The document summarizes the Latin American business environment and economic outlook for 2016. It finds that Latin American economies have struggled since 2014 to adjust to slow growth among trading partners, low commodity prices, and a strong US dollar. The outlook varies across the region, with the Pacific Alliance expected to see better growth than more state-controlled economies. Relations with Cuba are also changing as the US and Cuba work to normalize relations, but political and economic reforms will be needed for Cuba to fully open up.

1. The Latin American Business Environment
Outlook for 2016
Brian Gendreau
Department of Finance and
Center for Latin American Studies
April 14, 2016

2. The economic outlook year
ahead
Latin American Business Environment
The business climate
Relations with Cuba

3. Coping with global shocks
Until 18 months ago growth in Latin America appeared
to be on a sound footing.
During 2003-14 Latin American
economies had expanded at an
average rate of 4.0% per year.
 Income inequality declined even as
it increased in the developed world.
The proportion of extremely poor people
in the region fell from 25% of the
population to 12% in the 2000s. Rio de Janeiro at night

4. A clouded outlook
Since then Latin America has
struggled to adjust to three
global shocks:
— Slow growth in the developed world
— Low commodity prices
— A strong U.S. dollar

5. Slow growth in the region’s trading partners
The U.S. economy is still expanding at a trend-like pace,
but growth in Europe and Japan is weak and has slowed in China.

6. Falling commodity prices are hurting exports
The terms of trade have turned against Latin America’s commodity
producers, reducing exports and incomes. The markets do not expect
a substantial rebound in commodity prices soon.

7. Latin America: Still dependent on commodities
Many countries in the
region are just as
dependent — or even
more dependent — on
commodity exports than
they were 35 years ago.
Exports of primary products
% of total exports of goods
1980 2000 2013
Argentina 76.9 67.9 66.9
Brazil 62.9 42.0 63.6
Chile 88.7 84.0 86.1
Colombia 80.3 65.9 82.4
Mexico 87.9 16.5 23.8
Peru 83.1 83.1 85.4
Venezuela 98.5 89.1 97.6
a
Latin America 82.8 42.6 53.0
b
Source: ECLAC
a
2011
b
includes the Caribbean

8. Shifting trading patterns
China — the world’s
largest importer of
commodities — has
become a major trading
partner of Latin America.

9. Commodity shock = loss in GDP
The countries that are
the most dependent on
commodity exports have
suffered the biggest
decline in GDP.

10. Economic Outlook for the region

11. The outlook varies within the region
Today Latin America is split into three loose and sometimes
overlapping economic and political camps: ALBA, Mercosur, and
the Pacific Alliance. Economic policies differ markedly across the
three camps.
ALBA* Mercosur Pacific Alliance
*Alianza Bolivariana para los Pueblos de Nuestra América

12. Turning away from the market
Argentina, Bolivia, Ecuador and Venezuela abandoned the market-
oriented reforms and policies of the 1990s in favor of a broader
role for the state, a more heavily regulated the economy, and
redistributive policies.
Cristina Fernández de Kirchner,
President of Argentina 2007-15
Nicolás Maduro, President of Venezuela

13. Sticking with the market model (mostly)
Governments in Brazil, Chile, and Peru, while sometimes taking a
populist or socialist tack, have largely continued the market-
oriented policies of their predecessors. Mexico is exploring reforms
in its energy and banking industries.
Enrique Peña Nieto,
President of Mexico
Ollanta Humala, President of Peru

14. Diverging economic performances
Growth was similar across groups during the commodity boom
years, but the outlook for growth and inflation is now better in
the Pacific Alliance.
ALBA: Bolivia, Ecuador, Nicaragua, and Venezuela
Mercosur: Argentina, Brazil, Paraguay, Uruguay, and Venezuela Pacific Alliance: Chile, Colombia, Mexico, and Peru
Feb 15, 2016 forecasts

15. Latin American currencies have fallen
Latin American currencies have fallen against the U.S. dollar
as the dollar has risen against most currencies, including the euro
and the yen.
Falling currencies would
ordinarily mean more
competitive exports. But
currency depreciation can
be inflationary, and can lead to
rising debt burdens when
governments and firms have
borrowed in dollars.

16. Capital inflows to diminish
Capital flows by country
$ billions
Weak economies and the prospect
of higher interest rates in the
developed world — especially
the United States — mean that
capital inflows to Latin America
will fall again in 2016.

17. Rising U.S. interest rates: Less of a concern
Fed funds futures
When the Federal Reserve hiked
Its target policy rate for the first time
since the 2008 crisis the market
was pricing in further rate hikes.
Many observers were concerned
that higher interest rates in the
United States would mean more
capital outflows from Latin America.
Those fears have since abated.

18. Doing business: Getting easier
Judging from this year’s
World Bank rankings, it
became easier to do
business in 13 out of 18
countries in Latin
America last year.

19. Some examples of improvement
Panama Brazil Colombia
Time required to start a business (days) 6 108 105
Time required to register property (days) 30 30 13
Time required to get electricity (days) 35 58 105
Time required to enforce a contract (days) 686 731 1288
It is easier to do business in Panama (the fastest growing
country in Latin America) than in other countries.
Source: World Bank

20. Corruption: Still a problem in the region…
Global rank Score
Chile 21 73
Uruguay 21 73
Costa Rica 47 54
Brazil 69 43
Peru 85 38
Panama 94 37
Colombia 94 37
Bolivia 103 35
Mexico 103 35
Argentina 107 34
Ecuador 110 33
Haiti 161 19
Venezuela 161 19
Source: Transparency International, 2014. A higher score indicates
less perceived corruption.

21. …but the situation has been improving
Countries above the
dotted red line have
less perceived corruption
than in 1998.
HON

22. Crime: still a concern
Narco-trafficking, gang violence, kidnappings, and street crime are all-
too common In several countries in the region. In a recent
Latinobarometro survey more than 45% of respondents in Argentina,
Brazil, Mexico, and Peru reported that they or a family member had
been a crime victim in the past 12 months.

23. A sea change in the political environment?
Voters in Argentina and Venezuela recently
sent a strong message that statist policies in
those countries would no longer enjoy
popular support.
In Argentina, Mauricio Macri, the mayor of
Buenos Aires was elected in a run-off
election on November 22, ending 12 years of
Peronist control.
In Venezuela, opposition parties gained a
2/3 supermajority in the National Assembly
on December 6, delivering a powerful blow
to President Nicolas Maduro and the ruling
United Socialist party.
Mauricio Macri, elected President of
Argentina, November 2015.

24. Argentina: Moving toward a more open economy
Argentina had an overvalued official exchange rate and restrictions
on the amount of dollars citizens could buy. President Macri removed
currency restrictions within days of taking office in December. The
peso immediately fell by 29% and converged with the parallel “blue
market” exchange rate.
Argentina’s two exchange rates
Dollar-sniffing dog in Buenos Aires airport
In 2013.

25. Venezuela: Still struggling
Venezuela has an overvalued official exchange rate and a thriving
black market for foreign exchange. Price controls have led to
shortages of consumer and medical goods. Capital has been fleeing
the country.
Venezuela’s two exchange rates
Empty shelves in a Venezuelan store

26. A new regional reality
 Prospects for a hemispheric free trade area have
diminished as it has became clear the United States and
countries such as Argentina and Brazil had little common
ground on key issues.
 The Trans-Pacific Partnership, signed on February 4, 2016,
by twelve Pacific rim nations (including Chile, Peru, and
Mexico, would reduce tariffs and provide for an investor-
state dispute settlement mechanism. It has yet to be voted
on in Congress.
 Congress passed, and President Obama signed, legislation
renewing “fast track” treatment for trade pacts in 2015, but
the TPP has run into opposition in both parties.

27. Changing relations with Cuba
 In March of this year President Obama became the first
sitting U.S. president to visit Cuba since Calvin Coolidge,
the latest step in a thaw in relations that began in
December 2014.
U
Air Force One landing in Cuba
for the first time in 90 years.

28. A thaw in relations
 On December 17, 2014 President Obama announced changes
in U.S. policy intended to initiate a normalization of relations
with Cuba while continuing to raise concerns about democracy
and human rights.
 U.S. citizens are now allowed too visit Cuba under 12 licenses
covering, among other activities, family visits, educational
purposes, professional research and meetings, public
performances, and the export and import of information.
 In July 2015 President Obama announced that the United
States and Cuba would normalize diplomatic relations, and the
U.S. and Cuban interests sections in Havana and Washington
D.C. were converted to embassies.

29. Is Cuba ready for change?
 The Cuban government,
meanwhile, has been
implementing reforms intended
to allow market forces to play a
larger role in the economy.
 The reforms, which began in 2008, include allowing
individuals and cooperatives to cultivate unused plots of
land, permitting self-employment in a wide range of
activities, more autonomy for state-owned enterprises, and
allowing citizens to buy and sell homes.

30. What happens next?
 The United States currently does more
business with Cuba than most Americans
realize. From 2000 to 2015 the U.S.
exported $5.3 billion in agricultural and
medical goods to Cuba.
 The trade embargo, however, remains in
place. Exports not specifically authorized
in existing legislation are prohibited, as
are visits for tourism. Human rights and
claims for expropriated property remain
stumbling blocks.

31. Questions?