Challenges continue in Latin America

Economic conditions for plastics manufacturers will remain challenging in Latin America through all of 2016.

The growth rates for real gross domestic product across the region will vary, but no country will experience any acceleration in growth when compared with 2015. Moderate rates of growth are expected for Peru and Colombia. Brazil's recession will continue, and the contraction in the Venezuelan economy will become more severe.

These forecasts are based on a continuation of the two biggest developments in the global economy that emerged at the beginning of 2015 and then gained momentum in the second half of last year.

The primary negative factor is the sharp decline in global commodity prices. This trend is blamed most heavily on the recent slowdown in the Chinese economy, which resulted in lower global demand for many commodities. But a major — and often underappreciated — contributor is the substantial increase in the supply of commodities that occurred from 2010 through 2014.

These years were also a time of large capital inflows into Latin America. Some of the countries in Latin America contributed to the increase in the global commodity production, but all too often, the large stream of incoming capital was directed to both consumer spending and government spending. This spurred a predictable increase in consumption and imports, but this was not matched by an increase in investments in the type of productive assets that raise the productivity of a nation's economy. Thus, economic growth in Latin America is still impeded by a need for appropriate infrastructure development and reformed fiscal policies.

The other negative factor for these emerging economies is that growth in consumer spending in the U.S. economy started to gain momentum, which prompted the central bank of the U.S. to begin the process of normalizing interest rates at the end of last year. In other words, the U.S. economy appeared to get stronger while the economies in all of the other regions of the world appeared to get weaker. The uncertainty caused by the combination of slower growth in the global economy and more solid economic growth in the world's safest economy resulted in a huge inflow of capital into American treasury notes and bonds

Thus, we are now on the other side of the investment cycle that started in 2010, and huge sums of money started to flow out of Latin America in 2015. When capital flows out of a region, it lowers the value of the local currencies, it lowers local asset prices and it increases borrowing costs for domestic businesses. Some of the region's central banks have started to defend their respective currencies by raising interest rates or selling their reserves of dollars. This may staunch the flow of capital out of the region, but it will also restrict the rate of economic growth in the near-term.

These cycles represent a normal ebb and flow of global capital that has existed throughout history. Every now and then, these cycles become imbalanced to the point that it creates a crisis and perhaps even a panic. This is not the most likely outcome of the current situation, but memories of the Great Recession of 2009 and the Asian contagion of 1997 are still fresh enough to create some anxiety for both investors and central bankers.

This anxiety is apparent in the data from the plastics industry. Every quarter, the main U.S. trade association for the plastics industry — the Society of the Plastics Industry Inc. — conducts a survey of more than 100 of the world's best-known and most technologically advanced manufacturers of plastics machinery. This survey is an effort to measure and forecast the changes in market demand and investment levels for plastics equipment. The survey includes questions about the outlook for machinery demand in the coming months in five global regions.

According to this survey, expectations for favorable business conditions in Latin America (excluding Mexico) peaked two years ago, and they have been trending downward ever since. This indicates that suppliers to the plastics industry in Latin American countries have experienced a steady decline in investment for capital equipment during the past two years. This downtrend has not yet shown any reliable signs of reversing, but the risks to the outlook appear balanced at the present time. So the chances that things improve in 2016 are equal to the chances that things continue to deteriorate.

This does not mean that investment in new plants and equipment will completely collapse or that there are not any opportunities for plastics processors at the present time. Options for high-quality investments in the plastics industry in Latin America are neither as obvious nor as abundant as they were a couple of years ago. Nevertheless, opportunities still exist across the region.

Smart investors will need patience and discipline in order to overcome the considerable impediments to market growth that currently exist. The prices for such investments likely dropped substantially during the past couple of years, and they are now selling at bargain levels. If the global economy stabilizes in 2016, and the prices for commodities such as crude oil establish a cyclical bottom, then the economic prospects for Latin America will improve substantially in 2017 and beyond.