Six Latin American Powerhouses

In 2012, the global business cycle proved challenging for Latin America. Yet despite the economic headwinds, Panama, Peru, Chile and Mexico were surprisingly resilient over the course of the year as domestic demand posted a strong contribution that helped cushion the impact of global economic deceleration.

Although again likely to be nearer the estimated 3%level for 2012 than the 4.2% reached in 2011, the region’s gross domestic product (GDP) growth this year should continue to be supported by robust domestic consumption on the back of wage rises, further credit penetration and low unemployment rates. In addition the maintenance of a loose monetary policy, reduced global headwinds helped by a gradual fading of the biggest short term-risk brought about by the US fiscal cliff and a rebound in local economic growth should all help support Latin America in 2013.


2012 marked the second year of president Dilma Rousseff´s administration and will be remembered for its disappointing GDP growth. During the first half of the year, the economy failed to rebound as strongly as expected by the market, due to a combination of factors which had led it through significant deceleration over the second half of 2011 and which spilled over into 2012.

However, in 2013, investment is expected to resume on the back of lower interest rates and taxes – which were real (BRL) 45 billion in 2012 – and are set to reduce to BRL30bn for 2013; cheaper electricity tariffs; a more stable currency; and an expansion of the government’s agenda to reduce the cost of doing business in Brazil.

In addition, local reforms are likely to be an important theme in 2013. We will continue to see decision-makers focus on tackling infrastructure bottlenecks as well as the country’s multi-layered, burdensome tax system. On the household consumption front, income expansion, net formal job creation, tax breaks and the deleveraging process – where a significant reduction in lending rates and short duration of loans should help, are likely to continue supporting growth over the coming quarters.

As regards Brazil’s agricultural sector, the 2012-13 grain harvest is likely to be the country’s largest ever. The Instituto Brasileiro de Geografia e Estatistica (IBGE) forecasts total output of 171 million tons; a 5% increase from 2011-12.


The most important event of 2012 in Mexico was last November’s presidential election, which brought the Institutional Revolutionary Party (PRI) back to power. The election of Enrique Peña Nieto and the following government transition did not bring the financial instability or adverse impact on the equity market that followed the party’s previous election victories. Instead, the solid macroeconomic framework together with a clear political willingness to push for structural reform led to increasing optimism within local and international market participants.

Recently-approved labour reform has strengthened the economic momentum of the region’s second-largest economy. On the monetary policy side, Banxico was the only central bank in Latin America to keep interest rates on hold through the whole year. In 2013, it is clear that a weaker US economic outlook should pressure Mexico’s external demand, as the US is the main destination for the country’s exports at 75% of volume – a higher percentage than any other Latin American economy.

However, the Mexican economy can still benefit from a continuing market share gain of US imports, a resilient manufacturing cycle, credit expansion and high business and consumer confidence. In addition the political backdrop could also be favourable, as the ‘Pact for Mexico’ signed shortly after the election by the three main political parties showed further signs of more market-friendly economic policies.


The better-than-expected activity data for the majority of sectors in Chile during 2012 can be attributed to the dynamism of those linked to domestic demand, notably construction, trade and services. The latter continued to expand at a faster rate than GDP growth in recent quarters and economists revised the expected 2012 GDP rate, from around 4% in the beginning of the year to over 5% by the fourth quarter. Historically low unemployment rates, declining inflation – at 1.6% the lowest of the LatAm major economies – strong business and consumer confidence, and stable financial conditions have helped Chile’s economy to occupy the sweet spot.

In 2013, GDP is likely to expand by almost 5%. Growth in 2012 came in at 5.5%, according to the Central Bank of Chile’s quarterly report released in December. The Monetary Authority estimates that the economy will grow in a range of 4.25% to 5.25%, above its original forecast last September and supported by a furtther robust year for domestic demand, which is likely to increase 5.7% year-on-year.


Despite uncertainties surrounding its mining projects – which include local protests against developments and environmental damage concerns – Peru’s GDP growth continued to significantly outperform Latin America in 2012 as domestic consumption and investments surprised on the upside. Against this backdrop, Peru’s central bank increased its GDP estimate for the year to 6.0%.

On the political front, president Ollanta Humala faced social unrest on strategic projects, such as local farmers’ fierce opposition to the Conga gold mine project, coupled with a decline in the government’s popularity. In 2013, a benign inflation outlook is expected as the economy is set to continue expanding within a virtuous circle and Peru’s currency, the nuevo sol (PEN), is likely to remain supportive.

Inflationary pressures brought about by supply-side shocks, translating mostly into food inflation continue to dissipate. In November 2012 Peru’s consumer price index (CPI) came in at -0.1% month-on-month (MoM), for a 2.7% year-on-year (YoY) rate against from 3.2% in October; bringing inflation back to the Central Bank’s target range for the first time since June 2011.

On the business activity front despite expectations of mild deceleration – as a strong rally in metal prices is unlikely, investments could again deliver double-digit expansion in 2013 thus leading the contribution of domestic demand to overall GDP growth.

The need for infrastructure investments, as well as the government’s favourable attitude towards addressing various logistic factors, should help spending to remain robust over the coming year but the potential deceleration in mining investments and further social conflicts are still a risk. Household consumption is likely to continue to be a solid source of expansion, supported by social inclusion policies, high consumer confidence and credit availability.


Although the Ministry of Finance (MoF) reduced Colombia’s GDP growth expectation for 2012 to 4.0% from 4.8%, the economy should re-accelerate in 2013. The government’s projection for a rate of 4.8% is supported by investment; especially related to infrastructure and household consumption as increasing credit penetration and consumer confidence, coupled with a declining unemployment rate, are also likely to be supportive.

On the oil side, the regulatory framework has been improved and there has been a significant increase in exploration and production activity. President Juan Manuel Santos expects the energy industry to be one of the five engines of Colombia’s economic growth. On the trade/foreign direct investment (FDI) side, the free trade agreement with the US, which took effect in May 2012, more than five years after it was signed , and with other partners can help to lower costs from imported goods as well as increase the likelihood of the maintenance of robust FDI.


The economy is likely to present stable GDP and inflation numbers this year, in comparison to 2012 when growth fell from 8.9% to around 1.9% – while inflation was officially 10% but independent assessments suggested nearer 20%. The expected improvement is mostly supported by a more favourable external environment, including an acceleration of economic activity in Brazil alongside robust harvest volumes. However, the balance of risk could be still be skewed towards lower growth and continuing rampant inflation.


Related reading