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Latin America after the commodity boom



Throughout history Latin America’s fortunes have been tightly linked with commodity prices cycles (figure 1). The region has thereby failed to achieve convergence in prosperity towards levels seen in industrialised countries (figure 2). It seems we are currently at the end of yet another commodity price cycle. Furthermore, loose monetary conditions in the west, which have also boosted growth in the region, are about to be unwounded gradually. Where does Latin America stand now? Has this cycle been different? In our Latin America study we take stock of economic, political and institutional developments now that the commodity tailwinds have faded.

Figure 1: Economic growth in Latin America moves (seemingly increasingly) in tandem with commodity prices
Figure 1: Economic growth in Latin America moves (seemingly increasingly) in tandem with commodity pricesSource: US BLS, World Bank
Figure 2: No income convergence to the industrialized world
Figure 2: No income convergence to the industrialized worldSource: Maddison Historical Data, IMF

The decline of commodity prices has taken its toll on economic growth in Latin America, but resilience varies between countries. The economic slowdown of recent years is expected to continue in 2015, as lower commodity prices are dampening external demand and investment. Most Latin American countries are small, open economies and therefore vulnerable to developments in the external environment. However, strong FDI inflows and comfortable FX reserves generally speaking render the region fairly resilient to external shocks. Unfortunately, most countries have limited fiscal and monetary firepower to respond to the weakening external environment or large external shocks and support growth. A mild recovery is expected in 2016, but the region will in the near term not return to the economic growth rates seen during the commodity boom. 
Read Chapter 1 
Latin America: the tide has turned

The region’s long term outlook depends on the extent to which it can realise a structural transformation of the economy. Unfortunately, Latin American countries do not appear to be breaking out of the middle-income trap. Productivity growth has been disappointingly low. While the business environment seems to have improved somewhat in the past decade, progress has been less rapid than elsewhere. There are several big structural issues: i) insufficiently developed human capital and technology, ii) poor infrastructure and iii), in many countries, institutional weaknesses.
Read Chapter 2 Latin America: locked up in the middle-income trap?

On the political front, the commodity boom seems to have contributed to higher political stability. The strong fall of commodity prices therefore could also increase political risk. Latin American countries have managed to reduce poverty and income inequality over the past fifteen years, which is likely to have contributed to political stability. However, a number of countries have pursued populist policies in the form of unsustainable macroeconomic and aggressive non-market policies when the commodity boom provided a tailwind. During this period, presidents’ popularity ratings increased, but average ratings have been falling since 2009. Without commodity prices propping up political stability, political risk is set to rise.
Read Chapter 3 Latin America: progress through populist policies? A mixed picture.

Currency vulnerability has become an issue in the region. Latin American currencies have weakened substantially against the US dollar during 2015. While for some countries domestic (political and economic) factors have played their part, it has largely been external forces driving the selling. The prospect of a Fed hike, fallen commodity prices and weaker global demand in general weigh on Latin American currency valuations. Latin American currencies are most vulnerable to external forces from an interregional comparison, with the Brazilian real standing out.
Read Chapter 4 Latin America: external vulnerabilities and FX pressure valves

On the bright side, Latin America is an agricultural power house and its importance in this regard is only poised to increase. The region is one of the few parts of the world with significant resources of unexploited agricultural land. But challenges remain. Many of the region´s countries have achieved respectable rates of agricultural productivity growth in the recent past. Nevertheless, raising productivity will be essential to meet domestic food needs or to maintain or enhance export competitiveness. It will be as important to the region to sustainably raise agricultural productivity and output of smallholdings as it will be to boost the output of export powerhouses such as Brazil and Argentina.
Read Chapter 5 Latin America: agricultural perspectives


Annex 1: Latin America data tables (PDF)

Alexandra Dumitru
RaboResearch Netherlands, Economics and Sustainability Rabobank KEO
Jurriaan Kalf
RaboResearch Netherlands, Economics and Sustainability Rabobank KEO
Herwin Loman
Rabobank KEO
+31 30 21 62666
Other authors
Rabobank KEO

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