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Contagion from Argentina limited in
Latin America
In Latin America, the IMF notes the minimal spillover effects from
Argentina – with the exception of Uruguay – on the availability and costs
of external financing. However, the Fund states that substantial
Argentina-related contagion risks and uncertainties remain, particularly
if there is no rapid turnaround in policies, if confidence deteriorates
further, and if the magnitude of losses for investors and bondholders ends
up being greater than estimated so far. Moreover, so the Fund argues, some
economies in the region could also suffer from the sharp improvement in
Argentina’s international competitiveness.
For the region as a whole, the IMF expects economic growth this year to
remain unchanged from the 0.7% registered last year, improving to 3.7% in
2003 (Note: Data refer to the IMF’s “Western Hemisphere” regional
aggregate, which in addition to the eleven countries surveyed by
LatinFocus also includes Central America and Caribbean states). Thus, the
World Economic Outlook projection is a notch less optimistic than the
Consensus for the region, which maintained last month’s forecast unchanged
at 1.0% and 3.8% for this and next year respectively. As noted above, our
forecast weights change significantly owing to the devaluation in
Argentina. As a result, the projected 9.8% contraction in Argentine
economic activity this year (IMF: 10% to 15% contraction) weighs less
heavily on the regional average than in the IMF forecast.
Argentine recovery depending on
economic programme of new government
According to the Fund, Argentina will be plagued by recession and
inflation this year. With rising unemployment, lower consumer and business
confidence, locked up bank deposits and the impact of the devaluation on
incomes and spending, domestic demand is likely to plummet this year. On a
positive note, the devaluation greatly increases the country’s
international competitiveness and exports will rise further, boosted by a
pick up in global demand. Imports, on the other hand, will fall
substantially in the light of dropping domestic demand and a cut off in
external financing. As a result, the trade balance and current account
will turn positive this year. The shape of recovery next year – presaged
between 0% and 3% compared to a 2.5% growth projected by the Consensus –
remains highly uncertain and will depend largely on the new government’s
economic program and its implementation.
Brazil’s external financing
requirements cause concern
For Brazil, the IMF forecast is broadly in line with our Consensus and
expects the economy to gain strength this year and next amid improving
trade performance and recovering domestic demand. In particular the
recoveries in the United States and Europe, further easing of the power
crisis that hurt activity in 2001 and improving domestic confidence should
boost the region’s largest economy. However, the IMF identifies the large
external financing requirement as a weakness and explicitly cautioned the
country to maintain its inflation target. It may therefore seem ironical
that just a day prior to the presentation of the WEO, on 17 April, the
Brazilian Central Bank announced that the increase in its inflation
forecast.
Mexico will profit from US rebound
Mexico is seen to profit greatly from a swing of the US economy and the
IMF expects growth to pick up strength during this year and to return to
robust rates in 2003. Next to higher oil prices, the country should reap
the benefits from its strong monetary and fiscal policy track record,
which has cemented the government’s credibility. As a consequence,
financial market sentiment has remained favourable during the downturn and
the country even enjoyed upgrades to investment-grade status for foreign
currency–denominated sovereign bonds from the major international rating
agencies. If these favourable trends continue, borrowing costs should drop
further, thus helping Mexico’s public finances.
Andean economies will recover in the
wake of the global pickup
Andean countries have mostly suffered from lower commodity prices
throughout 2001 next to a general slump in demand for their products:
Lower oil prices affected Venezuela and, to a lesser extent, Colombia and
Ecuador; lower prices for copper and other metals lowered income in Chile
and Peru; while Colombia also suffered from a slump in coffee markets. As
these trends are reversing with increasing global demand for commodities,
the Andean economies will gain speed this year with the notable exception
of Venezuela where political and economic pressures, which have affected
domestic and foreign investor confidence thwart a sustained economic
rebound.
Note:
The above text is an abridged version of the LatinFocus Consensus Forecast
briefing for Latin America. For
more details please click here.
For five-year forecasts,
please click here.
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