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LATIN AMERICA: "Trucks: Brazil Demand Improves, Production Remains Weak (Dec. '14)" report

LATIN AMERICA: "Trucks: Brazil Demand Improves, Production Remains Weak (Dec. '14)" report. 5-page report by BAIRD.

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back to index backLATINtalk August,  2005

The Case for More Structural Reforms

After an upbeat 2004, Latin America appears to be heading for a period of slower growth as global demand cools. The region's gross domestic product (GDP) increased to 5.8 percent in 2004 and is expected to slow to 4.2 percent in 2005 and 3.7 percent in 2006. Most countries have benefited greatly from higher commodity prices, which enabled Latin American central banks to build up foreign reserve stocks. Venezuela's international reserves, for example, have increased an impressive $3.5 billion so far this year, reaching $27 billion the first week of May. Similar gains from solid export performance have taken place in Mexico, Colombia, and Peru, among others.

For many countries, strong GDP growth has also meant increased tax collection and fiscal surpluses, consequently reducing government financing needs. In addition, most governments have made significant efforts to improve their debt service profiles and reduce future amortization payments. These policies earned the recognition of financial markets, which in turn awarded ratings upgrades and lowered risk premiums, allowing more foreign capital to flow into the region.

In addition, high export volumes have also transformed many current account deficits into surpluses. This situation, together with a genĀ­eral widespread adoption of quasi-floating exchange rate arrangements, have made Latin American economies less vulnerable to capital inflow reversals.

However, as global demand eases in the second half of 2005, Latin American countries will begin to face constraints in maintaining solid growth rates and securing foreign capital. First, although governments have made a great deal of progress in reducing inflation, as growth rates begin to fall it will once again become a serious threat for the region. Most countries have been intervening in an effort to stem the appreciation of their own currencies, but inflationary pressures are becoming increasingly apparent. In Argentina, for example, as of May the yearly CPI inflation measure is expected to reach 9.7 percent, already above the government's forecasts of 8 percent. Similarly, in Venezuela, yearly CPI inflation is expected to be above 15.8 percent despite the range of financial and capital controls imposed by the government. Countries will find that they need to either limit their intervention or let markets freely determine the value of their currencies.

Second, Latin America's high public debt ratios remain the region's Achilles' heel. Although the region's debt-to-GDP ratio is only slightly higher than in emerging Europe or Asia, the problem resides in the rate of fiscal expansion that almost all governments have currently undertaken. As exports begin to ease and growth stalls, governments will find it hard to meet newly created recurrent expenses with their tax receipts, and debt levels will begin to rise once again.

Yet perhaps most worrisome of all has been the lack of progress in achieving significant institutional and political reforms. Furthermore, democracy seems to be under strain in several Latin American countries, especially in the Andean nations of Bolivia and Ecuador. Reforms in the region are needed badly to boost longer-term investments, increase competitiveness, and achieve a stable planning horizon.

Looking ahead, although much has been accomplished during these past months of economic expansion, much still remains to be achieved. With the exception of those oil-exporting countries, most Latin American nations are currently beginning to feel the slowdown of global demand, and to the extent that domestic demand strengthens these economies will continue to enjoy solid growth rates. By continuing reform and strengthen institutions, these economies will be able to attract foreign investment, increase productivity, and experience a less volatile growth pattern.

Source: Federal Reserve Bank Atlanta - GAI

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