0
Latin America
Despite political uncertainty and rising oil prices, inflation in Latin America is expected to post an average rate of 5.4 per cent this year, the lowest in more than 25 years. The region’s economies are expected to grow a total of 3.8 per cent, according to the International Monetary Fund, higher than the fund’s estimates for 2006 GDP growth in the United States (3.3 per cent) and the European Union (two per cent), but lower than the forecasts for the world (4.3 per cent).
The GDP growth will be driven by a combination of factors, depending on countries. For oil-exporting countries like Ecuador and Venezuela, rising oil prices will help boost exports, but net importers of oil - especially in Central America - will be negatively affected. Chile will benefit from rising copper prices, while countries like Argentina, Brazil and Peru will likely continue their successful exports of agricultural products.
Colombia, Costa Rica and other coffee-exporters should benefit from tighter coffee futures prices during the first half of 2006. In terms of specific export markets, China is expected to continue growing its share, while exports to the United States and Europe are also picking up. Meanwhile, the Central American and Caribbean members of the trade group are expected to benefit from rising two-way trade and foreign direct investment as a result of the pact coming into force this year.
However, Latin America’s expected GDP growth this year does represent a slowdown compared with the 2005 estimated growth of 4.1 per cent, lower than the 2004 rate. Latin America’s expected inflation rate this year is still higher than the world average - forecast at 3.7 per cent this year. But the rate - if realized - shows that progress is being made despite growing political volatility.
The inflation rates vary strongly from country to country, with two countries showing particular deteriorations in fighting consumer price growth: Argentina and Venezuela. Also, the Dominican Republic is expected to see strong inflation growth, although still within single-digits. These three economies are in the minority in Latin America, where 11 countries are expected to see falling inflation rates, six will see rising inflation and two will likely keep the same rates, according to the IMF forecasts.
One key factor driving GDP growth is the growing levels of foreign direct and portfolio investment. European investors have especially boosted their investments, attracted by higher returns than European funds provide. All in all, Latin American equity funds attracted some $4.5 billion last year, a nine-year record, according to Emerging Portfolio Fund Research data quoted by Bloomberg.
Brazil
Brazil’s economy, Latin America’s largest, is expected to expand by 3.5 per cent this year, a slight improvement over last year’s growth of 3.3 per cent, according to the IMF. Inflation is set to fall to 4.6 per cent in 2006 - from 6.8 per cent in 2005. The relatively good economic results come despite a corruption scandal involving members of the ruling Workers Party (PT) and uncertainty around the outcome of the October 2006 presidential elections. Unlike in the past, political uncertainty has not weakened the economy. Much of Brazil’s GDP is driven by booming exports - especially to China - and healthy profits by Brazilian companies. Brazil is seen as one of the most attractive economies in the world. The country’s healthy macroeconomic performance due to rising exports to China, higher commodity prices and improving domestic demand on the back of rising incomes have helped generate greater investor optimism. The South American giant also continues to be an attractive market for manufacturing investors, although automotive and transportation equipment investors ranked Brazil slightly lower from 6th to 5th place. The industry remains quite bullish on Brazil as cheaper credit, higher incomes and government-sponsored tax concessions have boosted vehicle sales.
On the other hand, the negative side is rigid labour market and high business costs. Despite renewed investor enthusiasm and the government’s economic pragmatism, Brazil suffers from one of the most rigid labour markets in the world, heavy bureaucracy, and slow implementation of public private partnerships needed to address infrastructure bottlenecks.
Output growth has gained momentum since the second quarter of last year and should pick up further over the near term. Private consumption has been resilient, and investment is on the rise. Both the trade and the external current accounts remain in healthy surpluses, despite the rising demand for imports as a result of the strengthening of the real.
Prudent macroeconomic management needs to continue to anchor expectations. Rapid disinflation has paved the way for on-going monetary easing, and the end-year inflation target is now within reach. Fiscal performance remains strong, benefiting from buoyant revenue, and a further fall in the public debt-to-GDP ratio in 2005-07 would be desirable.
The primary fiscal surplus totalled 5.6 per cent of the GDP in January-November, well in excess of the full-year target of 4.25 per cent of the GDP. Following the publication of weaker than expected third-quarter data, the estimate for real GDP growth in 2005 has been revised down to 2.6 per cent (previously 3.3 per cent). However, forecast for 2006-07 is unchanged.
Brazil’s primary budget surplus widened to 93.5 billion reais ($42.1 billion) in 2005 from 81.1 billion reais in 2004 thanks to tight spending controls. The result, which investors track to gauge a country’s ability to service its debts, was equal to 4.84 percent of gross domestic product compared with 4.59 per cent in 2004. That means Brazil surpassed its annual public sector primary budget surplus target of 4.25 per cent of the GDP.
The target aims eventually to cut Brazil’s net budget deficit and its debt load. But record interest payments of 157.1 billion reais widened the net budget deficit in 2005. In December, the primary budget result, which excludes interest payments, was a deficit of 5.1 billion reais. This was wider than estimates from three international investment bank analysts of a deficit of between 4.1 billion reais and 4.7 billion reais.
The net budget deficit, which includes interest payments, was equal to 3.29 per cent of the GDP in 2005, wider than 2.67 per cent in 2004. The central bank said it expects the net budget deficit to narrow to 2.7 per cent of the GDP in 2006. High interest rates and a large percentage of debt that floats on Brazil’s benchmark Selic interest rate, currently at 17.25 per cent after peaking at 19.75 per cent in 2005, pressured the net budget deficit.
Mexico
Mexico’s economy, Latin America’s second-largest, is expected to expand by 3.5 per cent this year, an improvement over last year’s growth of three per cent, according to the IMF. Inflation is set to fall to 3.6 per cent in 2006 - from 4.3 per cent in 2005. Much depends on who wins the July presidential elections. Mexican Finance Minister sees limited risk to government expectations of 3.6 per cent to 3.7 per cent economic growth in 2006, although sustained high growth isn’t be likely until structural reforms are carried out. The main risk is a slowdown in the global economy, particularly the US.
Meanwhile, Mexico has been growing as an investment destination and jumped six places on the latest AT Kearney Foreign Investment Index - from 22nd in 2004 to 16th place in 2005. The turnaround in investor confidence was led by increased FDI confidence among manufacturing investors. Japanese investors are especially keen on Mexico and ranked it as their 5th most attractive market in 2005 - an improvement from below the top 25 in 2004.
Mexico is also the top destination for German investors. Most of the (German) companies differentiate between Mexico and the rest of Latin America. Mexico’s economic volatility and risk are considered to be a lot lower than that of most other countries with the exception of Chile. Mexico is also seen as an entrance door to the largest market of the world, the US market.
The government’s strategy to reduce dependence on the US economy by pursuing a whole constellation of free trade agreements in Europe and Asia could be paying off. With the country preparing for the July 2006 Presidential election and high oil prices helping fill the state’s coffers via state-run PEMEX, future reform in the energy sector will be less likely – possibly delaying further the much needed infrastructure and technology to investments necessary to upgrade the oil, gas and electricity sectors.
Mexicans have been confidently buying consumer durables like furniture, televisions and washing machines in recent months, often attracted by offers of paying in instalments as retailers target low-income customers. Analysts do not expect consumption to be strong enough to stir inflationary pressure in Mexico, where 12-month inflation at the end of December was at 3.33 percent, the lowest full-year rate since records began being kept 37 years ago.
Consumer price data for the first half of January was expected to show a rise of 0.24 percent. This has pushed the 12-month inflation rate slightly higher. Mexico’s central bank sees inflation falling inside the target range of two to four per cent this year. But there are still some worrying elements, it said in a statement, pointing to volatility in fruit and vegetable prices, a rise in the cost of some services and concerns about longer-term inflation.
