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Sunday 14 April 2019

Are the economies of Latin America at an inflection point?

For all the talk of globalisation, we’re looking less over the horizon. Our attention is consumed by what’s happening at home, whether it is Trump in the US, Xi in China or Brexit in the UK. At a ThinkIn with our partner Santander, we set out to consider whether we are missing a moment in Latin America: the major economies have sputtered along these last few years, held back by lower commodity prices, Brazil’s underperformance and the upward creep of US interest rates. But with new political leaders with activist agendas in Brazil and Mexico, are things poised to take a turn for the better?

The long-term drivers of growth are on Latin America’s side. Its demographics promise a marketplace bigger than Europe. The world’s two superpowers – the US and China – are invested in the success of Brazil and Mexico, as energy providers, trading partners and agricultural producers. For the first time in a long time, the dominant story isn’t macro-economics; it’s not out-of-control inflation or a currency crisis.

Instead, the political leaders and their reform agendas are raising expectations: four months after he took office, approval ratings for AMLO – Mexican President Andrés Manuel López Obrador – are still running at nearly 80 per cent.

Jair Bolsonaro, Brazil’s new president, has had a bumpier ride in the opinion polls: he started the year, when he was sworn in, at nearly 70 per cent, but came down to well below 50 per cent this month.

For both, the GDP numbers look harder to move.

In Mexico, there’s a long way to go to reach AMLO’s target of 4 per cent growth. The IMF has just cut its growth forecast to 2.1 per cent for 2019 and 2.2 per cent for 2020. Anecdotally, there are signs that political enthusiasm is boosting consumer confidence: middle-class mortgage applications are on the rise. But the chief executives of Mexico’s biggest businesses remain wary of AMLO, a socialist former Mayor of Mexico City, and are holding back on new investments. There’s volatility in the bond market and, potentially, more to come. And there’s scepticism over whether Mexico’s president has the appetite – or the people – to push through the much-needed modernisation of Pemex, the Mexican energy giant.

Brazil holds out the promise of an economy on the turn. A consumer culture. An agricultural sector that could become China’s bread basket. And a finance minister, Paulo Guedes, who has set out a programme of economic reform, most importantly the overhaul of Brazil’s pension system. But, similarly, it has a long way to go to deliver on investor enthusiasm for the new team in Brasilia: the IMF’s forecast for Brazil’s growth is 2.1 per cent in 2019 and 2.5 per cent in 2020.

The volatility in currencies, on show in neighbouring Argentina, still make international investors cautious. The reliance on the charisma and dynamism of individual political leaders gives others pause for concern. And as global growth loses a little of its momentum, it becomes harder for Latin America to move up a gear.

But political risk is no longer just a feature of emerging markets. Far from it. In fact, the politics – and the pragmatism of populists and socialists alike – is not holding the economy back. This year it should boost the prospects for growth in Latin America, and that, in itself, is an inflection point.

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