OUTLOOK '18: LatAm recovery strengthens amid busy election year

09 January 2018 15:00 Source:ICIS News

HOUSTON (ICIS)--The largest economies in Latin America will continue recovering from recessions amid a busy election season.

Brazil and Argentina are recovering from recessions. In 2018, Mexico and Brazil will elect new presidents.

Argentina already held mid-term elections in late 2017, in which allies of the business friendly president, Mauricio Macri, won several seats. The victories should increase the likelihood of more laws and regulations that are intended to benefit business.

Brazil, the region's largest economy, will likely close the year at a growth rate of less than 1%, after two back-to-back years in which GDP declined by more than 3% annually.

Growth should increase next year, with Brazilian economists expecting GDP to expand by more than 2.5%. The International Monetary Fund (IMF) was more conservative in an outlook published in October, forecasting growth of just 1.5%.

Regardless of which forecast is correct, predicting what will happen in Brazil's economy is especially difficult because of the upcoming presidential elections.

The slate of candidates is among the widest since the military rule ended in Brazil in the mid-1980s.

With such a large number of candidates, it is unclear who will become president, making companies hesitant to invest in the country.

Although Brazilian economists and the IMF expect the recovery to strengthen in 2018, any growth could be capped by structural problems in the Brazilian economy. The country is infamous for the custo Brasil, the tangle of regulations, labour laws and taxes that make it difficult to do business in the country. Other problems holding back growth are lousy infrastructure and the need for a better trained workforce.

President Michel Temer had attempted to address some of these problems when he successfully pushed through a spending cap early in his term.

The Brazilian Congress was debating pension reform at the end of 2017, although it was unclear if it could happen.

Despite the uncertainty in Brazil's economic outlook, one thing that is clear is that the recession caused demand to fall sharply.

Braskem, the nation's sole polyolefins producer, had increased exports because Brazilian consumption had fallen by such low levels. It could be years before plastics demand returns to pre-recession levels.

Because of the lost ground that Brazil needs to cover, there are no major projects planned in the country.

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Mexico, Latin America's second largest economy, did not suffer from a recession, but, like Brazil, it is facing a contentious presidential election in 2018.

So far, neither of the traditional parties are leading in the polls. That distinction is held by Andres Manual Lopez Obrador, or AMLO, who leads the party, the National Regeneration Movimiento (MORENA). If Lopez Obrador wins, it would mark the first time in the nation's modern era that none of Mexico's traditional parties won the presidential election.

The MORENA party of Lopez Obrador had taken a populist stance, decrying the nation's energy reforms and NAFTA, a free trade agreement between Mexico, Canada and the US. The trade deal is being renegotiated.

The election does not take place until July, and much could change. The Institutional Revolutionary Party (PRI) had only recently indicated which candidate it would likely choose.

The other major party, the National Action Party (PAN), could choose a candidate later in 2017.

Whoever wins the election will unlikely overturn Mexico's recent energy reforms, which opened up the country to outside investment. Before the reforms, only state company Pemex was allowed to produce oil, fuels and natural gas.

Mexico passed the reforms to turn around falling oil production, which provides much of the ethane that its crackers use for feedstock.

Mexico does not have enough ethane to allow all of its crackers to run at full rates. The country expects to build an ethane import terminal to help offset some of the shortfall. The terminal could buy Mexico time until it increases domestic ethane production. Unless Mexico can produce more feedstock, it will be difficult for it to increase petrochemical capacity.

This is why NAFTA is so important to the plastics industries in Mexico and the US.

For Mexico, imports from the US will help meet growing demand as more people move to the city and adopt middle-class buying habits.

For the US, Mexico is a ready market for the new PE plants that are being built on the Gulf Coast.

As it stands, the main plastic trade groups in the US, Mexico and Canada are working together to ensure that the renegotiated NAFTA agreement meets the needs of the industries in all three countries.

NAFTA will likely be renewed, but uncertainty could make companies wary about investing in Mexico and cause volatility in the Mexican peso, Fitch Ratings said.

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Argentina, Latin America's third largest economy, has also emerged from a recession, although its downturn was nowhere near as sharp as Brazil's.

Allies of Argentina's business friendly president performed well during the nation's recent mid-term elections, which should quicken the pace of more economic reforms.

Fitch Ratings upgraded the country's sovereign rating outlook to positive from stable in November because of the improving outlook for policies that could make the economy stronger and more stable.

Argentina has grown in fits and starts during past decade and has failed to post two consecutive years of growth since 2011.

Argentina could break that spell if its economy grows as expected in 2018. The IMF expects GDP to expand by 2.5%, matching its expected performance in 2017.

Fitch Ratings is even more optimistic. It expects Argentina's economy to expand by 2.8% this year and by 3.4% in 2018. It considered the country's mid-term elections as auspicious for the reform agenda of Macri.

This includes providing some relief to Argentina's heavy corporate tax burden, making the labour market more flexible and reducing subsidies, Fitch said.

Among the three largest economies in Latin America, Argentina has both the growth and the feedstock to make it attractive for new petrochemical plants.

Macri's reforms have attracted companies to develop Argentina's Vaca Muerta, home to its vast unconventional shale-gas reserves. Much of these are in the Neuquen province, the country's historical oil hub, so it already has infrastructure in place.

Argentina has gas crackers at its complex in Bahia Blanca, which would allow producers to enjoy similar feedstock advantages as the US.

Argentina is also a member of the Mercosur trading bloc, which would give it preferable access to the much larger Brazilian market as well as a growing domestic one.

The table below from the IMF shows the growth forecasts for Latin America and the Caribbean:

2016 2017 2018
Mexico 2.3 2.1 1.9
Brazil -3.6 0.7 1.5
Argentina -2.2 2.5 2.5
Colombia 2 1.7 2.8
Venezuela -16.5 -12 -6
Chile 1.6 1.4 2.5
Peru 4 2.7 3.8
Ecuador -1.5 0.2 0.6
Bolivia 4.3 4.2 4
Uruguay 1.5 3.5 3.1
Paraguay 4.1 3.9 4
Central America 3.7 3.8 3.9
By Al Greenwood