Often called the forgotten continent, it has been impossible to forget Latin America in recent weeks and months. With 33 countries and a population exceeding 642 million, there is no single explanation for the unrest and economic weakness that is flowing from Bogota to Buenos Aires. But, with the IMF predicting a growth rate of just 0.2% in 2019 and 1.8% in 2020, the outlook doesn’t look likely to improve anytime soon and Latin America is set to be the world’s slowest growth region this year and next. This is a huge downgrade from the 1.4% predicted only 6 months ago and was made even before the latest turmoil hit Chile and Bolivia. There does, however, seem to be a common story amongst the region’s countries; inequality, anti-incumbency and an inability to diversify away from commodities.
While the wider global sentiment can somewhat be blamed, as US and China still struggle to finalise a “Phase 1” deal, other emerging market regions continue to expect strong growth through 2019 and beyond (IMF forecasts: Asia 5.9% 2019 and Africa 3.2% 2019). Figure 1 shows annualised year-on-year GDP forecasts for Latin America, emerging markets and the world economy, suggesting that Latin America’s problems run deeper than the broad economy’s, as its growth continues to flatten.
A common theme of timing and circumstance
Latin America was rescued from poverty nearly a decade ago by a commodity boom which came to an end in 2015. Since then the effects of predominately left-wing governments who redistributed income generously, but failed to invest for the future have been felt. The people of Latin America were supported by the commodity-fuelled growth across the region, narrowing the gap between rich and poor. The inequality was previously tolerable, as the future looked bright and poverty continued to decrease. However, across the region, real economic growth over the last 6 years has averaged 0.8% and with the population growth factored in, the share of the pie has actually shrunk. The decreasing optimism quickly turned to frustration which has now been brewing for several years.
In Chile, it was a 3.75% increase in metro fares. In Bolivia, election fraud and in Ecuador, the scrapping of longstanding fuel subsidies. All these arguably minor events were too much and have triggered violent protests, causing deaths and damage to infrastructure. A wave if anti-incumbency is being felt throughout the region as people are angry at the government for not doing enough. This all ties back to governments who have been trapped by a failure to diversify away from commodities, leading the region into its own middle-income trap. Even in the bigger regions of Brazil and Mexico, the central banks have cut rates on three consecutive occasions in a hope to encourage growth and bring inflation back to its target level.
However, It is not all doom and gloom, Brazil has passed a pension reform that offers much promise and Colombia have extended efforts to promote its technology industry and diversify the economy. Even in Chile, despite record lows last week in the peso, as it depreciated past 800 against the US-dollar, it has been confirmed Chileans will vote in a referendum to ditch the longstanding constitution. This effort to defuse the crisis saw the Chilean Peso jump back up 4%. However, the future of Latin America remains uncertain and the following weeks will determine the impact of the collective backlash. One thing is for sure, with the rising risk of global financial volatility, political leaders across the region will want to act fast and overcome the legacy of instability and frustration before its too late.
The Wider Impact
When it comes to assessing the global impact of the revolts, countries with their own political problems could see copycat demonstrations similar to that of South America or Hong Kong’s ‘frontliners’ or France’s ‘gilet jaunes’. With global growth already in the balance, further tensions will want to be avoided at all costs. This is all too close to home for the UK. Much like the countries of South America who yo-yo from far right to far left governments – as they vote out those who fail to deliver and vote in someone who promises to do things differently – Brexit was built on wanting change, even if that came with uncertainty. Now, the general election is looming and there is a risk that the people of the UK do not get what they voted for. And so, with these developments, we ask the question, would a Labour government and a second referendum leave the streets of the UK full of unruly unrest and frustration?