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7th Annual Latin America Predictors Forum: Economic, Financial, and Trade Predictions for 2011

December 02, 2010

Speakers:

  • Audley Fitz-Albert Shaw, Minister of Finance and the Public Service, Jamaica (keynote remarks)
  • Bertrand Delgado, Senior Research Analyst, Emerging Markets-Latin America, Roubini Global Economics
  • Eric Farnsworth, Vice President, Americas Society/Council of the Americas
  • Sergio Luna, Vice President, Department of Economic Research, Banamex-Citi
  • Douglas Smith, Chief Economist, The Americas, Standard Chartered Bank
  • Nancy Anderson, Senior Director, Americas Society/Council of the Americas (moderator)

Summary

Americas Society and Council of the Americas hosted a December 2 panel discussion on the economic, financial, and political outlook for Latin America and the Caribbean. With the Jamaican finance minister as the keynote speaker, discussion centered on progress made by Jamaica in the area of fiscal responsibility and increasing collaboration with the region. Panelists gave an overview of growth predictions for Latin America, as well as factors that will differentiate countries in the region in 2011.

Caribbean and Latin American Collaboration

Jamaica’s Minister of Finance Audley Shaw delivered keynote remarks highlighting Jamaica’s progress in terms of lowering debt ratios and increasing fiscal responsibility. He stressed that his country—and the Caribbean region as a whole—is set to take advantage of the tremendous growth and technological advances experienced by neighbors in Latin America. But he also voiced concern over public security, calling on the Latin American and Caribbean countries to collaborate more closely to enhance capabilities, reduce crime, and fight poverty.

High debt ratios and low growth have characterized Jamaica’s economy over the last two decades. Even before the financial crisis, the country grew at an average of 1 percent while the global economy grew at 5 percent. When Shaw took office three years ago, his aim was to reengage with the multilateral institutions—such as the International Monetary Fund, Inter-American Development Bank, World Bank—and ensure sustainable growth in Jamaica. The government implemented a series of performance matrices relating to transparency, tax reform, and public sector reform to make the government agencies more lean and responsive.

As a result, Jamaica has been able to borrow from multilateral institutions at rates between 0.63 percent and 1.5 percent. The country also completed a debt exchange this year to exchange $8 billion from an average interest rate of 17 percent to 12 percent. At a rate of 7.5 percent, its federal interest rate stands at its lowest in 33 years.

Jamaica now seeks investment to grow and be able to borrow at single digit rates on international capital markets. The country is also collaborating with other countries in thee region, including with Colombia on agricultural efficiency and Brazil on sugar-cane ethanol production. Shaw’s goals include repositioning Jamaica as a financial services center and call center hub, and he is also seeking investment in tourism and housing, particularly to accommodate employees in the tourism sector.

Strong regional growth for 2011

Panelists turned the discussion to the Latin American region as a whole, which—along with Asia—is leading the world out of the global economic crisis. The speakers agreed that growth rates in Latin America will average 6 percent for 2010 and slow to 4.5 percent in 2011. Even with the decrease, the region’s growth will continue at or above potential and outpace growth in the U.S. and Europe. According to Roubini’s Bertrand Delgado, Brazil, Peru, Chile and Argentina are exceeding growth expectations due to strong domestic demand, while Colombia and Mexico—though seeing positive growth—have disappointed in comparison. Doug Smith of Standard Chartered agreed, terming Brazil, Peru, and Chile as the “usual suspects” for regional success stories.

AS/COA’s Eric Farnsworth noted that watching the region lead the way out of a recession is a nice change from the 1980s, when Latin America caused global economic troubles. Citi-Banamex’s Sergio Luna also noted current growth rates have not been seen since the 1980s, when growth stood at about 6.7 percent. Now he forecasts a seven-year period in which Latin American growth will outpace that of the global economy. This is partly due to “a bit of luck” in relation to commodity prices and good terms of trade, particularly with China. But Luna also credited an important regional effort to “put the house in order” and focus on fiscal consolidation.

Smith noted that Standard Chartered had raised forecasts for the region several times due to resilience in fiscal and monetary policy, as the firm became less worried about rising debt burden and witnessed solid domestic demand. Delgado added that the region will be able to maintain strong liquidity because sluggish growth in the advanced economies will mean continued easing in monetary policy. The Federal Reserve won’t move on interest rates until 2012 or 2013 while further quantitative easing in the third and, possibly, the fourth quarter are expected. He added that this will provide emerging markets with cheap credit to continue financing domestic demand. The region remains fairly safe in terms of continued investment prospects stemming from strong fiscal responsibility and solid macroeconomic management demonstrated by most Latin American countries, with Argentina and Venezuela being the exceptions.

In terms of monetary policy, speakers agreed that Brazil, Chile, and Peru will lead tightening cycles, while Mexico will be behind due to close ties to the United States. Colombia may not tighten until 2012, given that domestic demand is still below potential. Luna says policy makers will need to hike interest rates to reduce inflation but will also face currency appreciation. Fiscal consolidation, he says, will be key in 2011 and currency wars will continue. Smith agreed that controlling inflation will drive currency appreciation pressures, but stressed that these small increases will not have a great effect on exports in the region, particularly in the countries where domestic demand is the largest driver of growth.

Two speeds of economic growth emerge

Given the positive forecast for the region, Farnsworth stressed that avoiding “triumphalism” will be a top challenge. Luna agreed and said the region’s economies will need to properly administer their success. He also emphasized that, despite the fact that the region has been moving in tandem over the last few years, there is no Latin American business cycle; the different drivers of growth among the economies will become more apparent starting next year.

Indeed, the divide is evident on the political side as well as in the economic numbers. Farnsworth noted that while Chile emerged as the “star of the south” for its strong economy and the successful rescue of the miners, Haiti remains in crisis. Mexico and the Caribbean (along with many other countries in the region) are seeing rampant crime. Venezuela is plagued by low growth, given anti-private sector policies and a strong dependence on oil prices. These regional differences will become more evident in 2011.

Smith defined two growth tracks in the global economy next year: the low growth track led by West and a fast track led by India and China. The implication for Latin America is that the economies with the strongest domestic demand and/or the greatest links with China will experience the greatest success. While trade with China is not necessarily a source of growth, it does lower vulnerabilities and boost reserves, strengthening economies overall. Smith also predicted that India will be the next big thing for Latin America, though perhaps beyond 2011. While China’s population ages and its labor costs increase, India’s young economy will see significant urbanization and a rise in manufacturing.

With regard to trade policy in the United States, Farnsworth cited little optimism in moving the agenda forward. While the Republicans will control the U.S. Congress come January, there is a strong populist contingent in the Tea Party that may not support trade. The Republicans as a whole have made it clear that other priorities, including extending tax cuts and overturning health care reform, will trump the trade agenda. However, the Obama administration has made it clear it intentions to push the South Korea agreement forward, which may present an opportunity to pass pending agreements with Colombia and Panama at the same time.