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Baila Comigo? The South America Predictions for 2017

The outcome of the U.S. presidential elections has destabilized the future of U.S.-Latin America relations. Although President-elect Donald Trump did not discuss a detailed foreign policy towards Latin America during his campaign, trade and immigration—two key topics of his campaign—are likely to dominate the agenda across the continent. Mexico is expected to receive the hardest hit, and this goes beyond building a wall between the two countries to stem the flow of illegal immigration. There is a high risk that protectionist policies could damage some of the Latin countries’ agricultural exports to the U.S.

The United States has had little engagement with South American countries during President Barack Obama’s time in power. The promise of a “new chapter of engagement” with the country’s southern neighbours and improvements in trade facilitation fell into oblivion. Brazil appears to be out of line of new administration’s sight and it is unlikely there will be more active policies under Trump’s government. Nevertheless, U.S. agricultural companies lobbying Trump to introduce tariffs and non-tariff barriers on certain products represents a greater risk to South American economies. Tariffs on raw materials could hurt Brazil, while greater U.S. protectionism against imports, such as grains, could cloud the U.S.-Argentina relations.

A potential hot spot is Venezuela. Despite years of anti-American speech by former Venezuelan President, Hugo Chávez, in practice there was little conflict between the governments. The U.S. is Venezuela’s largest export market and the Obama administration largely ignored verbal provocations by Hugo Chávez and Nicolás Maduro. However, this may change with Trump in power given he wants to appear strong on the world stage. If this turns out to be the case, Maduro risks significant fallout if he continues to blame the U.S. for Venezuela’s misfortunes, as Trump could be more likely to take retaliatory steps.

After the austerity measures implemented by the government, which resulted in a lots of protests around the country, the Argentinean economic recovery is finally a reality. The government also presented its proposal to reform the income tax on 22 November. The plan includes higher tax rates and an increase of 15% in the minimum exemption threshold. The bill, which could be approved by the lower house of Congress in December, has already been challenged by some parties and the government should negotiate in order to push ahead with its reform.

Despite the slow growth in the last quarter of the last year, mainly because of a prolonged truckers’ strike and subdued global trade, Colombia has positive outlooks for 2017. In November, the Senate approved a revised peace agreement with the FARC, just a month after the original proposal was rejected in a plebiscite. Among other things, the new deal establishes greater government presence in rural areas dominated by the FARC, obliges the rebels to divulge their assets and provides judges with more authority if insurgents are found guilty of drug trafficking. However, these changes – among many others – have not calmed critics of the peace deal. The FARC now has a six-month period to demobilize and form a political party.

Chile and Peru also have positive outlook for the year 2017. With the tightening of commercial relations with China, both countries might experience growth right in the beginning of the year. Even though the proposal for a transpacific train made by the Chinese government seemed to have stumbled upon the region’s economic crisis, Chinese president Xi Jinping appears to be excited to close more deals in South America.

The president of China has planned a week-long visit to Latin America in mid-November that included state visits to Chile, Ecuador and Peru. Xi Jinping’s visit immediately followed events of the U.S. elections, have called into question the future of U.S.-Latin America relations, and highlights China’s emergence as an important trading and investment partner for the region. China signed several trade agreements and appears open to the possibility of expanding its options of trading agreements in Latin America. Should the region start to explore the option of having trade agreements with China, the main priority ought to be the diversification of trade to reduce the importance of commodity exports to the economy.

Currency-wise, Trump’s victory has put pressure on most of Latin American. A large fiscal expansion – as preached by Trump during his campaign – in an economy close to full employment has resulted in an increase in U.S. Treasury yields, which, on the other hand, weakens emerging-market currencies. All currencies were affected by the “Trump shock”, especially Mexico. At the same time, this phenomenon stimulates commodities export and it should have repercussions on the expected inflation for this year. Specialists say the region’s overall inflation should rise by no more than 4% this year, according to the prediction which has already been adjusted to Trump’s victory.

The year of 2017 for South America will be determined by how the governments will react upon the shift of power in developed countries, which we observed in the past year. Will the Latinos get closer to China and ignore a long-time commercial relationship with the US, or will they try to adapt to Trump’s new protectionist policies?


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