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OECD reports: Brazil, Chile, Colombia, Mexico.

IPDAL publishes the most recent OECD forecasts for the economic evolution of the Brazilian, Chilean, Colombian and Mexican markets.

BRAZIL

The OECD considers it likely that the Brazilian recession will continue in 2016 and 2017, in a scenario of great political uncertainty and possible new discoveries of corruption cases, which, by undermining consumer and business confidence, lead to a decline in domestic demand. As the economy contracts, unemployment will continue to grow.

Political divisions have reduced the chances of achieving any noticeable movement in political reforms in the short term and gross public debt will continue to rise. Improving confidence will depend on the authorities’ ability to carry out significant fiscal adjustments, such as measures to ensure the sustainability of the pension system and a new wave of structural reforms. While remaining restrictive, monetary policy will slightly soften the way inflation declines.
According to the Organization, increased productivity will depend on reforms to increase competition, reduce trade barriers and administrative burdens and simplify indirect taxes. This increase will be key to achieving strong economic growth in the medium term.

The OECD points out that, in the last twelve months, Brazil lost almost two million jobs and the currency devalued by almost 20%. Business bankruptcies and debt have also increased.

The budget deficit increased, reaching above 10% of GDP and the primary deficit is above 2% of GDP. Annual inflation shows a slight decline as the recession eases inflationary pressures, yet remains well above the 6.5% target.

However, structural reforms have great potential to boost growth. Reducing compliance costs and distortions imposed by the fragmented indirect tax system in Brazil would lead to an almost immediate reduction in costs for companies and could be achieved through the consolidation of indirect taxes.

Greater trade integration would especially benefit those with lower incomes, since the expansion of the export sector would have a greater impact on the demand for less qualified labor. Improvements in higher education levels would not only increase productivity but also allow more families in economic difficulty to become part of Brazil’s growing middle class.
The political landscape presents positive and negative risks. If uncertainty about future policies is resolved faster than expected and a consensus on reforms is reached, confidence could improve quickly and growth could turn positive in 2017. On the other hand, serious political divisions could generate greater instability, seriously hampering the achievement of the growth necessary to sustain economic policies.

Other risks of negative impact may come from the business sector, where the effects of the ongoing recession are increasingly visible. Filings of bankruptcy declarations are increasing regardless of the size of the companies. Among listed companies, net financial debt grew 24% during 2015, while profits fell 29%, excluding the three large companies with public participation (Petrobras, Vale and Eletrobras). Another slowdown in growth in China, which is the main export destination for much of Brazil’s raw materials, could also reduce growth in the country.

CHILE

The OECD reduced its forecasts for the Chilean economy, due to the impact of low copper prices and weak demand from its main trading partners, to maintain its growth at 1.5% this year and 2.5% next year.

This means a significant reduction of seven tenths on the 2016 numbers and one on 2017 according to the OECD Outlook report from November 2015. The organization noted that the slowdown also contributed to tighter credit conditions – the central bank increased its main interest rate to 3.5% to contain inflation after currency devaluation – and lower business confidence.

This had an effect on investment, which fell in the last two years, but is expected to rise again by 0.9% in 2016 and 1.6% in 2017.

A consequence of all this will be the deterioration of the unemployment rate, which will go, on average, from 6.2% in 2015 to 6.8% this year and 6.9% next year. In any case, the OECD estimates that the GDP growth rate will be driven primarily by exports in 2017, which will benefit from an improvement in competitiveness (due to currency devaluation), but also from more predictable demand. The main risk in facing these expectations comes from the evolution of Chile’s trading partners (starting with China and other Latin American countries) and the price of raw materials.

On the one hand, conditions of financial volatility on a global scale could reduce demand for Chile’s minerals, on the other hand the increase in copper prices also increases investor confidence, in addition to filling the State’s coffers with more tax collections. . With regard to inflation, the study authors noted that the possibility of recovery is linked to the progress of the exchange rate and the price of a barrel of oil.

According to the reference scenario, the consumer price index, which averaged 4.3% in 2015, is expected to decrease slightly to 4% in 2016 and 3.1% in 2017.

COLOMBIA

This year, the OECD predicts economic growth of 2.4% for the country Colombia, essentially due to the collapse in the price of oil.

In its biannual Outlook report, the Organization reviewed the estimates, made in November 2015, that Colombia would experience an expansion of 3% in 2016 and 3.3% in 2017.

The authors of the study explained that due to the drop in the value of oil and coal exports since 2013, which represent two thirds of sales abroad, the exchange rate of the Colombian peso has fallen and the fiscal deficit has increased.
Furthermore, the intensification of the El Niño climate phenomenon is affecting agriculture and electricity generation, which, with its inflationary effect, has a negative impact on consumer confidence, private consumption and job creation.
In this regard, the well-known “Club of Developed Countries” pointed out that inflation rose to around 8% in mid-2015 and predicted that the consumer price index will be, on average, 6.9% this year (it was 5 % last year) and 4% next year.

Exports, which suffered the impact of raw materials and the reduction in the last two years, should begin to recover in 2016 and 2017, with increases of 1.1% and 2%, respectively.

As for the state of public finances, the current account deficit will continue at high levels, of 6% in 2016 and 5.5% in 2017, but without reaching the peak of 2015 when it reached 6.4% of Gross Domestic Product.

The OECD estimates that the cuts in public spending announced by the Government are adequately thought out so that their social impact is mild.
But he added that in the medium term a comprehensive tax reform will be needed to stabilize the fund, given its dependence on the volatility of raw material income, and also to achieve more inclusive social policies. There are also “essential” structural reforms to improve public infrastructure and productivity and allow economic progress to be more spread out.
In this regard, the organization spoke of abolishing barriers to entry for new dynamic and innovative companies or expanding access to training as a tool to increase labor productivity and reduce income inequalities.
In this sense, the OECD highlighted that policies that attack the duality of the labor market, create quality jobs, reduce the gender gap and informality of work will contribute to strengthening economic growth, mainly through domestic demand, in addition to reducing inequalities.

MEXICO

The OECD estimates that the Mexican economy will grow 2.6% this year and 3% in 2017. The numbers are mainly attributed to reforms implemented by the Executive, but imply a cut relative to its previous forecasts.

In its biannual Outlook report, the Organization for Economic Cooperation and Development (OECD) reviews the estimates made in November, when it calculated an increase in Mexico’s Gross Domestic Product (GDP) of 3.1% in 2016 and 3.3% in 2017.

The Organization begins by highlighting that the weakening of global growth, uncertainties in some markets or concerns about divergent monetary policies in emerging developed economies slowed growth in Mexico in 2015, which stood at 2.5%.

But it also notes that there are “manifesto” signs, such as the aforementioned structural reforms, in particular, measures to increase access to credit, and considers that full implementation is “essential”.

For the OECD, the depreciation of the peso reinforced the gains in Mexican exports, which increased its market share in the US, and the resilience of the domestic economy has maintained its support for economic activity.

The study authors add that the first wave of structural reforms led to significant progress in different areas and raised investor expectations.
The OECD hopes that these and other reforms can improve the efficiency, innovation and skills of low-educated workers.

“Measures to strengthen education, skills and financial inclusion will provide all Mexicans, especially women, with more opportunities to contribute to society”, says the Organization, which also predicts low inflation for 2016 and 2017.
The OECD considers it crucial for oil field offers to attract investment commitments and estimates that the main risks they could cause, which do not meet its growth forecasts, are a brake on global trade, especially in the case of Chinese and American economic advances. .

The authors also warn that greater pressure on oil prices and difficulties in implementing cuts in PEMEX could delay achieving the deficit reduction objective and erode market confidence.