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Latin America 2007: Economic, Financial and Business Predictions

October 31, 2006

Latin America 2007: Economic, Financial and Business Predictions
Conference Summary
New York, November 15, 2006

Introduction

Looking ahead to growth and investment prospects in the coming year, the Americas Society and Council of the Americas brought together leading financial analysts to reflect on regional and country-specific economic trends. In its fourth year, Latin America 2007: Economic, Financial and Business Predictions once again offered its over 100 participants critical insight into the opportunities and challenges facing the region.

Conference speakers included experts from the private sector, academia, and the International Monetary Fund (IMF) including:

• Jose Luis Daza, Managing Director at IFL-Integrated Finance Ltd
• Geoffrey Dennis, Managing Director, Latin American Equity Research at Citigroup
• Damian Fraser, Managing Director and Head, Latin America Equity at UBS AG
• Michael Hood, Chief Latin America Economist at Barclays Capital, Inc.
• Alberto Ramos, Vice President and Senior Economist at Goldman Sachs & Co.
• Federico Sturzenegger, Visiting Professor of Public Policy at Harvard University
• Vladimir Werning, Vice President, Emerging Markets Research at JPMorgan Securities Inc.

Anoop Singh, Director, Western Hemisphere at the IMF delivered the closing remarks. This summary provides an overview of the main points from the discussion.

Background

After the regional economic recession in 1998-1999, Latin American economies have witnessed strong growth over the last few years, with 2006 continuing that trend. Throughout the region, export and investment growth can be attributed to strong global demand and favorable financing conditions. From Argentina to Mexico and Brazil, economies are maintaining healthy recovery rates. In many countries, domestic demand is a significant factor in boosting production and consumption levels.

Summary

The conference offered an even-handed assessment of the region’s economic outlook, balancing praise for recent expansion with caution for the future. Dependent on the rest of the world for trade and investment flows, a U.S. or global economic slowdown would carry reverberations throughout the region. At the same time, maintaining and expanding recent growth rates will be heavily influenced by implementation of needed reforms and trade diversification.

Regional Predictions

Latin American economic expansion will continue to be tied to global financial conditions, and with the U.S. economy expected to lose steam in 2007, regional economies may likely grow more slowly than in 2006. For Michael Hood and Federico Sturzenegger linkages with the U.S. economy can also have positive effects throughout the region; in 2006, Latin America’s high growth rates can be partially attributed to a growing U.S. economy. But Sturzenegger, in warning of a potential slowdown, noted that the rapid, post-September 11 U.S. growth had likely reached its pinnacle. In speaking of additional factors that may influence growth, Anoop Singh, looking back over the past century, posited that sustained growth relates to political cycles. Sound politics are associated with low inflation rates, and at the same time, primary fiscal surpluses are generally witnessed alongside higher reserve levels.

In examining specific challenges for 2007 and beyond, speakers warned of an over-dependence on trade in certain goods and the need to prioritize investment in long-term development. While current growth can be attributed to high commodity prices, Geoffrey Dennis cautioned that deterioration in China’s economy would lead to a fall in commodity prices. Adding to concerns about fluctuations in the Chinese currency, Sturzenegger noted that appreciation could significantly raise prices to the point that Latin American commodities are no longer a viable option for the Chinese market.

Analyzing longer-term development factors, Singh sees boosting the region’s gross domestic product (GDP) as the biggest challenge. A doubling of the GDP over the next 20 years will require a two percent annual increase in development and infrastructure investment to the point where it reaches 20% of national budgets. Latin America faces the additional challenge of decreasing its high levels of income inequality, which are more pronounced than in the rest of the developing world.

Looking at positive examples from across the region, panelists cited the extraordinary growth seen in Central America, specifically highlighting Panama and El Salvador. In the case of Panama, speakers praised the decision to invest in expanding the canal.

Brazil

Brazilian growth will continue to hinge on passage of long-awaited reforms, and like many countries throughout the region, increased investment in infrastructure. Examining the likelihood of fiscal reform, Geoffrey Dennis is optimistic that passage will occur in the next four years. Such reforms would allow the government to increase its revenue base by taxing the large informal sector, according to Alberto Ramos. In turn, expanded government coffers would open the door for infrastructure investment beyond the US$18 billion currently allocated for 2007 – a necessary step to keep pace with investment levels in other emerging markets. Ramos cited China and Chile as prime examples of countries that have grown with increased infrastructure investment.

However, speakers such as Jose Luis Daza were pessimistic about Brazil’s long-term growth prospects and its financial capacity to address socio-economic issues. In agreeing with Daza, Sturzenegger also noted that accumulation of wealth would positively benefit Brazilians through the corresponding growth in internal markets. Singh noted that in comparison to the other BRIC countries, Brazil has lower levels of investment and GDP growth.

Argentina

A fiscal policy that encourages sustainable export growth and limits inflation is critical for near-term growth in the Argentine economy. Vladimir Werning also commented that while external markets have substantially contributed to recent growth, inconsistent export policy and high taxes (five percent) on manufactured goods exports prevent Argentina from reaching its full economic potential. He also mentioned that profitability overshadows investment, favoring short-term growth at the expense of higher inflation rates. On a positive note, Werning observed that investors view President Kirchner as a pragmatic leader who has stayed clear of political mistakes while continuing to reinvigorate the economy.

Mexico

Speakers addressed both internal and external factors that will shape the Mexican economy’s growth in the coming years. Damian Fraser predicted that a probable U.S. economic slowdown would most negatively affect Mexico, more than other countries in the region, as U.S. demand for Mexican exports falls. A global drop in oil prices below $50 per barrel would also threaten Mexico’s economic growth. But, with the cost of capital dropping by over 20 percent, Mexicans are benefiting from a greater availability of low income housing and increased private sector funding for construction of highway and infrastructure projects. Dennis praised Mexico for its positive consumer market trends and bank equity gains and expressed hope that they could continue in the near future.