It may be too early to herald a revival of Latin America’s manufacturing following a recent currency decline, according to a report by London-based research firm Capital Economics.
Increased competitiveness of local factories has been seen as a good side effect of the currency shock triggered by prospects of reduced economic stimulus in the United States. However, the data compiled by Capital Economics suggests there is still a long way to go before investors see any fireworks.
David Rees, emerging markets economist at Capital Economics, wrote in his report:
Most currencies are still around 15 percent stronger in trade-weighted terms than at the start of 2008. Indeed, even the Brazilian real – which has fallen by 20 percent in trade-weighted terms over the past two years – is still far stronger than it was in 2005.
The upshot is that the conditions do not yet seem to be in place for a renaissance in Latin American manufacturing. Instead, one of two things must happen if the region is to experience a period of rapid growth in industry – the authorities need to either kick-start supply-side reforms to boost productivity growth and increase flexibility in the labour market, or exchange rates need to weaken even further.