Argentine woes threaten region ...  Since August, Argentina has ranked last in the LatinFocus Consensus Forecast with regards to economic growth this year.  This month the country has seen yet another significant downgrade in its projected GDP growth forecasts amid the woes surrounding its public finances.  In fact, concerns over the mounting burden of Argentina’s borrowing requirements has sent sovereign spreads through the roof (see table below), further exacerbating the strains on the public accounts.  As a consequence, private sector financing costs have risen sharply with no apparent relief in sight.  The crowding out of private sector borrowers from national and international capital markets by the government is likely to curtail investment and consequently further undermine growth prospects.  As a result, the Consensus has slashed another 0.8% from this year’s economic growth projection after the 0.6% cut applied in last month’s edition and sees the Argentine economy expanding a meager 1.0% this year.

… but favourable growth prospects remain.  While Argentina's current economic plight may raise the cost of borrowing throughout the region, the effects are unlikely to prompt a slowdown in regional growth, according to the Consensus Forecast.  In fact, the regional growth forecast has been revised downward by only 0.03% from 4.47% to the current 4.44%, which can be attributed to the adjustment in Argentina.  Although neighbouring Brazil has the closest ties with Argentina, the effects on the real side of the economy are negligible as long as there is no major meltdown.  The Brazilian economy has been steadily recovering from last year’s recession and consumer confidence is rising.  As a consequence, panellists remain upbeat about this year’s prospects and continue to expect a 3.8% expansion.  Mexico's close ties to the U.S. economy are recognized by the markets and thus provide a certain shielding effect against emerging market crises.  The Consensus is even more optimistic than last month about the economic growth prospects in Mexico for this year and 2001, with growth projections at 6.9% and 4.4% respectively.  The only country that suffered a major downward revision is Peru.  However, the domestic political crisis rather than a spillover effect from Argentina is accountable for the 0.4% cutback in this year’s GDP growth to 4.3%. 

Asset prices tumbled.  Despite favourable regional growth prospects, investors scaled back investments in most Latin American countries by a sizeable amount due to the crisis in Argentina with significant impacts on the asset prices as evidenced by the substantial widening of sovereign spreads between 30 September and 10 November.

Although spreads have widened across the board not all of the effects can be attributed to the Argentine spillover.  More important has been the current “flight to quality” in the wake of the correction in U.S. technology stocks.  The same holds true for the stock markets in the region and exchange rate movements.  Particularly Mexico has proven a high correlation with stock market movements in the United States.

If the Argentine government succeeds in demonstrating the market its capability to finance its debt obligations and international aid is indeed forthcoming, then investors that have fled the region should come back and asset prices are likely to rebound, provided that international markets do not deteriorate significantly.

Note:  The above text is an abridged version of the LatinFocus Consensus Forecast briefing and includes information available up to 10 September.  For more details please click here.

For five-year forecasts, please click here.