Latin America is the world’s coronavirus hotspot but some of its best-run economies – Peru, Colombia and Chile – look well placed to recover…
Emerging markets have been flattened by the stampede for the exit. The Institute for International Finance estimates that overseas investors pulled $95billion from emerging markets in the first quarter of 2020 – the EM largest outflow ever.
Investors are right to be worried. Emerging markets tend to have bad health systems, cash-strapped governments and informal economies, which make it harder to battle coronavirus. That’s especially true in Latin America, which looks to be the most vulnerable emerging market region. The IMF believes Latin America’s economies will contract by 5.2%, which is worse than Africa or East Asia and as bad as Eastern Europe.
But don’t be discouraged by those grim numbers. The sell-off has created an opportunity for investors. Some Latin American countries – in particular the ‘Andean Three’ of Colombia, Peru and Chile – look well placed to contain and recover from coronavirus. The pandemic won’t alter their medium-term growth prospects but it has given us a chance to buy in at rock-bottom prices.
Why the Andean Three will do well
So far, the article makes pretty grim reading, so congratulations if you got this far – your perseverance will be rewarded. Although Latin America is in for a mega recession, there are some countries that will bounce back quickly. And with their stockmarkets lying battered now is the perfect time to invest. Chile, Peru and Colombia are long-term favourites because they are well-managed, open economies, with positive demographics and great growth potential. They are also the best-placed major economies in Latin America to control and quickly recover from coronavirus.
The key factor with the Andean Three is that they entered the pandemic from a position of macroeconomic strength that allowed them to respond strongly. Peru’s combined fiscal and monetary package is worth 12% of GDP and is the region’s largest stimulus. The largesse is possible because its 2019 fiscal and current account deficits were just 1.6% and 1.5% respectively, while its total debt-to-GDP ratio was only 26%. Its reserves comfortably cover external financing requirements, while it bolstered its position by securing an $18billion precautionary credit line with the IMF.
“The key factor with the Andean Three is that they entered the pandemic from a position of macroeconomic strength that allowed them to respond strongly…”
Chile also responded strongly, with a fiscal stimulus worth 6% of GDP, while its central bank launched the country’s first ever quantitative easing (QE), with a $4billion programme of bank bond purchases. Following political protests last year, Chile was already beefing up welfare payments and social services and the pandemic will merely accelerate that trend. With a 2019 public debt-to-GDP ratio of just 28%, the country can afford to spend its way out of the crisis. Moreover, thanks to its strong institutions it is spending wisely, conducting more coronavirus tests than any other nation in the region.
Colombia’s situation is the most precarious of the Andean Three, but still positive compared to the rest of the region. Public debt-to-GDP stood at 51% in 2019, although that was mitigated by strong economic growth of 3.3% and a fiscal deficit of just 2%. Moreover, the collapse in the oil price hit the country’s main export. These factors limited Colombia’s fiscal stimulus to 1.5%. However, the Central Bank has been more aggressive with its monetary response. In March, Colombia was also the first country in Latin America to implement QE with a $3billion programme that was more wide-ranging than Chile’s and covered private and public debt. Another radical measure was the presidential decree that forced Colombian banks to buy ‘solidarity bonds’ – ie government debt.
In a nutshell, the Andean Three members’ solid financial position entering the crisis, has allowed them to take strong measures to contain its economic impact and speed the future recovery. The IMF projects 2020 recessions of -2.4% for Colombia and -4.5% for both Chile and Peru, which is better than the regional average of -5.2%. In case you’re getting sniffy about those numbers the IMF has pencilled in a -6% contraction for the UK. And crucially all of the Andean Three will see a strong rebound in 2021. If the IMF is right in its estimate of 3.7% expansion in Colombia in 2021, 5.3% in Chile and 5.2% in Peru, then all three economies will be bigger at the end of next year than they are now.
The main reason to invest in the Andean Three is their growth prospects over the next decade. All three are commodity powerhouses. Chile has the world’s largest reserves of copper and lithium, while Peru has the most silver on the planet, third-most copper and fifth most gold. Colombia has a more varied commodity export basket that includes iron ore and oil. Lots of countries have lots of raw materials, but these three are very well-run, which they proved by surviving the last decade’s commodity crunch without succumbing to recession. They have also diversified massively in the last decade, with non-traditional agricultural exports, such as blueberries, avocados and grapes, becoming the second or third-largest foreign currency earner Peru and Chile and rising fast in Colombia. Chile is the richest of the three, while Colombia and Peru have the best demographics with young populations and expanding workforces. Covid-19 is wreaking havoc in the short-term but over the coming decades the world will still need the food, energy and metals that these countries have in abundance.
If you buy into that logic, then you should buy into the Andean Three now – because they are going cheap. One of the best ways to see if a stockmarket is good value is the cyclically adjusted price/earnings ratios (Cape). This compares the current market price with average earnings over the last decade, thereby smoothing out any impact from abnormal years. German Asset Manager, Star Capital has just crunched Latin American Cape numbers and Colombia is the cheapest on 10.1, while at 10.8 Chile is around half the level it was in late 2018. Peru’s cape of 10.9, is down from almost 17 just six months ago.
A version of this article first appeared in MoneyWeek on the 8th of May 2020