EconSouth (Fourth Quarter 2000)


International Focus

Stock Market

Ties between Latin America and the United States continue to strengthen. Trade flows have never been stronger, and total U.S. direct investment throughout the region is at an all-time high. Now more than ever, economic conditions in Latin America will affect the United States and U.S. businesses. This article reviews the economic performance of Latin America in 2000 and describes the outlook for 2001.

In Latin America, economic growth in 2000 was positive but uneven. The region as a whole should grow 3.8 percent after no growth in 1999 (see the table), and real gross domestic product (GDP) growth should continue to increase at its current pace through 2001 (see chart 1). Brazil and Chile achieved strong recoveries in 2000 and are likely to lead the region in growth in 2001. The oil-exporting countries of Colombia, Ecuador and Venezuela recovered from recession in 2000 and are expected to continue to improve in 2001.

Meanwhile, Mexico’s projected 6.8 percent growth in 2000 is forecast to slow to under 5 percent in 2001 as monetary policy tightens and the rate of economic growth in the United States slows. Finally, Argentina’s economic performance in 2000 was a major disappointment. The economy was expected to spring back from 1999’s recession, but real GDP growth in 2000 is now projected to be less than 1 percent while the 2001 Consensus Forecast (from Consensus Economics) stands at 2.8 percent.

Argentina looks to regain investor confidence
Argentina’s political situation and lackluster economic performance are the most immediate areas of concern for the international financial community. In October, Argentina’s Vice President Carlos Alvarez unexpectedly resigned from office. His departure prompted concern over whether or not the left-center Alianza coalition led by President Fernando De la Rua would survive; the coalition’s failure could in turn jeopardize the reform process. The market responded with a sell-off of Argentine bonds as some observers began to express concern about the extent to which Argentina would have access to international financial markets. Improving relations within the Alianza, the passage of a government fiscal stimulus plan and the likelihood of rapid legislative approval of an austere 2001 budget at least temporarily calmed the markets. In mid-November President De la Rua announced a series of emergency economic measures, and the International Monetary Fund (IMF) announced that an assistance package would be forthcoming.

The country’s poor economic performance led some analysts to voice concern about Argentina’s burdensome debt commitments, which amount to approximately 50 percent of GDP when provincial debt is included. Standard & Poor’s cited lower growth forecasts when it downgraded Argentina’s long-term foreign currency rating from BB to BB– in November (but left the short-term B rating unchanged). Analysts are concerned about the extent to which Argentina can generate sustained economic growth over the next few years (see chart 2). Clear signals that the economy is recovering will be key to restoring investor confidence.

Real GDP in Latin American Countries
    Latin America   0.3       4.3 3.8 4.5 4.0
    Argentina –3.1       1.7 0.9 3.7 2.8
    Bolivia   0.6       NA 3.0 NA 3.5
    Brazil   1.0       4.0 3.8 4.5 4.3
    Chile –1.1       6.0 5.5 3.8 5.7
    Colombia –4.5       3.0 2.8 6.5 3.2
    Costa Rica   8.3       NA 5.2 NA 4.6
    Dominican Republic   8.3       8.4 6.5 6.5 6.1
    Ecuador –7.3       0.5 1.2 3.5 3.2
    Guatemala   3.5       3.6 NA 3.0 NA
    Mexico   3.5       6.5 6.8 4.8 4.7
    Panama   3.3       NA 3.3 NA 3.6
    Paraguay   2.3       NA 2.3 NA 3.0
    Peru   1.4       4.0 4.4 6.0 2.9
    Uruguay –3.2       2.0 1.2 4.0 3.2
    Venezuela –7.2       2.5 2.7 3.0 3.9
*Consensus represents an average of private forecasters as published by Consensus Economics.
Sources: International Monetary Fund, September 2000 World Economic Outlook; Consensus Economics, Latin American Consensus Forecasts, October 2000.
Strong performers pace the region
Brazilian economic fundamentals improved in 2000 and appear set to continue on a positive track. Real GDP growth is forecast to increase 3.8 percent in 2000. According to Consensus Forecast, inflation should come in at just over 6 percent (down from 8.9 percent last year), and unemployment has finally begun to decline. The forecast for 2001 projects 4.3 percent GDP growth and inflation below 5 percent. Despite a much-hoped-for trade surplus, the country is likely to experience a trade balance near zero in 2000 as import growth outpaced export growth because of higher oil prices and low international prices for Brazilian commodities. Nevertheless, exports are increasing as the trade deficit totaled U.S.$6.6 billion in 1998 and fell to U.S.$1.2 billion in 1999.

In 2000 Brazil made substantial progress toward reducing its fiscal vulnerabilities. Fiscal restraint imposed by recent legislation, expenditure cuts and improved tax collection is expected to lead to a decline in public sector borrowing in 2000 (the current projection is a deficit of 3.8 percent of GDP compared to 9.5 percent in 1999). Tax and social security reforms have yet to be completed, and the government has also failed to reach its ambitious poverty-reduction goals.

Brazil’s trade balance in 2000 was not significantly affected by Argentina’s poor economic performance. While Argentine consumption of Brazilian goods fell a hefty 20.5 percent in 1999, Brazil’s exports to Argentina were up 19 percent in the first nine months of 2000 over the same period in 1999. Furthermore, Brazil is not as economically dependent on its neighbor as Argentina is on Brazil. Argentina does purchase the overwhelming majority of Brazil’s exports to Mercosur countries, but only 11 percent of Brazil’s total exports go to Argentina. Much larger shares go to the European Union (29 percent) and to the United States (23 percent). Conversely, around 30 percent of Argentina’s total exports go to Brazil.

Latin American Real GDP Growth
Latin American Real GDP Growth
Sources: International Monetary Fund, September 2000 World Economic Outlook; Latin American Consensus Forecasts, October 2000

Argentina Real GDP
Argentina Real GDP
Sources: International Monetary Fund, Consensus Economics. Data for 2000 are an estimate; data for 2001 are from Consensus Forecasts.

Chile’s economy recovered strongly in 2000: real GDP is forecast (by Consensus Forecast) to grow 5.5 percent, compared to –1.1 percent in 1999. Growth for 2001 is forecast at 5.7 percent. Chile’s growth has been largely export-led as domestic demand has remained moderate. This relative weakness in domestic demand resulted in unemployment remaining high despite the economic recovery. The unemployment rate reached 10.5 percent during the third quarter of 2000, up from 8.2 percent in the first quarter. Lowering the high unemployment rate is a top priority for President Ricardo Lagos’ administration.

In its first six months in office, the Lagos administration pushed through key reforms to liberalize financial markets and appears set to resume the pace of reform after several months of sending out contradictory signals. The government seeks to pass labor reform legislation in 2001 as well as a bill regulating public share offers in order to protect minority shareholders. The administration has targeted a fiscal surplus of 1 percent of GDP every year through 2005 and an inflation target of 3.5 percent. Higher oil prices have led to a projected inflation rate of 4.7 percent in 2000, but core inflation is expected to be more modest.

Mexico’s economic growth accelerated in 2000 to an estimated 6.8 percent from 3.7 percent in 1999. In 2001, the Consensus Forecast projects real GDP growth to decelerate to 4.7 percent, a growth rate that should rank among the strongest rates in the region. The relative slowdown from 2000 is largely a result of a likely deceleration in U.S. economic growth and tighter fiscal and monetary policies in Mexico. The new administration of President Vincente Fox is not expected to alter Mexico’s market-oriented economic policies. Inflation is expected to slow from 8.6 percent in 2000 to just below 8 percent in 2001.

On the political front, 2001 will inaugurate a new period in the country’s history. Mexico will have its first administration not led by the PRI (Partido Revolucionario Institucional) since 1929. The transition is proceeding smoothly and is evidence that the process of democratization in Mexico is moving forward. While past presidential transitions often resulted in economic crises, no such post-transition crisis is expected in the coming year.

Midsize economies keep step
Colombia faces a series of obstacles — fiscal imbalance, concerns over the reform agenda, and a protracted insurgency — that will continue to dampen the economic outlook even as the economy returns to growth. After rebounding from recession in 1999 (the first in 60 years), the Colombian economy experienced sustained but low growth in 2000. The economy is on track to reach 2.8 percent real GDP growth in 2000 after contracting by over 4 percent in 1999, and inflation is forecast to be under 10 percent this year for the first time since the early 1970s. The Consensus Forecast is for growth to reach 3.2 percent in 2001.

But despite near-term improvement in the economic indicators, Colombia still finds itself in the midst of a political and economic crisis. Structural reform has stagnated amidst political gridlock. Real GDP growth averaged less than 1 percent between 1996 and 2000. During the 1990s, drug cultivation and the underground economy expanded, as did the toll from guerilla and paramilitary violence. During late 1999 and 2000, the civil war appeared to enter a new phase as public safety deteriorated even further and private investment declined. Since the announcement of Plan Colombia, the government’s new effort to combat drug production and promote peace, the conflict has escalated (the U.S. government has approved U.S.$1.2 billion in assistance for Plan Colombia). Growth prospects for Colombia remain limited as long as concerns about public safety continue to deter private investment.

The Ecuadorian economy has shown remarkable signs of recovery after a disastrous performance in 1999, when the economy contracted 7.5 percent. The turnaround followed a brief political crisis and the January announcement of a plan to dollarize the economy. Defying most expectations, the economy showed signs of recovery during the first half of 2000. Dollarization, the signing of an IMF standby agreement and higher oil prices contributed to consumer confidence and an increase in domestic demand. The monetary stability brought about by dollarization increased the purchasing power of Ecuadorians and lowered real interest rates. However, despite an improving macroeconomic picture, structural reform has lagged, prompting the IMF to delay a scheduled $42 million installment of standby credit until the government makes progress toward cutting subsidies and instituting financial sector reform and tax reform. The current IMF agreement expires in April, and lack of progress toward reform could jeopardize a new agreement. An increase in consumption and investment, as well as higher revenues from oil exports, is forecast to result in real GDP growth of 1.9 percent in 2000 and between 2 and 3 percent in 2001.

Peru experienced a political crisis in 2000 when President Alberto Fujimori made a successful bid for a third presidential term that critics charged was illegitimate. The crisis culminated when President Fujimori was removed from office following a scandal involving one of his top advisers. (Fujimori’s letter of resignation was rejected by the Congress, which instead dismissed him for being “morally unfit to serve.”) On Nov. 22, opposition leader Valentin Paniagua was sworn in as interim president. New presidential elections are scheduled for April 2001, and the winner will be inaugurated in July. Paniagua faces the difficult challenge of restoring confidence and economic stability to Peru.

The forecast for Peru’s real GDP growth for 2000 has been revised down to 4 percent and to around 3 percent for 2001 largely because of the uncertain political climate and a drop-off in foreign investment. Peru’s year-over-year inflation rate is forecast to be near 4 percent, the same as in 1999. The inflation forecast for 2001 is around 3 percent.

During the first half of 2000, Venezuela’s economy recovered from its 1999 recession. Led by higher oil revenues and increased fiscal spending, the Venezuelan economy should grow 2.7 percent in 2000 — well up from the 7.2 percent contraction in 1999.

Dependence on oil export revenues will continue in Venezuela, leaving the country vulnerable to a decline in oil prices. The Consensus Forecast sees oil prices declining to $26 per barrel by October 2001, a decline of roughly 20 percent from October 2000. Nonetheless, forecasters expect Venezuela’s real GDP growth to accelerate slightly to 3.9 percent in 2001 largely because of expected ongoing stimulus from fiscal policy. Inflation is forecast to accelerate modestly in 2001 to 17.7 percent from 2000’s estimated increase of 16.8 percent. On the political side, President Chavez continues to consolidate political power as exemplified by the fact that the legislature, which is dominated by his supporters, recently granted him unprecedented power to make policy through executive decrees.

Central America and the Caribbean gain ground
Central America’s real GDP growth is forecast to be 3.1 percent for 2000 and 3.8 percent for 2001. Weaker prices for the region’s principal exports of sugar, coffee and bananas and higher prices for imported oil put a damper on economic growth in 2000.

Costa Rica’s economy is projected to expand 5.2 percent in 2001, led by growth in the export-oriented free-trade zones. A more positive outlook may turn on legislative approval for the privatization of state-owned energy and telecommunications firms. In Guatemala, weak domestic demand and moderate growth in exports should result in 3.6 percent real GDP growth in 2000 and 3 percent in 2001. Panama’s projected 2000 real GDP growth remains subdued at 3.3 percent in the aftermath of the U.S. military’s departure and storm damage that weakened agricultural output. In order to comply with an IMF standby arrangement, President Mireya Moscoso must negotiate structural reform with an opposition-led legislature.

In the Caribbean, the Dominican Republic’s new president, Hipólito Mejía, is seeking legislative approval for an ambitious structural reform program. Tighter monetary policy will lead to a slowdown in real GDP growth, which is forecast at 6.5 percent in 2000 and 6.1 percent in 2001.

Varied progress on horizon for Latin America in 2001
Economic recovery and growth will continue in Latin America in 2001, but there will be significant divergence within the region. The political situation in several Andean countries and uncertainty in Argentina cloud an otherwise positive regional forecast. U.S. trade and investment flows appear poised to continue, and opportunities clearly exist for U.S. business to further expand into Latin America’s liberalizing economies.

This article was researched and written by Mike Chriszt, Stephen Kay, Elizabeth McQuerry and Myriam Quispe-Agnoli of the Atlanta Fed’s Latin America Research Group.

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