by Manuel J. Balbontin*
What a difference a few years of discipline, responsible governments and learning from past mistakes make. We may be getting a lot of help from Asia and an ongoing secular global demand for commodities. Perhaps we go a little over the top when we talk about decoupling, but you have to agree that this time, we are watching a very different movie to the one we saw, over and over again, in the multiple crises of the last few decades.
Is this decoupling? I strongly believe so.
Today, as the US, Japan and many European countries are not only sneezing, but undergoing severe and lasting colds, LatAm, or at least over 80% of the region is barely sniffling. It is very well prepared to sustain further global deterioration.
Brazil in the second quarter grew at an historic pace of 6.1%, exceeding even the most optimistic estimates. It is not alone. Peru, Colombia, Mexico and Chile also continue to show quite healthy levels of activity. There is domestic market growth, increased local consumption and infrastructure investment, all coupled with healthy demand for some exports, energy and food.
On the inflation front, Latin America has also made impressive advances. The countries mentioned above are all enjoying single digit inflation and being subjected to increasing domestic interest rates imposed by very strict independent central banks in an effort to contain imported international inflation due to rising energy and food prices.
This is a good recipe for an optimistic assessment of the next few years. Latin America is better prepared than ever to face a bigger and more protracted global slump.
More than a commodity/export story, this is a situation of real political and economic change. Discipline, growing reserves –regional international reserves exceed the amount of external debt by more than $50 billion – fiscal and monetary obedience and strong banking sectors are all bullish. LatAm is increasingly an investment grade region, with Brazil, Chile, Colombia, Mexico and Peru all deserving the rating.
The Populist Menace
There is meanwhile a new middle class, strong corporate performance and rapidly developing local capital markets. This is a story of domestic growth, both in terms of existing and new consumers and investments, of people working with the people, for the people. Some of the less fortunate that had little reason to believe in it are starting to have faith and derive some of the benefits.
Unfortunately, even though this is the exception rather than the rule, some regional leaders have not learned. Populism, irresponsibility, empty promises, protectionism, and nationalism, are still rampant in Venezuela, Ecuador, Nicaragua and Bolivia.
The only good news for these countries is encapsulated by the Spanish saying “no hay mal que por bien no venga.” These populist leaders are drowning themselves, slowly but surely. Unfortunately, many innocent bystanders are also going down with them, and the resulting destruction will be long lasting. Argentina is still in the middle, but it is being rapidly pushed to choose between a forward looking globalized country and an old fashion populist regime.
Today, the biggest risk that LatAm faces is inside the region. Is not about global slowdown, but internal wealth distribution and its effects on some of these new and fragile democracies.
Unlike most developed markets, every four or five years some of these countries play Russian roulette. Capitalism, open markets, free trade, economic and political discipline hang in the balance with nationalism, protectionism and absurd levels of destruction and irresponsibility.
Lets not forget that this is not just a Venezuelan, Bolivian and Ecuadorian problem. Many other countries, even investment grade, are not out of the woods. The risk of populist governments resurfacing in the near future is too high.
Think Ollanta Humala in Peru, or Andres Manuel López Obrador in Mexico. They and others like them are lurking in the background ready to strike. This is by far the biggest economic and political derailment risk that countries like Peru, Mexico, Brazil and Colombia face over the next 3-5 years.
The world is suffering a serious cold, yet Latin America barely sneezes. Watch out for the poor who are not benefiting, elections are drawing closer. LF
* Manuel Balbontin is founder and president of Compass Group, a New York-based investment manager focused on Latin America.