Argentina

The economy of Argentina, the third-largest in Latin America and the second-largest in South America, is a high-income economy.

The country benefits from rich natural resources. It has an export-oriented agricultural sector and has a well-diversified industrial base.

Though the country’s economic performance has historically been uneven for years, it maintains a relatively high quality of life and GDP per-capita and is one of the G-20 major economies. With a GDP of more than $550 billion, the country was downgraded by the World Bank in 2016 from a high-income to upper-middle-income economy.

External economic shocks, as well as a dependency on volatile short-term capital and debt to maintain the overvalued fixed exchange rate, diluted benefits, causing erratic economic growth from 1995 and the eventual collapse in 2001.

By 2002, the country had defaulted on its debt. Its GDP had declined by nearly 20 per cent in four years with unemployment reaching 25pc and the its currency, peso, depreciating 70pc after being devalued and floated. However, its socio-economic situation has since been steadily improving.

The economy nearly doubled from 2002 to 2011, growing at an average of 7.1pc annually and around 9pc for five consecutive years between 2003 and 2007.

Expansionary policies and commodity exports triggered a rebound in GDP from 2003 onward. The economy in 2010 rebounded strongly from the 2009 recession, but has slowed since late 2011.

Foreign exchange controls, austerity measures, persistent inflation, downturns in Brazil, Europe and other important trade partners contributed to slower growth in 2012. Growth averaged just 1.3pc from 2012 to 2014 before rising to 2.4pc in 2015.

Since December 2015, President Mauricio Macri has addressed the important economic issues by cutting energy subsidies, abolishing export taxes, lifting capital and currency controls and floating the overvalued the Argentinian peso.

The 2016 also saw a massive peso devaluation of more than 30pc after the government decision to float the peso and subsidy cuts.

While the return to more market-friendly policies has improved, Argentina’s short-term outlook remains challenging. Real GDP contracted by 2.3pc in 2016, compared to the average 3.3pc growth recorded in the previous decade. The contraction was mainly due to the weakness of domestic demand.

Oil and gas production fell to its lowest in 25 years. The current level of production is 40pc below the record high. Oil decline in 2016 was attributed to a continued decrease in international prices since 2014.

Fiscal consolidation is slower than anticipated due to political considerations and social pressures with annual deficits expected to remain above 5pc while government debt rising further.

In early 2016 Argentina negotiated a debt deal with remaining holdout creditors which enabled the country to exit default and to return to international capital markets.

Though Argentina will be playing for high stakes in 2017, the economic recovery would be slower than anticipated, according to most economists.

But President Macri administration is banking on attracting foreign investment and an infrastructure push to revive the economy after a deep recession last year.

Investment is expected to be the main driver of growth. Inflows of foreign capital are expected in the energy and manufacturing industry sectors and real estate.

The 2017 forecast is for a 3.5pc growth. However, a central bank poll of analysts sees GDP growing by 2.7pc. The International Monetary Fund (IMF) projects Argentina’s GDP growth at 2.2pc. The World Bank expects 2.7pc growth.

Despite budgetary adjustment measures which consisted of eliminating subsidies on the price of electricity, gas and transport and reducing total payrolls in the public sector, the government deficit deteriorated in 2016.

Latest budget figures reveal that Argentina posted a primary fiscal deficit of $8.4bn, equivalent to 1.5pc of GDP, in the first half of 2017, beating the government target for a gap of 2pc of GDP.

The government aims to reduce the deficit to 3.2pc in 2018 followed by 2.2pc in 2019, compared with above 5pc in 2016. Cutting the fiscal deficit is a key priority.

Analysts, however, believe that the 2018 target will be more challenging. They forecast a deficit of 3.8pc of GDP for 2018. According to the IMF, the public deficit is estimated at 6.1pc of GDP in 2017 and 5.1pc in 2018.

Chile

Chile, one of South America’s most stable and prosperous nations, has a market-oriented economy characterised by a high level of foreign trade and a reputation for strong financial institutions and is ranked by the World Bank as a high-income economy.

It had almost tripled its per-capita income of $4,700 in 2001 to almost $14,600 in 2011. In 2006, its per-capita GDP, estimated at $15,020, was the highest in Latin America. Exports of goods and services contribute one-third of GDP, with commodities making up some 60pc of total exports. Copper alone provides 20pc of government revenue.

The country has significantly reduced poverty. Between 2000 and 2015, the population living in poverty on the basis of $4 per day decreased from 26pc to 7.9pc.

However, there is a high level of inequality. Currently, Chile faces three main economic challenges in the long term. These include reducing income inequalities and overcoming traditional dependence on the price of copper, production of which represents 50pc of the country’s exports, developing a self-sufficient food supply as agriculture produces less than half of domestic needs, and increasing productivity, especially in the mining sector.

Since the 1990s Chile has earned a reputation for being the best managed economy in Latin America. From 2003 through 2014, real growth averaged almost 5pc annually despite the slight contraction in 2009 that resulted from the global financial crisis.

The declining copper prices are negatively affecting private investment and exports.

Chile, being the world’s largest copper exporter, is experiencing an economic slowdown since 2015, mainly due to the fall in international copper prices.

Growth slowed to an estimated 2.3pc in 2015. In 2016, the country further experienced its second consecutive year of slow growth, decreasing to 1.6pc, the slowest pace since 2009

Chile is also facing some political risks as the presidential election approaches in November. However, the economy is to rebound in 2017, benefitting from the recovery in copper prices, even though its largest customer China is facing a decline in demand.

Due to a reduction of demand in the main emerging markets, 2017 forecast is for a moderate growth. The central bank of Chile forecasts a GDP growth in 1pc to 2pc range in 2017 and between 2.3pc to 3.3pc in 2018.

Published in Dawn, The Business and Finance Weekly, July 31st, 2017