In its first regionwide downturn since 2009, Latin America's economy is projected to contract by 0.3 percent in 2015 according to the International Monetary Fund's World Economic Outlook. A confluence of factors, including a collapse in commodity prices, a strengthening U.S. dollar relative to national currencies, and weak domestic demand, is responsible for this marked decline. Consequently, many Latin American governments have seen budget revenues drop and social instability rise. While the region is more economically developed and capable of recovering from its commodity-driven decline than at any other time in recent history, the downturn will not be without political consequences.
The region's commodity boom, which was largely driven by China through the 2000s, has slowed dramatically since 2013. The global prices of many of the region's primary commodity exports, including crude oil, coal, copper, nickel and iron ore, have fallen precipitously, bringing economic growth rates down for many countries as compared with the previous decade. Meanwhile, inflation and unemployment have risen on the whole.
Compared with previous commodity downturns, such as the 1980s debt crisis, Latin American countries are in a much better position to handle the decline. They are simply no longer as vulnerable to the cyclical ups and downs of commodity markets. For example, with certain exceptions like Argentina, most countries in the region have much lower external debt ratios and larger international reserves. This gives them greater flexibility in monetary policy and greater access to private capital markets, instead of forcing them to rely on austerity-driven international loans.
Latin American countries have dealt with this turmoil in widely varying ways. Factors such as different levels of economic integration with the United States and China as well as flexibility in monetary and fiscal policy have played a major role in this variation. Some countries will continue to suffer more than others in the coming year. This will prove particularly true of large and influential countries such as Venezuela and Brazil. But many more, including Mexico, Bolivia, Paraguay and the Central American countries, will be better off.
