"These countries have shown their own resilience. Their economic policies have been sound and they’ve been able to conduct countercyclical policies."
Chairman of Roubini Global Economic and New York University Professor of Economics Nouriel Roubini joined AS/COA Online's Carin Zissis for an exclusive interview regarding Latin America's economic outlook. Roubini forecasts and regional growth rate of 3.8 percent for 2010. He also offered his outlook for specific countries, including Brazil, Mexico, and Venezuela.
AS/COA: In October you upgraded the growth outlook for Latin America for 2010 from 3 percent to 3.3 percent. Tonight you placed it at 3.8 percent.
Roubini: Yes, we’re doing our quarterly update to our global economic outlook and, as of now, we’re going to come out with it in early January, it’s probably going to be 3.8 percent for Latin America next year.
AS/COA: What is behind this increasingly positive outlook for Latin America?
Roubini: There are two things. One is that global economic and financial conditions are improving. There is a recovery of growth even if it’s going to be anemic. Commodity prices have been rising. Financial conditions remain easy. Capital is flowing back to emerging markets. So that is the global outlook.
And two, these countries have shown their own resilience. Their economic policies have been sound and they’ve been able to conduct countercyclical policies. They’ve not experienced a financial crisis in these episodes. Their overall fundamentals are sound, so the combination of maintaining sound fundamentals and right economic policies with improvement in the global economic outlook implies a recovery.
Even with this recovery, the trend was 5.5 percent growth for the last eight or so years. Now we’re expecting only 3.8 percent. Of course, it’s much better than last year when there was a contraction, but it’s still below potential and below trend for 2010 in our view. We’re less bullish than some of those houses that suggested Latin America actually could go back to potential growth next year.
AS/COA: There’s a lot of talk about how the developed world affects emerging markets, but I’m wondering how do you see Latin America’s growth as having an impact on advanced economies?
Roubini: So far, the size of Latin America is too small to make a direct effect on the advanced economies. Some people say that China has become large enough in its demand to have global effects on helping the recovery of commodity exporters, parts of emerging Asia, and so on. In the case of Latin America I would say probably, one, overall its size is too small. Two, its economic success is more dependent on growth being strong in the advanced economies rather than being a major locomotive for global growth. Of course, within Latin America, given the importance and size of Brazil, if Brazil does better than expected then that can be helpful for Argentina and all the other countries that are trading with Brazil as well. So, within the region, Brazil plays a leadership role and the fact that Brazil might do better might be beneficial for the region.
AS/COA: Brazil has been a darling in the region. What do you see as some risks for the Brazilian economy?
Roubini: The risks are, one, that the global recovery supplies are on the downside. If that happens, you get a correction both of markets and of commodity prices and so on. The second risk is that there’s something of a fiscal slippage that is becoming somewhat of an issue in the case of Brazil. And the third risk is if Brazil fails to conduct some of the structural reforms that are needed to step up the growth rate to the next level and leave it much above the more anemic growth rate that they had for the last decade, which is better than previous decades but still not what Brazil should be having. Brazil to address these issues of poverty and inequality has to have a growth rate of 5 or 6 percent plus. So 4 to 4.5 percent in some sense is better, but is not sufficient.
There’s also a near-term issue of how to manage these capital inflows and how to deal with the pressures to a successive appreciation of the currency.
AS/COA: There are certain countries in Latin America that have a recent record of nationalization or troubles with inflationary data. You mentioned these countries in your talk. Do you think there’s going to be a point when investors say enough is enough?
Roubini: It depends on how much more or less radical some of those policies become. The recent pressures in Venezuela falling further is signaled in a nationalization of banks and that there’s kind of some investor flight. The black market exchange rate is much weaker than the official one. I think there’s a likelihood of significant financial pressures in those countries. Of course, what keeps those countries from having a much more severe financial outlook is the fact that commodity prices are rising. So if oil stays at $80, Venezuela is going to have mediocre growth and avoid financial crisis. If you have a massive correction of commodity prices that are important for countries like Ecuador, like Venezuela, like Bolivia, like Argentina, then you could have fiscal issues that become much more severe.
AS/COA: In some of those countries, there is still room for political change. If and when there is an election in Argentina, whoever is the next president is probably going to be slightly more market oriented relative to the current administration.
Roubini: So I think that with commodity prices rising and global growth being okay and the regional growth being okay, even those that are not market friendly can avoid severe financial distress. But if there is a meaningful correction, they are going to get in real trouble. Even without the correction, a country like Venezuela looks like it’s on a path that, sooner rather than later, is going to lead to some kind of financial crisis in my view.
AS/COA: Mexico experienced two recent investment rate downgrades. By Fitch and Standard & Poor’s ratings, Mexico now has lower ratings than Greece, for example. What’s your take on this and what’s the outlook for Mexico?
Roubini: There have been some downgrades. Fiscal conditions have slightly worsened. I don’t think that emerging markets and especially those in Latin America that have achieved the investment grade status are at risk of being downgraded to below investment grade, unless there is a really massive fiscal slippage and massive worsening also of growth prospects.
In specific countries like Mexico, there are challenges of doing more of the structural reforms in terms of taxation and otherwise to put the revenue on a more sustainable basis. The linkage between Mexico and the United States tradewise implies that the business cycle in Mexico is much more related to the United States than other countries. So far, I don’t see serious concerns of massive fiscal deteriorations that would lead to significant downgrades.
But that means that, at the margin, these countries should be more cautious, rather than loosen up the kind of fiscal gains that they had achieved in the last few years. If the slippage in fiscal policy goes beyond 2009, it spills into the next few years with a whole bunch of elections coming up. There is risk in each one of these countries that fiscal policy remains looser than otherwise. To avoid those downgrades, you have to maintain fiscal responsibility.