Latin America struggles with slow growth

11:00 AM | January 17, 2020 | Francinia Protti-Alvarez

Several factors are putting a damper on the growth of Latin America’s petrochemical industry in the new decade—slowing economic growth, policy uncertainty, and trade tensions. The region’s economic forecast is mixed, and regional governments have limited options to drive domestic/private demand.

Growth has been slow across Latin America. Its largest economies, Mexico and Brazil, are struggling to generate enough growth to climb out of recession.

“Argentina experienced a strong recession in 2019, and in 2020 the economy will shrink further—albeit not as strongly,” says Rafael Amiel, director/economics Latin America and the Caribbean at IHS Markit. “The country also faces a fiscal crisis.”

Last year, Brazil’s economy grew by 1.1%, and in 2020, growth should reach 1.7%. The Bolsonaro administration does not have much room to introduce fiscal stimulus because its deficit is close to 6% of GDP, according to IHS Markit data.

Meanwhile, Mexico’s fiscal position is manageable, and debt is relatively low, but state-owned Petróleos Mexicanos (Pemex; Mexico City) is in a difficult financial and operational situation and has accumulated substantial debt; this could affect public finances. Mexico’s economy, however, did not grow last year, and in 2020, growth should be a modest 0.8%, the same data shows.

“These figures are not ideal for emerging economies,” Amiel says. “Latin American economies are forecast to grow 1.6% in 2020, but external factors, including a slowdown in global growth, lower commodity prices, and policy uncertainty, continue to threaten growth.”

Slight economic growth is expected in 2020, while the petrochemical industry will continue to develop additional feedstock to keep up with the growing demand for consumer products, says Rina Quijada, vice president/oil markets, midstream, downstream, and chemicals at IHS Markit. 

Policy uncertainty and lack of fiscal space are also a drag on growth, and populist governments have done little to encourage investors, so investments in much-needed infrastructure is unlikely in the short term.

“The country with the most anticipated industry changes is expected to be Brazil, and this should create business opportunities. Petrobras, under new management, is taking long-awaited measures,” says Quijada.

Petrobras is divesting eight refineries, and the auction process for four of these refineries has already begun, with results expected by March/April 2020. Petrobras also has the mandate to divest its stake in Braskem, preferably in the first half of this year. Finally, a recently licensed 313-kilometer gas pipeline will contribute to lowering the cost of gas from the current $13–14/MMBtu. The gas duct (Route 4b) will link the Santos Basin presalt production hub to Madeira Island at the Itaguaí Port in Rio de Janeiro.

“Brazil is the only country in the region making these decisions, implementing them, and obtaining results. All these investments are in the billion-dollar range, and Brazil expects they will support economic growth in 2020,” Quijada notes.

The increasing presence of populist governments in the region is not promising.

“Argentina has a new government, and it is difficult to predict what policy/changes the new administration will introduce—which is normal with any new administration. But it is unlikely that there will be significant investment in infrastructure,” says Rafael Amiel, director/economics Latin America and the Caribbean at IHS Markit.

The Vaca Muerta shale play provides an opportunity for Argentina, but infrastructure investments are a must; production in Vaca Muerta already meets domestic demand, and only access to export markets will ensure continued developments in the Neuquén Basin.

“The key for the country is to find additional demand for natural gas and the capital required to invest in debottlenecking ports and transport gas from Neuquén [in the west] to Bahia Blanca [in the east], thereby opening export opportunities,” Quijada notes.

Expand your understanding on the complex issues affecting Latin America's growth during the Latin America Petrochemical Summit at the World Petrochemical Conference in New Orleans, Louisiana, 24–27 March 2020.