The Impressive Rise and Unfortunate Fall of Latin America’s Decade Long Commodities Boom
By admin July 22, 2015


After a decade of soaring growth, the good times may be woefully over across major Latin American economies, in what experts fear may be more than a short-term economic slowdown. The continent already has much to be anxious for as anticipation of increasing U.S. interest rates steadily grows, the collapse of global commodity prices – seen over the past 12 months – hits home, and weakened demand due to China’s economic slowdown making matters only worse – all proving to be a lethal combination for near-term prospects that in due time could create a wider collapse of confidence and markets across the region.

Despite the continent’s remarkable growth, which according to the World Bank, lifted more than 70 million people out of poverty and expanded the middle class by more than 50%, the 21st century miracle has reshaped itself into an unfortunate nightmare. The International Monetary Fund’s (IMF) latest regional forecast for Latin America shows an expected decline for a fifth consecutive year, with growth at 0.5 percent, the lowest in over a decade.

And to top it off, the region is also home to four of the seven worst performing major emerging market currencies over the span of the last two months, according to the Financial Times (FT).

It may be now that you’re asking, what’s fuelling this Latin slowdown?

A recent report from the Organisation for Economic Co-operation and Development’s (OECD), the “Latin American Economic Outlook” released this year notes that “…business cycles in Latin America – unlike growth potential – are heavily influenced by fluctuations in external resources, whether capital inflows or commodity exports.” And this was the case factoring the continents growth during the 2000s, which in large part was accredited to a commodities boom triggered by an increase in the overall price of commodity exports.

The report further underscores the impact of such commodity booms on emerging markets, where minerals, fuels and short-term flows coming from big-time investors, such as China, “have a procyclical influence on the GDP gap.” And as the report warns “when the booms finish, countries seem to return to pre-boom stage of the business cycle, which means they failed to use the booms to boost the regions long-term growth.”

And what’s in store for Latin American after the commodity boom?

With the drop in external flows and collapse of energy, food and metal prices, nearly every major Latin American country faces a widening trade and financing gap, which in turn leaves governments vulnerable to unpopular structural reforms and growing discontent from the general population. Already Mexico, Brazil and Colombia have shaved their budget this year, according to FT, “in a bid to cope with weaker oil prices.”

It is becoming markedly clear that governments can no longer afford to cast off much needed reforms that refocus public spending and stabilize their economies.  Although this may be a hard pill to swallow for many countries alike, as the recent protests in Brazil this summer have proved, it is one that may put the region back in the path to long-term growth and galvanize a more productive economy.

Find out more:

Focus Economic

World Bank Overview

IMF: Growth in Latin America Weakens for Fifth Year in a Row

FT: Latin American currencies feel more pain

WSJ: Latin American Currencies Hurt by Commodities’ Drop, U.S. Fed Expectations

Worldcrunch: Adios To The Latin American Fat Years

The Economist: Learning the lessons of stagnation

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