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What's happening to Latin America?

Posted By:09/04/2015

Has Latin America finally entered the Promisd Land of healthy sustainable growth?

Just a few short years ago it seemed like the countries of Latin America had finally figured out their economies and entered the promised land of healthy sustainable growth, at long last escaping the boom and bust cycles that had characterized these economies for half a century. That now appears to have been an illusion; this time was not different. For the largest and most important economies of Latin America the bust has returned, and prospects for a return to the good times from the early and middle part of the last decade look dim. So what happened? While there is some variation in the economic makeup of the individual countries in the region, one similarity is their reliance on commodities and the destination of those exports. The end of the commodity "super-cycle" has hit a number of these Latin American economies hard and has exposed other weaknesses in their economies that had always existed but were hidden by the previous strong growth. Additionally, most of these commodity dependent economies did not save or invest their windfall during the good years, choosing instead to increase other spending, and now have nothing in store during the downturn.


For Argentina this new reality has been especially painful. Argentina has a long history of economic troubles, experiencing economic crises every decade or so. The last major crisis was in 2001-2002 as a rising dollar, to which the Argentinean peso had been pegged, made Argentina's exports much less competitive and led to a debt crisis that shrank the economy by close to 30%. However, after defaulting on its debt, the economy grew spectacularly with average annual growth reaching almost 9% between 2003 and 2007. The plunge in commodities prices during the global recession took Argentina's economy with it. Commodities rebounded in 2010 and 2011 in large part due to China's stimulus program, which pushed a huge amount of money into the economy and was used for investment as well as purchases of raw goods. But since then prices of commodities have been falling, causing problems for Argentina. Argentina's top three exports are soybean meal, corn and soybean oil, which account for about 25% of total exports. Soybean prices are down more than 35% over the past two years, while corn prices are lower by almost 50%. The destinations of these exports are also problematic for Argentina: Brazil, which is near recession, and a slowing China. Argentina's economy eked out a gain in 2014 of 0.5%, but this was only because imports of goods and services collapsed.


Source: RISI

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