Since eight months have already elapsed in 2015, a few issues have come to the fore that will have long-term implications for the region. For instance, the fact that the hard-currency days are definitely over in South America, with the exception, of course, of Venezuela and Argentina, which insist on keeping up the fiction with their erroneous foreign-exchange control policies.
On the other hand, Brazil, Colombia, Peru, Chile, and Uruguay, to varying extents, have started to depreciate their currencies, as illustrated in the table below.
|Exchange Rate Variations vis-à-vis the US Dollar|
|Country||YOY Variation at 08/31/15||Year 2015 Variation|
|Brazil||71.4 %||43.3 %|
|Uruguay||20.0 %||17.6 %|
|Chile||19.0 %||10.3 %|
|Peru||13.0 %||5.2 %|
Note: Ecuador is dollarized since 2000. Bolivia’s currency is stable compared to the US dollar.
No doubt, Brazil is experiencing the most worrying situation with the greatest impact on the region. It used to be a member of a former group of nations seemingly regarded as the largest burgeoning economies, first known as BRIC and then as BRICS (Brazil, Russia, India, China, and South Africa). Each of them led to huge transformations in their own social and economic structures, which also had major effects on nearly all the remaining world economies.
But things are no longer what they used to be. The bubbles have changed to make us believe that the crises were over. We overcame the dot-com crisis to then experience the real-estate bubble that, in turn, generated the 2008 financial crisis, after the collapse of Lehman Brothers. It was the result of over-indebtedness that exposed the grim reality that “you cannot spend more than you earn”.
Unlike what usually happened in the 20th century, this phenomenon occurred mostly in developed economies. The crisis started in the American financial system and subsequently expanded to the rest of the world, mainly to some European countries, which suffered it like the Latin American countries did in the past. In this sense, Spain, Portugal, and Ireland were the worst hit, followed by Italy and Greece.
The BRICS growth honeymoon is over
China is no longer a locomotive of most global growth. However, it should be noted that the countries that capitalized on this situation saw commodity prices rise to unexpected heights.
But things are different now. Commodities have gone back to their historical levels and, in some cases, have reached an unforeseeable low. And there are no exceptions – from metals to crude oil and grains, especially soybean.
Venezuela and Argentina know pretty well about these last two since, in times of plenty, they wasted the additional revenue obtained from market prices that attained levels no one would have imagined years ago.
The price of crude oil has not only led to significant adjustment in the big oil companies but also represents a setback in Venezuela’s depleted public coffers. There are multiple dollar exchange rates and an untenable spread between the official and black-market rates. On the other hand, the dollar exchange rate for tourists is hard to obtain at 13.50 to US dollar; SIMADI dollar at 198.77 and unofficial dollar at 687.42. A pandemonium.
What to expect in the region
As already said, this century has seen quite a few changes in most countries in the region. Crises no longer have the impact they had in the past. Regardless of why and where they originated, they used to begin in some fairly remote place but ended up by severely hitting the region.
Most South American economies have steadily expanded in the last 8-9 years.
Brazil, which due to its size accounts for 60% of the region’s GDP, has attracted much attention in recent years, despite the difficulties often encountered by foreign investors to develop their businesses.
However, the situation is fairly complex nowadays, what with an economy that is no longer growing and has already entered recession and an uncertain political scenario for 2016.
In Venezuela, only those already in the system are interested in investing as they cannot get out.
Chile, Peru, and Colombia will keep growing but at a much lower rate. Peru, on the other hand, seems to be ahead of the rest. In fact, it boasts the fastest-growing economy in recent years, even above Brazil as a percentage of GDP, and it looks better equipped to face the situation.
Chile and Colombia follow close behind. However, as far as the hotel industry is concerned, particular care should be taken in those markets where the supply in place and projects in the pipeline call for caution. In this sense, Cartagena is perhaps the best example.
Uruguay, especially hard hit by Argentina’s situation but with its accounts almost under control, will have to wait a bit before resuming the development of new hotel projects. It is worth keeping an eye on what may happen in Montevideo and Punta del Este, two major international markets.
Currency devaluation in those countries offers an advantage for foreign investors as fewer dollars will be needed to carry out any new development.
Ecuador and Bolivia have lots of work ahead and their economies keep expanding. Anyway, foreign tourist arrivals have grown at a much higher rate than the region’s average, especially if considering the world average. Particularly Ecuador.
Finally, Argentina. Although it is risky to ascertain who will take over as the new president next December, any of the two candidates that voters seem to be finally choosing are already announcing the beginning of a cycle change. This cycle change would not be the same in either case, but it would be a change after all.
The legacy of the previous administration is not the best – growing fiscal deficit, uncontrolled money printing with a logical impact on inflation rates, dollar exchange controls, lagging exchange rates and dollar shortage, public utility rates lagging behind, and a complex scheme of subsidies that, in addition to covering needs, have created an intricate clientelistic system, all of which make up a situation that will be tough to overcome. But, as is well known, these blunders to be addressed contrast with a country teeming with resources that will eventually offer new opportunities in the medium term.
It is interesting to see how the countries in the region have learnt the lesson and are in a position to deal with the future. No doubt, some will cope much better than others.
SAHIC, to take place next September 28-29, will be a good barometer to measure the near future.
See you in Lima!