Latin America in a Global Context - Economic Briefing May 2004

Increasing Optimism about Global Rebound Drawing to an End (continued)

Much better outlook for Japan
The single most important upgrade to an economic forecast since the September 2003 WEO was applied to Japan.  The Fund more than doubled its 1.4% forecast for 2004 GDP growth to 3.4% and is thus 0.3 percentage points more optimistic than the Consensus.  So far, the recovery has been driven by exports, particularly to Asia, and by a rebound in private investment.  According to the IMF, the key question is whether Japan’s recovery can be sustained or whether it will prove to be yet another false dawn.  While corporate sector performance is better than last year, improvements have been concentrated in large export-oriented enterprises and the situation of small enterprises remains difficult.  Similarly, the financial system health is improving but the ratio of non-performing loans remains relatively high.  Finally, deflationary pressures have eased recently and survey data provide tentative evidence that deflationary expectations are easing.  However, a further appreciation of the yen, in spite of the record official foreign exchange intervention, could pose a severe downside risk is.  Therefore the IMF expects the recovery in 2005 to slow to 1.9% output growth versus the 1.8% expected by the Consensus.   

IMF and Consensus see sound recovery in Latin America
For Latin America, the Fund mostly shares the assessment of the LatinFocus Consensus Forecast.  The Fund sees growth strengthening this year, as the recovery in domestic demand takes hold further but sees the outlook as vulnerable to a deterioration in the global financial market environment or domestic policy slippages that undermine investor confidence.  With its 3.9% economic growth projection for 2004, the IMF sees the Western Hemisphere (which is not identical to Latin America since it also includes Caribbean economies) a notch more pessimistically than the Consensus that has the region growing at 4.0% this year.  Next year, the IMF anticipates 3.7% growth versus 3.6% expected by the Consensus. In the main economies, the Fund’s assessment is broadly in line with the Consensus with the exception of Argentina and Venezuela. 

IMF more pessimistic about Argentina than market …
In Argentina, the WEO sees economic growth 1.3 percentage points below the Consensus at 5.5% this year.  The Fund sees the sustainability of the recovery depending on progress on the policy front.  Key policies include: an increase in the budget surplus and the restructuring of sovereign debt to restore fiscal sustainability; a strengthening of the banking system; and an improved environment for private business, including the development of a balanced regulatory framework for private utility companies and a more predictable legal environment. 

… but more optimistic about rebound potential in Venezuela
For Venezuela, the WEO is more optimistic than the Consensus, expecting the economy to expand by 8.8% versus the 7.3% projected by the Consensus.  Obviously, the Fund is more optimistic about the possibility of an orderly resolution of the political crisis and a corresponding recovery in consumer and business confidence.  The IMF highlights that corrective measures are urgently needed to restore fiscal sustainability, as the sharp deterioration in the budget position has significantly increased vulnerabilities to a decline in oil prices or a deterioration in external financing conditions.