Save a few exceptions, outlook for the Latin American fiscal market is bleak. The region as a whole will grow only by two percent and is marked by countries like Peru, where growth has been exceptionally slow, and even more notably by the recent default in Argentina.
This was Argentina’s first default in 13 years, but the eighth default in its history. When the country defaulted in 2001, the government issued negotiable promissory notes that the country later decided not to honor. When Argentina renegotiated to pay back its debt at 30 cents on the dollar, over 90 percent of the bondholders agreed.
The remaining investors did not yield, and were led by Elliot Management to find a solution and be repaid. In a strange turn of events, the Wall Street firm, with only a few hundred employees, managed to attain control of an Argentine naval vessel. It should be noted that no physical force was used, and the original crew was allowed to remain aboard.
Despite the theatricality and the poverty held within Buenos Aires, the nations of Colombia and Peru offer interesting insight into the future of prosperous Latin American countries, even if they show what not to do.
In the short term, Colombia is succeeding. The first reason for its success has been called “winning the commodity lottery.” Colombia’s main exports, oil and coal, have held steady prices in recent years. However, that is hardly replicable. When copper and gold staggered, so did Peru, as the two materials account for 50 percent of exported goods.
Colombia has reformed as well. They have lowered mortgage rates through an agreement with banks and public subsidies. Unemployment decreased, and jobs in construction grew vastly. A law signed in 2012 cut payroll tax, while raising income rates on the better off. It was a true success story, as jobs grew at eight percent.
Peru, in contrast, saw its currency depreciate. Poor contracts in fishing and farming markets lowered public trust. Several corruption scandals did not help matters, either.
The government has tried to respond by including bonuses and increasing wages for state employees, while giving out extra loans for small businesses. Analysts predict that such reforms could have Peru overtake Colombia once more, especially if their lottery fortune increases even marginally.
– Andrew Rywak