APLA ’15: LatAm’s largest economies diverge

CANCUN, Mexico (ICIS)–The outlooks of Latin America’s largest economies are diverging as the annual meeting of the Latin American Petrochemical Conference (APLA) begins on Sunday.

Among the three largest, Mexico will be the only one that will grow next year. Economists there expect the country will grow by 2.29% this year and 2.79% in 2016.

Economists in Brazil, the region’s largest economy, expect the nation’s GDP to contract by 3.05% this year and by 1.51% in 2016.

Argentina, the third largest, will grow by 0.4% this year but shrink by 0.7% in 2016, according to the International Monetary Fund (IMF).

“Mexico is doing the best out of a bad lot,” said Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics.

The country does have its challenges, however. Labour regulations are discouraging Mexico’s large number of small and medium companies from expanding, he said.

Plus, criminal cartels continue to extract protection money from smaller companies, he said. While Mexico has become safer, violence is still high. Hufbauer estimates that that shaves a percentage point off of the country’s GDP growth rate.

Meanwhile, Mexico’s infrastructure and educational system are still inadequate for the country’s needs, he said.

Nonetheless, Mexico’s GDP is still growing at a time when other emerging economies are struggling with low commodity prices and depreciating currencies.

The Mexican currency has weakened sharply this year, but paradoxically, inflation is at 40-year lows. In fact, inflation this year will fall below the central bank’s target of 3%.

“They used to have institutional inflation of 8% or higher,” Hufbauer said. “That has been run out of the system.”

Hufbauer attributed this to Mexico’s disciplined central bank and its governor, Agustin Carstens. “It’s widely understood that Carstens will not allow inflation to proceed,” Hufbauer said. 

The governor himself noted that the bank’s autonomy – obtained in 1994 – has allowed it to successfully fight inflation.

In addition, recent reforms in Mexico’s telecommunications sector have caused prices in the sector to drop. Prices for fuel and food have also fallen, taking further pressure off of inflation.

Low inflation has allowed the central bank to maintain interest rates at a low 3.0% for several months. The price stability that comes with low inflation has also benefited the economy.

Mexico has also grown because of its close ties to the US economy, which is also expanding.

But unlike Brazil and Argentina, Mexico has opted for a much more open economy, Hufbauer said. In addition to its membership in the North American Free Trade Agreement (NAFTA), it also belongs to the Pacific Alliance, a trade bloc that includes Colombia, Peru and Chile.

“What that means is that the Mexican economy is very open to competition from the outside,” Hufbauer said. “They get good access to markets elsewhere.”

In the long term, Mexico’s economy should get more of an uplift from its membership in the forthcoming Trans-Pacific Partnership (TPP), a trade bloc that includes the US, Canada, Australia, Japan, Malaysia and Singapore, Hufbauer said.

“Big companies will be thinking of Mexico as a place for manufacturing and production for Asia as well,” he said.

Another future boost could come from the country’s recently adopted energy reforms. These have allowed companies other than state-owned Pemex to develop the country’s oil and natural gas reserves as well as extract natural gas liquids (NGLs).

The addition of private investment could provide Mexico with the money needed to develop these resources and supply chemical companies with the feedstock needed for expansion.

Mexico is among the few countries in the western hemisphere that cracks gas-based ethane instead of oil-based naphtha to produce ethylene. Commodity prices have favoured ethane cracking, giving these producers a cost advantage.

Mexico will ultimately need new petrochemical capacity. The start-up of the Braskem-IDESA Ethylene XXI project should address a part of country’s current deficit of polyethylene (PE). However, since Mexico’s economy should continue expanding, PE demand should also increase, worsening the deficit.

If energy reforms can successfully increase NGL production, then Mexico could have enough feedstock for another integrated PE complex that could meet this additional demand.

The energy reforms are also intended to increase Mexico’s refining capacity. Imports of gasoline meet about half of the country’s demand for the fuel.

The reforms will not only allow companies other than Pemex to invest in its refining sectors, they also gradually remove the government’s role in setting fuel prices.

By removing government pricing, companies could become increasingly confident that investments they make in the country’s refining sector can be recouped through market-based fuel prices.

Mexico is not the only Latin American country to embrace open trade and other economic reforms.

Samuel George, project manager of the Bertelsmann Foundation, wrote a paper in 2014 that groups Mexico with Colombia, Peru and Chile as the “Pacific Pumas”.

He said all four have mature and independent banks and floating exchange rates.

George wrote that the economies of these four countries have grown by an average of 4.69% since 2005.

In 2000-2010, the middle classes in Colombia, Chile and Peru have expanded by more than 10%, George said. For Mexico, some accounts show that more than half of the country has joined the middle class.

George expects this growing middle class will help the four countries expand beyond their typically reliance on commodity exports. As it is, Mexico already ranks among the world’s largest automobile and appliance manufacturers.

The four countries have also tamed inflation and have maintained strong foreign reserves, allowing them to assume countercyclical macroeconomic positions, he said.

George pointed out other similarities. New leaders have accepted existing economic and political structures without swinging to ideological extremes.

When any of the four countries leaned to the left, they avoided statist models made popular by Hugo Chavez, the former president of Venezuela. When they leaned towards the right, they did not abandon social programmes or heavily favour the military.

The four countries have also pursued open trade. Among themselves, they created the Pacific Alliance, which removed duties on 92% of trade amongst themselves. Within 15 years, the figure should rise to 100%.

The countries have also pursued trade pacts with the US and with the EU.

In all, exports rose by an average of 4.66%/year since 2000. They should grow by 6%/year through to 2017.

The slow, difficult adoption of these reforms are paying off now that emerging markets are slowing. George said that the nations’ fiscal and monetary balance should help them withstand the turbulence.

The APLA annual meeting runs through Tuesday.