Dissecting Latin America in 2016 and 2017

January 03, 2017 Sean Silva

2016 for Latin America marked a curious mix of startling equity rallies and bouts of financial volatility (particularly after Donald Trump’s election as US President), all in the face of significant economic and political turmoil. But with that said, most countries ended the year with torrid returns in their major equity indices. As the situations for different Latin American countries begin to vastly differ from each other, calls grew stronger throughout the year for the investment world to stop looking at Latin America as a holistic region, and to instead assess each country’s situation individually. As a sign of support for that assessment, we have detailed the 2016 highlights of Latin America’s largest nations below, a few 2017 trends worth monitoring and, at the bottom of this post, our usual financial summaries:

• Brazil’s BOVESPA index shrugged off (some may say applauded) a presidential impeachment and a major investigation into the country’s largest ever corruption scandal to return 38.9% on the year, which dwarfed the staunchest of U.S. rallies by the Dow (13.4% in 2016) and the S&P (9.54% in 2016).
• Argentina’s Merval index soared to a 44.9% return thanks largely to the arrival of pro-business president Mauricio Macri, ending over 12 years of protectionism and economic turmoil under a Kirchner Administration that is reeling as its leader and former president Cristina Kirchner was indicted on corruption charges four days before the end of the year.
• Colombia, where the IGBC index returned 18.2%, advanced several milestones this year. President Juan Manuel Santos won a Nobel Peace Prize for securing a historic peace treaty with the Revolutionary Armed Forces of Colombia (“FARC”), ending five decades of warfare with Colombia’s government that led to over 220,000 deaths.
• In Mexico things have been much tougher, as a Donald Trump presidency weakened the Mexican Peso by 20% in 2016 against the US Dollar, and Mexico’s Central Banker Agustín Carstens, who is incredibly well respected and credited with having stabilized Mexico’s economy, resigned. As this was happening, the global plunge in oil prices threw a monkey wrench into the country’s efforts to monetize its energy offerings amidst the private sector. Despite this, the government is optimistic about a 2017 liberalization of oil prices and the IPC index still finished up 6.2% on the year.
• In Peru, the IGBVL ended the year with a torrid 58.06% return and saw Pedro Pablo Kuzcynski become President, defeating Keiko Fujimori, daughter of former Peruvian President Alberto Fujimori, who ruled from 1990 to 2000.
• In Chile, public outcry grew to historic levels regarding the nation’s pension system, where savings rates, as a result of government deductions, were among the world’s lowest, critically hampering an economy that was already failing to meet its growth targets. President Michele Bachelet and Central Bank Head Rodrigo Montes enter the year under pressure to reverse the country’s economic trajectory.
• Venezuela suffered a very difficult year as inflation spiraled out of control, keeping scores of the country in poverty and without access to basic goods while the nation’s currency experienced hyper-devaluation and at one point was temporarily outlawed by the government.
• In Puerto Rico, the passing of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) transferred control of the U.S. Commonwealth’s economic decision-making to a federal oversight board with the goal of reversing the Island’s current economic recession.
• Cuba made history with the United States as President Raúl Castro removed U.S. restrictions on Americans travelling to Cuba and, in March, hosted President Obama on the Island, marking the first time a US president stepped foot in Cuba since 1928.
• And finally, Panama was thrust into the global spotlight in April after law firm Mossack Fonseca fell victim to the largest data leak in history in the form of 11.5 million documents detailing financial and attorney client information for over 200,000 offshore entities, uncovering numerous high-profile money laundering scandals.

2016 marked an inflection point for many of the above countries, so we are not anticipating seismic shifts in any one particular country’s current trajectory, but instead expect a continuation of the macro-economic and political trends, for better or for worse, that each country is experiencing. Some things to keep an eye on for each country or commonwealth:

• Argentina: Mauricio Macri’s government will remain focused on repairing relationships with the international community, using its vast energy offerings as a key lever, while also working to reset standards for inflation and utility sector pricing.
• Brazil: Expect a continued focus on interest rates as the Central Bank tries to rein in inflation by continuing to reduce its key interest rate. 2018 is also an election year, and pundits will be watching the moves of President Michel Temer, who as Vice-President replaced the impeached Dilma Rousseff in 2016, very closely.
• Chile: We anticipate a heightened level of scrutiny to every economic data print this year as the country’s frustration with its stagnated economic growth mounts.
• Colombia: The anticipated passing of Colombia’s tax reform, which will see it raise sales taxes by 300 basis points, among other new changes, is expected to significantly improve the country’s economy. 2018 is also an election year, and with the country relatively split on the FARC peace treaty, populist politicians will undoubtedly latch onto this as a campaign point (remember that the public voted against the peace treaty by a razor thin margin in the original referendum, and the amended treaty was re-submitted without public approval).
• Cuba & Mexico: While the economies of both nations are on different tracks, the fate of both countries, for better or for worse, will be impacted by President-Elect Donald Trump’s foreign policy, so a major To Be Determined for both Cuba and Mexico.
• Panama: While the country’s stock market, the BVPA, was not fazed by the Panama Papers incident, having just about broken even on the year, the factor to monitor here is for any shifts in the amount of private companies opening offices in the region.
• Peru: Keep an eye on Peru’s banking sector this year. They have been making strong moves to promote activity not only by lending more but also by embracing and promoting online banking (Interbank became the first Peruvian bank this year to waive service fees for online banking transactions), which should help grease the country’s money supply cycle.
• Puerto Rico: Despite the passing of PROMESA in 2016, there is still much to iron out in terms of the how the PROMESA Oversight Board will manage and solve for the country’s current economic situation. The arrival of governor-elect Ricardo Roselló, who has declared a fiscal emergency across the Commonwealth government and has pledge to resolve the current situation, will add another variable worth following.
• Venezuela: There are no clear signs that the country’s current economic situation will improve right away, so we’d anticipate a continuation of the nation’s current struggles.   

End of Week Market Updates:

• Merval (Argentina) +44%
• Bovespa (Brazil): +3.95%
• IPSA (Chile): +70%
• IGBC (Colombia): +1.56%
• IPC (Mexico): +1.04%
• BVL (Peru): +86%

End of Year Market Updates:

• Merval (Argentina): +9%
• Bovespa (Brazil): +38.9%
• IPSA (Chile): +8%
• IGBC (Colombia): +18.2%
• IPC (Mexico): +6.2%
• BVL (Peru): +58.06%