Pacific Alliance “Health Check” after CELAC summit

Pacific Alliance “Health Check” after CELAC summit

The Pacific Alliance economies will likely face slower growth in 2015, requiring the trade bloc to seek partnerships in India and East Asia as well as stronger relations with the United States.

What to make of CELAC

Representatives leading the recent summit of Latin American and Caribbean States (CELAC) shied away from discussing pressing economic issues, such as the likely prospect of slower growth in the region. Instead, the summit was dominated by a highly politicized anti-U.S. tone.

With Latin American commodity-dependent markets looking increasingly volatile and with the American economy poised for a strong year, CELAC’s decision to bash the U.S. seems counterproductive.

Pacific Alliance markets, facing increased economic uncertainty, would have benefited from a region-wide discussion centered on transitioning from a commodity-dependent development trajectory to one based on diversified, quality growth.

A less rosy immediate future for the Pacific Alliance

Although Pacific Alliance member states have been outperforming the rest of Latin America (at least since 2011), their currencies have recently tumbled, losing a combined 15.5% of their value to the greenback since last July (excluding Costa Rica). They are also facing lower rates of foreign investment and cheaper commodity exports.

The additional fall in foreign investment in extractive industries has been severe. According to the United Nations Conference on Trade and Development (UNCTAD), foreign investment in Latin America fell by 19% in 2014. Oil producers were hit the hardest – foreign investment in Mexico dipped by 52% this past year. It is not surprising then that sovereign bonds yields have increased markedly in the past year amid a fear of capital outflow and governments such as Colombia have stopped buying foreign reserves.

Pacific Alliance markets are expected to grow at a slower rate in 2015 because of three reasons.

1. The price of main commodities such as iron, copper, gold, and crude oil have decreased dramatically. In the span of half a year, the price of iron ore has decreased by 50%, copper by 25%, crude oil by 55%, and soybeans by 24%. Gold dipped by 15% before rallying back up to 1,260 an ounce, only a 6% drop from July 2014. With Pacific Alliance countries mainly producing these commodities, there is no doubt that cheaper export revenues have already affected their fiscal plans. Mexico, for example, relies on oil revenues for funding two-thirds of its national budget. Peru, which relies on mining revenues for half of its national budget, is already reaching into its lean rainy day fund to finance a stimulus package amidst decreased foreign investment in the mining sector and a budget deficit.

2. Political volatility in Peru, Colombia, and Mexico has decreased investor confidence. No Pacific Alliance head of state is enjoying favorable popularity ratings and massive protests have sparked up in January 2015 in Peru and Mexico, placing added pressure on the governments of these two countries to shift towards a progressive policy framework, emphasizing issues such as labor laws.

3. The Chinese slowdown means less growth in demand for Latin American products and commodities. The trade bloc was envisioned in a post-2008 crisis world, when business-friendly leaders from Mexico, Colombia, Peru, and Chile acknowledged that the United States and Western European consumer economies were contracting and China and East Asia were rapidly expanding. With China in particular quickly becoming a main consumer of Andean and Mexican commodities, the Pacific Alliance was born out by China’s vast demand. The pace of growth of China’s economy, however, has changed dramatically. 2015 is already shaping up to be a troubling year for China’s dominant industries, including manufacturing, construction, and real estate. As the main export target for the Pacific Alliance, China’s recent growth slowdown poses yet another risk for the Latin American trade bloc. The bloc should not completely abandon its focus on Chinese demand, but needs to pivot towards the Southeast Asian nations, South Korea, and India for added commercial partnerships.

The bottom line is that the previous bonanza years enjoyed by the Pacific Alliance member states did not allow a complete transition to developed consumer economies. Leading policymakers in the Pacific Alliance countries should see the current situation as an opportunity. They have the economic potential to weather slower growth and develop strategic export sectors by taking advantage of more competitive foreign exchange rates.

With a less optimistic outlook, the export sector in the Andes and Mexico is once again seen as an integral part of the solution to return to fast growth.

Most importantly, the Pacific Alliance member states have to continue strengthening ties with the United States and ignore the anti-U.S. resolutions drafted at the CELAC summit in Costa Rica. If Latin America is to continue growing and evade a regional economic downturn triggered by a commodity bust, it should refortify ties within the western hemisphere rather than foster division—especially when the market targeted for exclusion is the fastest growing developed economy in the world.

Categories: Economics, Latin America

About Author

Daniel Lemaitre

Daniel is a GRI Senior Analyst. He has worked in policy research centered on the political economy of the Andean region in the public, NGO, and private sectors. Daniel holds an MSc in Comparative Political Economy from the London School of Economics, concentrating on Latin American markets.