The demise of populism is an important development within many countries in Latin America. In the case of emerging markets more broadly, the rise of the internet and smart phones has aided this trend. Greater numbers of people now have knowledge of what is happening at the highest levels of their governments, and have been able to respond and let the world know.
We recently visited the Brazilian president’s office in the capital and it was clear government officials were working to institute reforms as quickly as possible in order to improve the economy and save their political careers.
Most important of these reforms is the privatisation of a number of government organisations and the general selling of assets in a transparent and systematic manner, including some oil and infrastructure projects such as airports.
Brazil has endured an unfortunate economic and political crisis, and that has brought forth a more reform-minded government. We are optimistic these reforms can continue. While the equity markets have already been pricing in progress, with Brazil’s Bovespa index one of the top-performing in the world last year, we still see plenty of opportunities ahead.
It is estimated that this year’s Carnival celebrations attracted more than one million visitors to the Rio de Janeiro area alone, and contributed more than US$900m to its economy.
According to Rio’s Department of Economic Development, the festival created temporary jobs for 250,000 people in the city alone, including carpenters and seamstresses who work throughout the year to prepare the various floats. Rio’s samba “schools” spend upwards of US$1m each to put together their shows with elaborate floats, costumes and dances. In the Sambadrome, about 1,000 fast food vendors are hired for the festivities.
Carnival offers an example of how important it is to remember that, while an economy may look bad from a macro point of view, certain segments at the micro level could be doing very well.
Trade relations top of mind in Mexico
Meanwhile, in Mexico, Donald Trump’s election as US president has caused some concern about their relationship, particularly in the area of trade. Trump’s stated objective to keep the US dollar’s value weak, in order to aid American companies reliant on exports, is of importance to countries heavily exporting to the US. It will be interesting to see if he can accomplish this in light of further potential increases in interest rates, which tend to boost the dollar.
But while the Trump adminis-tration’s policy actions will be important to Mexico, we must not lose sight of the fact that US-Mexico trade is enormous and important to both countries.
Indeed, two-way trade was estimated to be a total of more than US$580bn in 2015. Trade in both directions is heavily geared toward machinery and manufactured goods. The automobile sector, including vehicles and parts, is Mexico’s top source of exports to the US. The US auto industry is highly dependent on parts from Mexico, so trade cannot simply be shut down completely.
In general, fears about economic relations between the US and Mexico completely breaking down are probably overblown. That said, most emerging markets will need to evaluate their trade strategies both with regards to the US and more broadly.
The bigger picture
Looking at the bigger picture for emerging markets, we are encouraged to see performance improving. Emerging markets generally outperformed developed markets in 2016 and the stage is set for this trend to continue. According to the International Monetary Fund, gross domestic product growth in emerging markets this year is forecast at 4.5 per cent, versus 1.9 per cent for developed countries.
Latin America is just starting to get its act together. Although Brazil seems likely to eke out economic growth of less than 1 per cent this year, there could be a potential surge longer term. This year, Mexico’s GDP growth is projected at 1.7 per cent, while growth in Argentina is forecast at 2.7 per cent. We are excited to see what the future will bring for the region.
Mark Mobius is executive chairman at Templeton Emerging Markets Group