Plenary Session: “Regional Economic and Energy Outlook”

One of the fundamental themes of the 39th Annual Meeting of the Latin American Petrochemical and Chemical Association (APLA), which took place in Buenos Aires in November 2019, was the transition to cleaner energies and the impact of this process on the different components of the value chain. This was the underlying idea of the plenary session on November 11, which was titled "Regional Economic and Energy Outlook" and followed by "Towards an energy transition," a CEO panel that brought together the leaders of YPF, Braskem, Ecopetrol and Dow Argentina.

The chief economist of Fundación Capital, Martín Redrado, started the plenary session with a talk on the regional macroeconomic context. Redrado began by explaining that, in order to analyze the Latin American economy, two variables must be put into perspective: the level of interest rates and the price of raw materials.

With respect to the first point, Redrado described how we are living “a new paradigm with very low interest rates and a lot of liquidity,” which generates abundant financing capacity to invest in those countries that have good economic performance and in productive sectors with the ability to generate currency.

Regarding the impact of the low price of commodities, Redrado stressed that, although most Latin American countries have implemented strong macroeconomic reforms covering fiscal and monetary terms and achieved low inflation rates, deeper reforms in competitiveness are still pending. “We have not made reforms that lower logistics costs, improve interest rates in local currency or allow us to be more competitive, which also applies to labor. In this sense, we have been complacent in the region, and therefore there are countries in Southeast Asia that now have an edge on us,” he said.

Before going into detailed projections on the performance of the region’s largest economies, Redrado explained the four fundamental factors that must be taken into account when deciding whether or not to invest in a given jurisdiction. These are: economic growth, inflation rate, current account deficit and fiscal deficit. "If these four variables show positive indicators, it is certainly worth investing in that country," he affirmed.

Along with these variables, Redrado urged countries in Latin America to put more emphasis on solving inequality problems, especially considering the social and political revolts that shook the region in the last months of 2019. In this context, he continued, it is useful to examine the Gini coefficient used by economists, which measures the difference between the richest 10% of the population and the poorest 10%.

How Are the Main Economies Performing?

Redrado went on to summarize the economic perspectives of the dominant economies in Latin America, which are also the ones that provide the best pulse on the state of the chemical and petrochemical industry. In Brazil, he said, a recovery is beginning after reaching the milestone of pension system reform. "Latinos and the rest of the world are going to have a good problem to solve, which is that – fortunately – life expectancy is increasing, but longer life expectancy must be financed," he said. Fundación Capital projects 2% growth in Brazil in 2020, something that, according to Redrado, is well below the real potential of the country. "Brazil should expand between 3.5% and 4% annually over the next 10 years," he said.

Mexico also offers “reasonable prospects” through improvements in consumption thanks to higher levels of remittances from the United States and higher social spending. However, the general sentiment is negative; Redrado attributes uncertainty about internal policies and the revision of energy contracts, as well as the slow pace of the revision of the free trade agreement with North America, to the lack of optimism. He added that while Mexico has a reasonable rate of inflation and manageable levels of fiscal deficit and current account deficit, projected growth in 2020 is only 1.2% – "a more sluggish recovery than in Brazil."

Enthusiasm characterized discussions on Colombia, largely due to its high levels of growth, estimated at 3.2% in 2019 and 3.3% in 2020. Redrado stressed that, although the average growth of the Latin American region is between 1.5% and 2% per year, there are countries such as Colombia and Peru that far exceed those figures or even double them, thanks to rising industrial production and the ability to produce commodities. In Colombia, Redrado explained, “the inflation rate is very low and there are good fiscal accounts. There are no major challenges or threats to the country.”

Finally, Redrado analyzed in detail the Argentine economic situation, not only because of its complexity, but also because of his deep knowledge of the country; indeed, he was president of the Argentine Central Bank between 2004 and 2010. He began by highlighting that the Argentine recession has not yet touched the floor and that this breaking point will probably only occur in 2020, because economic policies have not attacked the deep-rooted problems. He added that the International Monetary Fund program has been very recessive for the country and produced significant fiscal and exchange rate adjustments.

At this moment of political transition, Redrado pointed out that Alberto Fernández's new government (which took office on December 10, 2019) will face significant challenges. "The most pressing issue in the short term is the payment of the debt [...] Argentina needs a long-term agreement with the IMF and should talk with the creditors because there is a very heavy debt maturity schedule in the next four years," he explained.

Political Consensus for Vaca Muerta

Part of Martín Redrado's presentation dealt with the current situation of energy markets, which are experiencing prices "at a lower level, as a result of the prospect of lower global economic growth." Redrado stressed that Latin America already has an interesting position as a producer of oil and gas, but he believes that even more interesting is its reserves potential, particularly with the unconventional resources of Vaca Muerta in Neuquén. "In Vaca Muerta there is a real revolution, with a lot of projected investment and optimism toward the future."

That said, Redrado cautioned that the future success of Vaca Muerta will rely on a consensus between the two major political forces that have emerged from the previous elections in Argentina. This consensus, he explained, should revolve around three fundamental issues. First, companies that invest in Vaca Muerta must be able to leave foreign currency abroad. Second, there must be export parity prices. According to Redrado, the pesification of prices in recent months and at a delayed exchange rate was a mistake. Third, Argentina should have a tax and labor framework similar to that of companies operating in the Texas Permian Basin, reducing the tax burden for companies that explore for unconventional deposits.

To boost Vaca Muerta, investments in infrastructure must also be made, Redrado said: if the country is to expand the petrochemical industry in Bahía Blanca, there needs to be a pipeline that connects Vaca Muerta with the petrochemical pole, and Argentina should also invest in a liquefaction plant that turns Argentina into a large gas exporter.

Latin America and the Global Landscape

To conclude, Redrado stressed that the Latin American region faces numerous challenges and that we must be attentive to the slowdown in global growth, as well as commercial and technological tensions between consolidated powers (the United States) and emerging ones (China). In this context, Redrado said that the Chinese currency has no intention of replacing the dollar as a reserve currency, and he anticipated a transition to a multi-currency system where the dollar maintains its dominance.

With respect to the global energy industry, Redrado explained the difficulty of making projections on the price of oil due to its volatility and exposure to geopolitical factors. However, he anticipated lower energy demand in the short term as a result of lower global growth. Regarding the long term, he concluded that the change in generation and consumption trends towards renewable energies in countries such as China and India will have a great impact on the dynamics of supply and demand.