The economic climate in Latin America improves but remains unfavorable
The Economic Climate Index (ECI) for Latin America by the Getulio Vargas Foundation (FGV) recorded a slight increase from the third to the fourth quarter of 2020, advancing from -43.2 points to -39.3 points. Despite the 3.9-point improvement, the index remains in the unfavorable zone of the economic cycle.
The ECI is the geometric mean between the Present Situation Index (PSI) and the Expectations Index (EI). The improvement in the ECI was influenced primarily by the advance in the PSI, which rose 4.4 points in Q4 compared to Q3. Despite recovering from -98.0 to -93.6 points, the result remains extremely poor. However, the EI increased from 41.1 points to 42.8 points, a rise of 1.7 points.
The previous survey highlighted that the improvement in the economic climate between the second and third quarter was explained by the reversal in expectations from pessimistic to optimistic, although assessment of the present situation continued to worsen. The crisis would have reached its lowest point with the possibility of the region entering a period of recovery from the third quarter onwards. The fourth quarter survey confirms this scenario, showing advances in both the PSI and the EI. Nevertheless, the increase has been relatively small and the PSI remains in the unfavorable zone of the cycle.
Economic climate: Results by country
In addition to information on the economic climate, the current edition of the Latin American Economic Survey provides the results of specialist GDP projections for each country in 2020 and 2021.
The ECI advanced in all the countries, with the exception of Argentina and Brazil, although the indicators of all the analyzed countries remain at unfavorable levels. In Argentina, the ECI decreased by 13.5 points to -41.0 in the fourth quarter. In Brazil, there was a slight decrease, worsening from -32.0 to -32.8 points between the third and fourth quarters. The country with the best ECI is Paraguay (-14.8 points) followed by Uruguay (-21.4 points) and Colombia (-28.5 points).
Following the tendency observed for the ECI, the PSI has remained at an unfavorable level in all the analyzed countries since the second quarter of 2020. Four countries recorded a rise in the PSI in the fourth quarter (Brazil, Chile, Paraguay and Peru), with the biggest gain coming in Paraguay, where the indicator rised 14.3 points to -85.7 points in the fourth quarter. Ecuador and Mexico had maintained the indicator at the minimum level of -100 points for the previous two quarters. In Argentina, Bolivia, Colombia and Uruguay there was a fall in the PSI. In addition to Paraguay, only Brazil reported a PSI between -80 and -90 points; all the other countries have a PSI between -90 and -100 points. When evaluating the present scenario, the majority of the specialists consider the situation to be extremely unfavorable in all the countries.
The expectations indexes for the region are at a favorable level in all the countries in the fourth quarter of 2020. In the current edition, Bolivia, Ecuador and Mexico stand out for moving from a negative EI in the third quarter to a positive situation in the fourth quarter. In addition to these three countries, all the others recorded an increase in the EI, with the exception of Argentina (fall of 39.4 points); Brazil (fall of 35.7 points); and Chile (fall of 10 points).
In the previous survey, we highlighted that the consulted specialists considered the present situation unfavorable and the expectations favorable for almost all the countries. Furthermore, the difference between the EI and the PSI was over 100 points in all the countries, except Mexico and Bolivia. Now all countries are included and the difference in Brazil, which was 182.4 points, fell to 133.4 points with the drop in the EI, indicating a reduction in optimism in the country.
GDP forecasts for 2020 and 2021
The specialist evaluations are reflected in the projections carried out in relation to the GDP of their respective countries. Table 1 in the Press Release shows the projections in relation to the GDP growth of 2020 and 2021. In all the countries, a fall in Gross Domestic Product is projected for 2020, the largest drop being in Argentina (22%) and the smallest in Paraguay (1.9%). When comparing the 2020 results collected in Q4 with the Latin American Survey Q3 results, all the other countries revised their predictions downward, except Brazil and Chile. In Brazil, the forecast was a decrease of -6.5%, which was revised to -5.5%, and in Chile it was -7.3% and revised to -6.1%. It should be noted that Brazil and Chile are among the countries that also improved their evaluation of the present situation. For 2021, all the countries forecast an increase in GDP, except Ecuador. For Brazil, GDP growth is projected at 3.2%.
In Table 2 in the Press Release, the first question is “Compared to the level observed just before the coronavirus crisis, at the end of 2021 your country's GDP will be: higher; the same or lower.” Excluding Paraguay, in all the countries, percentages above 50% predominate for the “below” option. Therefore, even with GDP growth in 2021, most of the specialists consider that the countries will be poorer in terms of GDP size and that the impact of the crisis will not be totally recovered in 2021.
The second question in Table 2 is “Considering the growth rates, at the end of 2021 your country's GDP will be: accelerating; stabilized; or decelerating.” According to the responses, 53.2% consider that the GDP will be accelerating, 33.8% believe it will be stabilized, and 13% said it would be decelerating. The percentages are above 50% for “accelerating” in Brazil, Chile, Colombia and Paraguay. Brazil stands out with the highest percentage of 69.2%.
There is relative optimism for growth in 2021 associated with favorable expectations in all the countries. However, the effect of the crisis on GDP in each country still will not have been totally mitigated.
Main problems faced by the countries
In the second and fourth quarters, the Latin American Survey researched the main problems each country faces in relation to their respective growth (Table 3 in the Press Release). Percentages above 50% are identified as relevant issues (important). In the fourth quarter, in decreasing order of importance based on the weighted mean of Latin America specialists' answers, the main results are: lack of innovation (90.7); inadequate infrastructure (89,3); corruption (88,3); increase in income inequalities (85,6) and; insufficient demand (80,9). Of the 15 problems cited, 10 are considered relevant.
Some of the cited problems are structural issues and are always present on surveys, such as the presence of an international side, income inequalities and innovation. Other issues depend on the economic cycle (insufficient demand), and on the current government (lack of confidence in economic policy or corruption). With the pandemic, government performance is a crucial reference, and in this case Chile, Colombia, Paraguay and Uruguay present scores below 50 points in terms of “lack of confidence in economic policy”, which means that this is not a relevant problem in the opinion of the specialists consulted in these countries.
The case of Peru stands out with the indicator of 100 for political instability in October, confirming the political turbulence in the country. In Bolivia, the reversal in expectations to a favorable level may indicate a positive bet on the new government. However, Bolivia, Argentina and Ecuador recorded the highest percentages in almost all of the aspects in the table. Legal and administrative barriers to investors, for example, are high in these countries.
In Brazil, only lack of capital; insufficient debt management; and lack of credibility in central bank policy have results below 50 points. All other issues score over 50 points and some have worsened in comparisons between the second and fourth quarters. The largest differences are in corruption (increase of 21.5 points) and lack of innovation (26.6 points). The emergency assistance program helped reduce the scores in increase in income inequalities (-10.5 points) and insufficient demand (-17.2 points). The score for Political instability also retreated from 81 points to 60 points.
Trade war between China and the United States
When consulted on the tendency in positioning of the country’s foreign policy regarding the trade war between the United States and China, the option of neutrality is well defined in Chile, Peru and Uruguay, where at least 70% of the specialists believe that their respective country’s government will follow this guideline. Chile is 100% neutral. In Peru, after neutrality, the most chosen option was a pro-China bias, while in Uruguay it was for the United States.
In the other countries where the percentage of specialists opting for neutrality was greater than or equal to 50%, the options are divided in relation to the second choice. Neutrality was the choice of 53.3% of the specialists in Brazil, while the remaining 46.7% opted for a pro-United States bias. Argentina has a greater preference than Brazil for neutrality (66.7%), but the remainder opt for China. Bolivia is equally divided between neutrality and China.
Over 50% opt for the United States in Colombia, Ecuador, Mexico and Paraguay. No country recorded a proportion of responses above 50% for China.
China is the main destination market for the exports of many of these countries, such as Brazil. However, in the “war”, the characteristics of which go way beyond trade, neutrality does not always appear to be the choice of the governments.