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Our Predictions for Latin America in 2015

Our Predictions for Latin America in 2015

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Now in its third year, our regional experts? candid predictions for the coming year have become something of a tradition. And far be it from us to blow our own trumpet, but 2014 saw us proven right on all seven of last year?s predictions! But don?t ask us for any more thoughts on football ? it?s just all too upsetting?

So with the bar set high and the pressure on to be as prescient as last year, senior consultants from Brazil, Mexico, Argentina, Venezuela, Colombia, Chile and Peru boldly predict the following?


Brazil

The ?Petrol?o? scandal will grow and greatly impact both the government and the country's multi-billion dollar oil industry in 2015

Petrobras is facing a range of problems and potential new accusations that will have significant impacts in 2015 for the company, its market relations and the government.

Dilma will replace the current directors and president with independent and professional ones, appointed by technical rather than political criteria.

The crisis will further affect large contractors and their relations to Petrobras in 2015, minimizing or paralyzing their services to the oil giant.

The ?Petrol?o? scandal will also force a change to Dilma?s ministerial team in early 2015 as a growing number of politicians are revealed to be involved in illicit activities with Petrobras.

Prices and taxes will continue to increase in Brazil, while the economy shrinks further with an expected GDP growth of less than 1%

Right from start, this will be a very complex year for Dilma Rousseff, due not only to the Petrobras corruption scandal, but also weakened political support and the results of excessive public spending seen throughout her first mandate.

Economically, the Brazilian GDP in 2015 will grow less than 1% and the tax burden and prices will increase in order to balance government accounts.

We see Rousseff facing decreasing support and growing dissatisfaction from most politicians, opponents and allies alike ? including those within her party (PT) itself.

In order to mitigate her inabilities with Congress, Lula will step in with more assertion in 2015 as a facilitator of dialogue, and, naturally, to set himself up as a presidential candidate in 2018.


Mexico

Cycle of violence and protests will increase

The recent increase in heinous attacks on civilians, followed by nationwide protests will, unfortunately, continue.

More sensational cases, such as the recent disappearance of 43 students, will take place as the government seeks to exert its authority and the cartels their ability to act with impunity.

Social protests will grow and are likely to reach national proportions before federal elections in June. The government?s ability - or otherwise - to bring order to the country will greatly influence the outcome of elections.

GDP will grow despite violence and protests

While growth will not be as pronounced as in years past, the Mexican GDP will grow more than 3% in 2015, due to the structural reforms taking place.

In particular, reforms to the mineral and mining code and fiscal policies in particular give Mexico the potential to grow double digits in the coming years. The major threat to this growth is the cycle of violence and instability in much of the country which has tempered investors? interest. However, these milestone policy changes are momentous enough to push Mexico into growth in 2015.


Peru

Lame duck Humala will see his popularity decline further in Peru

In a pre-election year and in the face of decelerating growth, President Humala?s already low popularity will decline even further in 2015.

Already seen as governing from the shadows of his highly influential and more popular wife, Nadine Heredia, Humala will struggle to get much done. Humala was already obliged to reshuffle his cabinet in June of 2014, replacing his foreign affairs, interior and transportation ministers in the face of a steep decline in popularity. Last September, the last original member of Humala?s cabinet, the highly respected Economy and Finance Minister, Miguel Castilla, resigned amid criticisms of a slowing economy.

We believe a center-right candidate is now certain to win the presidency in 2016. Although it is still early days, the front runner, Keiko Fujimori, the daughter of highly controversial former president Alberto Fujimori, is looking very strong but 2015 will be a critical time to gather political momentum.

Social unrest will grow in Peru

With declining Chinese (and global) demand for its commodities, Peru?s once rapidly growing economy will continue to cool down in 2015. For a nation that has been accustomed to exceptional growth since 2002, this will be hard to accept?especially for communities in remote areas near mining and energy facilities that have grown ever more vocal over environmental and social issues.

This will be all the more aggravated by climate change caused by the El Ni?o phenomenon. Average temperatures have risen and rainfall is below usual levels, suggesting difficult times ahead for agricultural communities. The blame for droughts in such cases is often shifted onto mining companies (instead of water dependent rice and asparagus farmers).

With over 40 percent of Peru?s surface earmarked for mining, logging, and oil and gas drilling, and 96 percent of that land occupied by indigenous peoples and local communities, we will, without doubt, see increased social unrest in the coming year.


Argentina

Argentina will vote to keep the same ruling party, despite the global backlash against "Kirchnerismo"

We predict that Daniel Scioli, head of the Justicialist Party, will win the October 2015 presidential elections.

Despite a global backlash to the economic policies of the ruling Justicialist Party, Argentina has taken on a siege mentality and will vote in the same party in 2015 on principle and as a signal of solidarity with the government?s position towards the ?debt vultures? that are seen to be the primary cause of Argentina?s financial woes.

The economy will shrink, inflation will skyrocket and currency restrictions will remain in place in Argentina

We predict that the restrictions to currency exchange operations will remain in place and economic activity will continue to decline.

Analysts predict that the economic growth in 2015 will be negative, an average of -0.7% and the average inflation in late 2015 will be close to 35%.

The next government will inherit major problems and will need to adjust macroeconomic policies to restore balance and economic growth.


Chile

Chile's economic growth will slow by more than 50%

The Economic Commission for Latin America and the Caribbean (ECLAC) predicts that Chile will grow only 1.8% in 2014 compared to 4.1% the year before.

Due to the slowing Chinese economy, lackluster domestic demand and output and high inflation levels, 2015 will see less growth still.

A bright light is that production costs will go down if oil prices continue at current levels but this is offset somewhat by the reduction of copper exports, the mainstay of the Chilean economy, to China

Bachelet's reform package for Chile will be lackluster and her popularity will drop

Analysts fear that a package of bills passed by the Bachelet administration this year could dampen growth.

Although officials have insisted that it won?t affect growth, business leaders say the legislation is already hurting investment, which has fallen as a result of a drop in the price of copper, which accounts for more than half of Chilean exports.

The tax increases and disputes over labour and education legislation have pushed the popularity of President Michelle Bachelet to its lowest level since she took office in March. These disputes are most likely to increase in intensity and bitterness from March 2015 on.

The business community is also concerned about proposed changes to labour laws that will strengthen unions in collective negotiation: they warn that the reforms will not help improve the economic situation nor restore growth.


Venezuela

Maduro will stay in power; we will see more of the same in Venezuela

The protests that rocked Venezuela this year and came close to toppling the Maduro government have abated and it?s become clear that, for better or worse, the majority of the population, by a small margin, supports the United Socialist Party and ?chavismo? is alive and well in Venezuela.

Like Argentina, the country has adopted a castle mentality with the country's woes being blamed by the government on ?outside forces?.

2015 will be a repeat of 2014 with sporadic protests, increased instability and inflation, decreased foreign investment and ramped up rhetoric by Maduro. Companies with interests in the country will face new challenges and legislation shifts on a daily basis.

Venezuela will default on its foreign debt

The sharp decline in oil prices observed in recent weeks is putting additional pressure on the country?s battered finances. According to some analysts, the country loses USD 700 million a year for every USD 1 decline in oil prices.

Fitch Ratings cut Venezuela's rating further into junk territory, saying that falling oil prices are pressuring the country's already-troubled finances. Fitch cut Venezuela's foreign and local currency issuer default ratings, as well as its unsecured bonds ratings, from B to triple-C.

This combined with Venezuela's limited access to external financing means a default is imminent and we predict the country will default in 2015.


Colombia

Colombia will achieve lasting peace with FARC

As FARC begins it unilateral ceasefire, the Colombia peace process is, in theory, reaching its end game. Loud protests have been held against the impunity with which some, led by former-President Alvaro Uribe, believe that FARC and other rebel leaders are set to be treated. This issue remains the key factor holding back public enthusiasm. However, with support from the international community, business sector and key parts of civil society, plus the promise of a huge economic dividend, we are optimistic for a peace deal in 2015. We predict a clear ?yes? vote before the end of year as a peace deal is put to referendum, ending five decades of conflict.

Colombia breaks its infrastructure curse

Colombia has perhaps the region?s most challenging terrain for building infrastructure. Three ranges of Andean cordillera and vast expanses of rainforest have never been conducive to roads and rail. Even now, the country ranks near the bottom of the region?s infrastructure league. It is cheaper to transport a container from Barranquilla to China than to take it in land to Bogota.

The country?s huge ?4G? program aims to change this by providing thousands of miles of highways, new ports, navigable waterways and railways. Many projects are already underway but 2015 will show if enough finance can be attracted to finish the job. Again, a peace deal may hold the key. New infrastructure that unites the country and opens up new growth opportunities will be vital to making any deal stick.

We predict that reaching an agreement with FARC, alongside a series of facilitating reforms, will unlock support from the international and global finance communities that will allow the Government to deliver on much of 4G?s lofty ambition.




Our thoughts

One could be forgiven, reading this commentary, for believing that Latin America is beset with problems. One could also have been forgiven five years ago for thinking that Latin America was the new emerging market Holy Grail. Much was exaggerated then, just as now, much seems worse than it might be.

It is undoubtedly too true that Latin America has two of the most exciting global emerging market prospects; that has not changed. As for several other economies in the region, there are many - such as the Eurozone - which would be delighted to have such growth figures.

Speyside works mainly with global multinational businesses invested or investing into the region. We are exponentially busier than we have ever been. Part of this is our own growth and a growing global recognition of Latin America as a major market (we see the opposite situation in our original markets of Central Eastern Europe) and part, the fact that many of these issues keep us and our clients busy in forging a path forward. A big part though is due to the fact that our clients are taking long term views on the importance of Latin American markets. We don?t expect that to change.

One final thought: We didn?t especially highlight oil in the above predictions. We are not soothsayers and oil may go up as well as down; after all who would have predicted such a sudden drop. However, in the unlikely event that it dropped and stayed at 35USD a barrel for any length of time ?.well, then all bets would be off!


Ian Herbison


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