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Economic News & Analysis—April 15, 2013

China and Venezuela: Part of the emerging markets slowdown story

By Brian Jacobsen, Ph.D., CFA, CFP®, Chief Portfolio Strategist

For those who follow global economics, this past Sunday was an exciting day. Venezuelans went to the polls to elect a new president to succeed Hugo Chavez—who passed away on March 5—and China posted some important macroeconomic statistics for the first quarter.

Nicolas Maduro won the presidential election in Venezuela. This was widely expected considering Chavez handpicked him as successor and opinion polls had Maduro favored by double digits. Maduro effectively pledged to continue the socialist policies of Chavez while the leading contender, Henrique Capriles, ran on a platform to reverse many of Chavez’s policies. According to Capriles, Chavez squandered Venezuela’s massive oil wealth, putting the nation on the road to perdition.

What was so surprising about the election was how narrow Maduro’s margin of victory was. According to the electoral office, Maduro took 50.7% of the popular vote while Capriles won 49.1% of the popular vote. For investors, the election probably has few near-term consequences because Venezuela is not classified as an emerging market. In May 2006, the country was kicked out of the MSCI Emerging Markets Index and put in a standalone index because the country’s policies are not friendly to foreign investors. As a result, many emerging markets investors—or even frontier markets investors—don’t likely have much direct exposure to Venezuela. From an economic perspective, the election could matter in the long run. The country’s finances are not in good shape, and it is heavily dependent on oil revenues, with more than 40% of its oil exports going to the U.S. The drop in the price of oil could continue to strain Venezuela’s finances, perhaps setting the stage for Venezuela to move toward policies more like Brazil’s rather than its current embrace of Cuba-like policies. While that change could be a long-term positive, transitions like that never occur without disruptions.

Many Latin American economies have become dependent on selling commodities to the rest of world. The run-up in commodity prices over the past decade has been a boon to many of those nations, but that boon could turn to bust as commodity prices have begun to decline. The decline is likely to persist as China continues to converge toward a slower pace of growth. Gross domestic product (GDP) in the first quarter of 2013 grew 7.7% from the same quarter a year ago in China—down from the 7.9% rate in the fourth quarter of 2012. Industrial production grew 8.9% in March, which was down from 9.9% in February. Retail sales in March rose 12.6%. 

Part of the slowdown in growth could be due to the long-run problem of a slowing growth rate of the population. If you measure the GDP growth in terms of per person, the slowdown is barely evident and should be expected. As the population migrates from rural to more urban areas, we could see many years of above 6% growth but probably few, if any, years above 8% growth. If hopes for accelerating growth in China were buoyed by rising commodity prices or emerging markets stocks, those hopes may prove to be more dream than reality.

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