Low commodity prices — and particularly a low oil price — are bad news for Latin America. Its biggest economies are net oil exporters, and not always particularly well managed ones, leaving them doubly vulnerable to these price shocks. 

Commodities exports have represented more than half of Latin America’s exports from 2012 to 2014, according to the World Bank, and for many, an oil price fall exposes unstable foundations upon which an economy has been built.

But there are exceptions. Latin America does have net oil importers and, better still, net oil importers with shrewd economic management. 

CHILE AND PERU

The biggest Latin American economy to be a net oil importer is Chile followed by Peru. But it’s not a straightforward story because both countries are also heavy exporters of hard commodities, principally copper. “Sixty to 70% of Chile’s exports are copper,” says Maarten-Jan Bakkum, senior emerging market strategist at NN Investment Partners. “So if oil and copper go down at the same time, Chile is not a straightforward beneficiary in that environment.”

Nevertheless, analysts and fund managers still tend to favour Chile and Peru more than almost any other Latin American economy because of the nuances involved both in their copper production and their economic management.

“Chile and Peru are the lowest cost producers of copper in the world,” says Roberto Lampl, who is responsible for the Latin America fund at Alquity Investment Management. “They have the highest quality copper that can be refined globally and they both face the Pacific, so from a logistical point of view they also have an advantage in exporting their goods to China.” 

According to research from Coface Group, the credit insurance group and French export credit agency, Chile’s dependence on China is the highest in Latin America, with 24.4% of total 2014 exports going to the country, equivalent to 7.1% of its total GDP.

Clearly that’s not quite the advantage it once was. “Obviously there has been a humongous decline in demand, while some supply has been coming on stream,” says Lampl. “Copper prices have fallen from a peak of over $6 to $2.20 or so [per pound; in fact $2.10 at the time of writing]. But they’re still making money. We are still above the cash cost for these two countries while other copper mines around the world are suffering.”

PRUDENCE PRAISED

Nevertheless, in many countries a drop like that — and a sharp reduction in margin — would place a serious strain on government finances and economic growth. But both countries are praised for their prudence. Chile has its Economic and Stabilisation Fund — a reincarnation of an earlier Copper Stabilisation Fund — which exists specifically to finance fiscal deficits and amortise public debt using funds it has received from the state during periods of high commodity prices. Peru too has a fiscal stabilisation fund, Fondo de Estabilizacion Fiscal (FEF), funded by surpluses from the Peruvian Treasury (as well as a slice of concessional fees and privatisation proceeds) which also only accrue when commodity prices are strong. 

“They are responsible governments,” Lampl says. “Both Chile and Peru have saved up for the rainy days. They truly understand that commodities go in a cycle, and in a price taking industry, they had built reserves that are being used counter cyclically. That’s why they are still growing.”

Bakkum agrees, particularly about Chile. “Chile is one of the few countries in the whole emerging world that has its house in order,” he says. “They have fiscal discipline and have built a structure to save when copper prices are higher than the long term average and spend when it goes down so as not to be vulnerable to price movements. When prices are strong they benefit a bit less than they otherwise would; but when prices are weak they suffer less.”

The two countries are nevertheless different stories from one another. “There’s one country that always stands out and benefits from oil price declines and that’s Chile,” says Bakkum, who consequently calls it “one of my preferred markets”. Peru does generate oil but comes out as a net importer. Also, in terms of other commodities, Chile’s export mix is dominated by copper, whereas Peru is a little more diverse, exposed to copper, gold, silver and some other metals. 

DISTRACTIONS

Both also have other considerations besides the impact of commodity prices. Peru has the distraction and potential upheaval of elections on April 10, which must result in a change of government since incumbent President Ollanta Humala is ineligible to run due to constitutional term limits. 

In Chile’s case, its long term prudence around commodity prices has arguably not been matched by attempts to enact other reforms. 

“Peru grew close to 3% last year — its annualised rate of growth for December was around 6% — but Chile grew a little over 2%,” says Lampl. “Chile’s growth should have been better but the government hasn’t done a good job in implementing a number of reforms,” particularly around education and tax reform. “It has been messy and awful and caused a decline in industrial confidence and in investment.”

That said, its use of savings has allowed the government to continue to commit to fiscal expenditure without wrecking the budget, so Lampl says he believes Chile’s outlook for this year and next is “quite positive”. 

Still, not everyone is cheerful on even these economies. “Copper exposure makes Chile highly dependent on China’s construction and infrastructure where we still see slowdown,” says Xavier Hovasse, head of emerging equities at Carmignac Gestion. “Thus we do not see any positives in the mid to long term.” He also thinks valuations are expensive. 

And Peru? “Peru is a bit more attractive than Chile as it has some underpenetrated sectors — banking for example — where you could find value,” he says. “Valuations are also expensive but at least they offer superior growth.” He is more of a fan of Mexico, covered in Saturday’s article.

AND THE REST?

There are other economies in the region which benefit from low commodity prices. In fact, relatively few Latin American countries are net oil exporters: in 2014, based on IMF calculations, only Venezuela, Bolivia, Ecuador, Colombia, Trinidad and Tobago and Mexico were (not even Brazil, whose complex situation will be discussed alongside Venezuela’s in Sunday’s edition. Argentina, another tricky nation to interpret, is discussed in detail on Saturday alongside Mexico and Colombia). The World Bank’s calculations for 2015 are due any day but are unlikely to show a considerable change from that mix.

Few net importers, though, have emerged unscathed in a difficult global environment. Uruguay, for example, should benefit but as an exporter of agricultural commodities it is still stung by fallen prices and its currency has depreciated in real effective terms. It is in any case increasingly linked to oil as its offshore oil potential is developed (Norway’s Statoil has acquired a 15% interest in one of its offshore blocks). 

Uruguay has numerous influences upon it beyond commodity prices; over the last year it has had the rare distinction of suffering both drought and flooding in the same year, a consequence of El Niño. And then there are the neighbours. “Uruguay is squeezed between a deepening economic crisis in neighbouring Brazil and a transition in Argentina, both of which are likely to negatively impact growth,” says Focus Economics.

CENTRAL AMERICA

Central American states are net oil importers and this constitutes one of the few parts of the world that appears to be growing at an accelerating rate. Economic growth for the economy of Central America and the Caribbean was higher in the third quarter last year (3%) than in the previous one (2.6%) with projections in the final quarter better still at 3.9%. 

Panama, the best by far, is expecting 6.1% growth in 2016, according to Focus Economics. Here, though, oil is just a small part of a complicated picture: Panama’s growth has to do with its reinvention as a logistics hub and potential improvements in receipts from the expanded Panama Canal, while the recovery of the US economy is more closely felt here than further south. 

Also, these economies are diverse and face different prospects and challenges: Costa Rica, for example, has been downgraded by Moody’s because of its high fiscal deficit, increasing government debt and a government that it feels is unable to implement the necessary tax and fiscal reforms. 

The World Bank thinks the Caribbean, which is chiefly made up of oil importers, is the best placed chunk of the region in terms of economic growth and expects an average of 3% a year growth from 2016 to 2018. “Central and North America and the Caribbean saw a narrowing of fiscal deficits in 2015, predominantly due to fiscal consolidation,” says the IMF in its analysis of global economic prospects for the region from January 2016. 

But this wasn’t always to do with oil: in Jamaica, for example, an improvement in national economics was at least as much to do with new consumption taxes, a reduction in the public sector wage bill, lower gross debt and an IMF-supported extended fund facility as it was to commodity prices. Similarly, it would be tempting to look at the considerable narrowing of the fiscal deficit in the Dominican Republic and assume it was down to commodity price movements, but in fact this was mainly because the country settled a debt due to Venezuela at a considerable discount. In general, the Caribbean’s deficit narrowed but the World Bank attributes this chiefly to elevated tourist receipts. Also, the Caribbean is favourably affected by US recovery and expansion and remittance flows have also helped. 

Still, in this environment, it’s better to be a net oil importer than an exporter and the strongest economies in the region are those who don’t export oil and have thought ahead about the cyclical commodities they are exposed to.