inflationary pressures – already occurred in Chile and Colombia

5. Deteriorating Outlook III

6. External Developments
External Sector Performance
Trade deficit widened to $38 billion up from $4 billion in 2014
Reflects a 14% drop in value of exports
First time since 2001 region has run a deficit on trade in goods for two consecutive years since 2001
$107 billion foreign investment in 2015 represents drop of 22%
Inflow of portfolio capital – bonds and shares dropped 40% to $70 billion

7. Key Domestic Indicators I
No good news here either
Private consumption contracted for first time since the 2009 crisis
0.3% drop overall
1.6% in South America
Public consumption has risen by 0.7%
0.1% in South America
Investment – gross fixed capital formation contracted by 4.2% in 2015
7.2% in South America
Lowers region’s investment down from 21.5% of GDP in 2013 to 20.0%

8. Key Domestic Indicators II
Employment
Urban unemployment rate increased to 6.6% up from 6.0% in 2014
Signs of deterioration in job quality – increase in own-account work
Inflation
Little change except for Venezuela
Currently around 6% for entire region
While inflation dropped in Mexico, Central America and the Caribbean, South America has seen increase to 8.5% from 7.6% in South America

9. Key Domestic Indicators III
Fiscal Accounts
For first time since 2009 all LAC countries running a fiscal deficit
May reach 3.3% of GDP (including debt servicing)
Brazil may reach 8.3%

10. Sub-Regional Differences I
Growth has decelerated in all South American Countries except Argentina, Chile and Peru
Only Brazil and Venezuela have contracted – forecast to do same in 2016
If these two countries are excluded – South America's growth has held steady over the last three years.
Mexico has seen a gradual acceleration from 2.4% in 2014 to 2.5% in 2015 and forecast 2.6% in 2016
at 2.3% inflation is the lowest in 45 years despite currency depreciation
Benefitting from weaker prices for its commodity imports and stronger U.S. demand Central America also seen a sustained increase in growth
may be slightly lower in 2016
Private consumption and investment in contrast to contraction in south America have expanded by 4.6% and 7.0% in 2015

11. Sub-Regional Differences II
Lower commodity prices have also benefitted most Caribbean countries
Despite an acceleration in growth which is expected to last into 2016, region burdened by extremely high debt