Following years of successful economic performance, Latin
America, like many other emerging markets, is now facing
significant domestic and external pressures that have already
begun to dampen economic growth.
Investment outlook When the dust settles
Country differentiation will prove key for investors navigating Latin America’s darkening economic landscape. By Nouriel Roubini
Economies that had benefited from institutional development
and sound macro policies face the prospect of becoming stuck in
a middle-income trap: having already picked the "low hanging
fruit" of domestic factors including expanding labor forces,
they now risk being unable to achieve high-income status as
external sources of growth dissipate.
Meanwhile, those countries that failed to undertake sound
macro reforms, but which were nevertheless able to sustain
rapid growth on the back of strong external demand and high
commodity prices, must now significantly alter their
Against an increasingly challenging backdrop of weaker
global growth, the diverging paths of the region's economies
will be determined by several factors: the nature of countries'
trade and economic linkages with larger emerging and developed
economies, especially if China's economy slows sharply or if
the commodities super-cycle comes to an end; the macro policy
framework countries choose to adopt, whether state capitalism
or more market-oriented policies; and, political stability,
which will be key for countries looking to attract
international investment as liquidity tighten across global
Latin America's bigger economies can be divided into the
following four groups:
Argentina and Venezuela: After several years of heavy
government intervention and state-oriented policy making,
growth models in both countries are faltering, exposing falling
productivity and rising political turmoil. The tail risks
associated with the possibility of a volatile regime change are
especially large in Venezuela, but the emergence of a
market-friendly government could lead to a significant pick-up
in oil-related investment.
Chile and Peru: These economies are mining-intensive and, as
a result, are highly exposed to China's investment boom. Thanks
to their impressive economic expansion, strong investment flows
and solid institutions, both countries have built up robust
reserve buffers, which could make them less vulnerable to a
scenario of widening current account deficits and reduced
international liquidity, although conditions will be more
challenging than in recent years.
Mexico and Colombia: Both economies are more affected by
fluctuations in the oil market and the US economy than by
China. As a result, they stand to benefit from rising growth in
the US and a shift toward a consumption-led development model
in China, both of which should boost exports from these
countries. Additionally, both countries have embarked on a
series of ambitious reforms.
Brazil: Potential output is falling as its demand-driven
growth model, sustained for several years by an expansion of
the labor market, runs out of steam. A failure to address
supply-side bottlenecks through structural reforms, coupled
with stimulus measures aimed at boosting growth by spurring
demand, has led to above-target inflation and monetary
tightening, further hampering the country's growth prospects.
With the lowest investment-to-GDP ratio in the region and few
pockets of untapped labor, productivity - a very important
component of growth in the first decade of the 2000s -will be
key, but the lack of reforms in recent years has held back
gains in this area.
Some bright spots remain, however. Chief among them is
Mexico, whose ambitious reform agenda has the potential to
significantly improve the country's appeal to international
investment. Meanwhile, political change in Venezuela could spur
investment in projects to explore the country's massive heavy
oil reserves (estimated to be the world's largest but in need
of foreign expertise). And Brazil's 2014 presidential elections
could usher in a new economic approach that prioritizes
structural reforms that boost, rather than sap, investor
All told, however, the bad currently outweighs the good for
Latin America. Over the next five years, the region is likely
to face slower growth than pre-crisis levels. While some of the
better prepared economies, including Chile, will have to cope
with the challenges of weaker external demand, positive
developments in Mexico and Colombia are counterbalanced by a
high degree of uncertainty over the future of policymaking in
Brazil, Venezuela and Argentina.
Even if some of the factors limiting the region's growth are
cyclical, there are important structural forces also at play.
For investors, country differentiation will be key.
Nouriel Roubini is co-founder and chairman of Roubini
Global Economics and professor of economics at New York
University's Stern School of Business.