Economic Outlook: Latin America
By Scott Hazelton13 May 2014
The outlook for Latin America is one of cautious optimism, with most economies expected to accelerate from their 2013 performances. This will be driven by a favourable global environment in which the US economy is forecast to grow above +3% in 2015.
Brazil, Mexico, Colombia, Peru, and Chile enjoy sound macroeconomic fundamentals, thanks to effective monetary management that has achieved low inflation. This is accompanied by flexible exchange rates acting as a buffer from external shocks.
Many Latin American countries also have good debt metrics and sizeable foreign exchange reserves that again shield them from external shocks and sudden capital outflows.
But the forecast is cautious because downside risks also exist, and are related to the need for structural reforms. Commodity prices and external demand no longer mask the corruption and red tape that discourage investment in Latin America.
Nevertheless, the region’s economic growth will pick up to between +3.6% and +3.8% in 2016 and beyond, while long-term prospects are also positive, with a few exceptions. After overcoming the 2008 to 2009 crisis, Latin American economies are well-positioned to continue on the path of moderate-to-strong growth, provided the rest of the world does not fall into recession again.
Within Latin America, Brazil dominates not just with size, but also near-term growth. The confluence of the World Cup, Olympic Games, and energy-related investments suggests growth above global averages for the next two years.
But as the impact of these mega events passes, construction growth will slow. Unless the country acts to adjust its Byzantine regulatory framework, it will lag global and regional performance in the long-term despite its advantages in natural resources and demographics.
Indeed, after 2015, slower growth in Brazil combined with the poor performance of Venezuela and the uneven growth of Argentina are expected hold the region back.
Latin America accounts for just +4% of global construction output, but growth over the past decade gave the region potential as an emerging market. In 2013, construction output increased +2.9%, with +3.2% expected in 2014.
Total construction spending will peak with a +5.1% increase in 2015. Panama will experience the most rapid growth, with construction bolstered by the Panama Canal expansion and the subsequent development of the Colón free-trade zone. In contrast, Argentina and Venezuela will have the weakest near-term growth, with Venezuelan construction activity shrinking.
Over the medium-term, the fastest growing segment in Latin America will be infrastructure, with Panama and Brazil seeing the most impressive gains. Venezuela and Ecuador will experience the weakest growth thanks to policy mismanagement and resource nationalism.
Nevertheless, thanks to the limited scope and poor condition of infrastructure in the region, almost half of total construction spending goes towards infrastructure. In 2013, real infrastructure construction spending increased +3%, and is forecast to grow +4.4% in 2014, followed by +6.1% in 2015.
Brazil and Argentina have the largest markets for infrastructure construction, while Panama will have the fastest growth. Not only does work on the Canal drive growth, but Panama City is also constructing Central America’s first metro.
In preparation for upcoming sporting events, Brazil’s infrastructure is increasing rapidly with expected growth of +9.5%.
Regionally, transportation projects – the largest component of infrastructure – will grow most rapidly, followed by the water and sewer sector, while energy construction will lag. In the longer run, growth in infrastructure will moderate to +1.7% annual growth, with spending on transportation still expanding the fastest, although by a narrower margin.
Over the longer term, spending on non-residential construction will have the highest growth. This sector showed +2.6% growth in 2013, with the strongest performing sector office construction, with +5% growth, while industrial construction was the weakest, growing +0.7% as strong utility and refining sector activity was held back by chemicals and food processing.
Non-residential spending in the region is forecast to increase +4% in 2014 and +6.2% in 2015.Brazil has the largest non-residential market, but Panama will lead growth as it continues to build the commercial and industrial area surrounding the Panama Canal. The medium-term outlook for non-residential spending is for +5.2% growth over the next five years, with office construction the strongest and industrial the weakest.
And as far as residential construction is concerned, spending in Latin America increased +3% year-on-year in 2013, but will fall to +1.1% growth in 2014 thanks to weak income growth and the expiration of key housing incentives. Growth should return to the +3.0% to +3.5% range in 2015 and beyond.
The medium-term outlook for residential construction is positive, with +3.9% growth expected over the next five years, accelerating to +4.2% over the following five years.
In sum, Latin America still offers potential, but it has ceased to be a world leader. Construction growth will continue, but performance will be uneven across the region, and even the stronger economies need to liberalise to attract sustained investment. Even so, opportunities exist, particularly for infrastructure.