In the latest projections published in the IMF’s April 2014 World Economic Outlook (WEO), the 2014 growth forecast for Latin America and the Caribbean was lowered significantly compared to the October 2013 outlook. The IMF report now projects real GDP for the region to grow by 2.5% this year, compared to the 3.1% growth projected in the October 2013 release.
One of the major factors cited by the IMF for its reduced growth expectations was continued lower commodity prices. The economies of Latin America are heavily dependent on exports of energy and metals, and lower prices mean lower revenues when measured in dollar terms. Approximately 20% of Brazil’s export revenues come from oil and iron ore, while Chile relies on copper exports for half of its export sales. Peru’s exports of copper, gold, and other minerals represented 55% of trade revenues last year, but in recent months that share has fallen below 50%. For Venezuela, a member of OPEC, oil makes up a whopping 96% of its goods exports.
Copper and gold prices peaked in 2011 after recovering from the global economic slowdown, but have been on a steady downward trend since; prices for both metals have fallen by more than 30% from their respective peaks in 2011. China remains a major consumer of industrial metals and one of the major drivers of global prices, but the IMF sees that demand changing as the country’s economy shifts toward private consumption. According to the latest WEO report, while China’s overall demand for commodities will continue to grow, the composition is changing as “…base metal consumption has generally shifted away from low-grade metals (copper and iron ore) toward high-grade ones (aluminum and zinc).” Analysts surveyed by FactSet are projecting copper prices to continue to fall in 2014; the consensus number from FactSet Estimates shows a 3.3% decrease in copper prices this year, the third consecutive year of falling prices.
Meanwhile, oil has maintained a flat trend for the past three years. Supply has been the main driver in keeping prices down, although geopolitical events in Africa and the Middle East still have the potential to create price volatility. The FactSet Estimates consensus forecast for crude oil projects that oil prices (WTI) will fall by 2.8% in 2014 followed by a 3.8% drop in 2015.
While commodity prices are not something that the governments of Latin American countries can control, the IMF report advises that policy makers focus on domestic reforms that can help to mitigate the negative effects of weak commodity prices. The Mexican economy, also heavily dependent on oil exports, was cited as a positive example where ongoing economic reforms are expected to lead to accelerating growth in 2014 and 2015.