Latin America is inching slowly along the road to recovery from the crisis that began in Argentina in 2001 and quickly swept though most Latin nations, pulling down trade across the region in 2002 and into 2003. U.S. exports to South America fell more than 20 percent in 2002 and continued to slide in the first half of 2003, although at a slightly slower rate. Export markets may revive in the second half of this year, but political tensions in several countries and ongoing difficulties in Argentina will keep credit risks at higher than average levels.
Banc One forecasts real 2003 GDP growth in South America of 3.5 percent, a considerable improvement over last year's recessionary level of -2.2 percent and negligible growth in 2001 of only 0.1 percent. This forecast, however, is premised on oil prices averaging $28 per barrel, which may prove to be overly optimistic.
According to Inter-American Development Bank estimates, if the current international tensions do not grow worse, Latin America and the Caribbean could grow between 1.5 and 2 percent this year, up from a 0.5 percent decline in 2002.
If the upward trend continues, growth could reach 4 percent in 2004. "Latin America is cautiously optimistic about its economic recovery after suffering one of the worst years in decades," said IBD President Enrique V. Iglesias in his closing speech at the March 2003 Board of Governors' annual meeting.
Iglesias also highlighted how several countries in the region are combining prudent macroeconomic management with efforts to mitigate the social impact of recent crises. In order to make inroads against the poverty that has trapped up to 44 percent of the population of Latin America and the Caribbean and severely restricted trade, the regional annual growth rate must reach an average of 2.7 percent annually over the next 15 years, according to the IDB. Iglesias recommended an agenda for sustained recovery that includes maintaining macroeconomic equilibrium, focusing social policy to benefit the neediest sectors of the population, expanding foreign trade, deepening integration, attracting investment, promoting growth of the private sector and increasing business productivity, especially for small- and mid-size enterprises.
Argentina's economic and political situation remains dire. Coface, the French rating agency, gives Argentina a D rating, the lowest speculative grade, indicating extremely high levels of risk. The nonpayment index has improved since late 2002 but remains catastrophically high. Argentina's real GDP contracted by a staggering 11 percent in 2002 and is expected to register low negative numbers for 2003. Inflation hit 38 percent in 2002 and should remain at roughly the same level for 2003. U.S. exports to Argentina dropped by almost 60 percent in 2002 to $1.6 billion, down from $3.9 billion in 2001 and a high of $5.9 billion in 1998.
Banc One forecasts real GDP growth of 2.0 percent for Brazil this year, up from 1.2 percent in 2002 and 1.5 percent in 2001, but still well below the 4 percent achieved in 2000. It anticipates inflation of 9.5 percent, down from 10.2 percent for 2002. Despite slow growth, the Brazilian government is turning both fiscal and monetary policy in a contractionary direction to boost confidence in the financial markets. If inflation increases by more than 1 percent per month during 2003, the government will toughen contractionary policies.
Coface currently gives Brazil a C rating, a speculative grade indicating that an unsteady political and economic environment could worsen an already bad nonpayment record. The country has been on the watch list with negative implications since July 2001. Bankruptcies in Brazil rose 28.8 percent in 2002. Coface notes that the size of the foreign debt remains a major obstacle to growth.
Although most of the crippled Latin economies bottomed out in 2002 and are expected to show some improvement this year, Venezuela has plunged into a deeper recession. …