Latin American Manufacturing Sector to Contract this Year, Sluggish Next Year

An array of troubling economic conditions—from poor infrastructure bottlenecks to rising labor costs to an anemic global economy—are aligning to limit foreign trade of manufactured exports as a primary contributor to Latin American growth in the near-term.

While manufacturing exports have increased in value terms over the last decade in Latin American countries, factors such as wage increases, tax hikes and appreciating currencies following the commodities boom that peaked in 2014 kept the manufacturing sector more exposed to international competition, according to a new Coface report on Latin American manufacturing. Local output was scrapped to allow imports to meet growing domestic demand. “Countries in Latin America seemed unable to compete with low-income countries for the production of unsophisticated goods, or with advanced countries for high value products and technological services,” according to Patricia Krause, LATAM region economist with credit insurer Coface.

Yet the currency devaluation—along with reduced prices and increased competitiveness—in many Latin American countries since 2014 has not been met with a concomitant rise in manufacturing revenues, suggesting changes in exchange rates have had a limited influence, Krause said.

“Overall, countries failed to take the advantage of the past commodity bonanza, to implement the reforms they needed,” she said. “Serious challenges now remain, but government revenues have shrunk.”

Now, these countries’ manufacturing sectors are facing obstacles to future growth. Without a reduction in labor costs, price competitiveness evaporates, Coface economists said. The ongoing weak global economy will naturally reduce demand for manufactured goods. As corruption scandals continue to plague the region, the prospects for infrastructure improvement remain dim. Meanwhile, a growing sentiment toward protectionist policies is likely to weaken the prospects of trade agreements going forward.

Coface predicts the overall impact will be that Latin American GDP growth will shrink by 0.5% this year, and see a small rebound of 1.7% in 2017.

- Nicholas Stern, editorial associate

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