Unlike during previous periods of slower global growth over the last decade, Latin economies now off...
Unlike during previous periods of slower global growth over the last decade, Latin economies now offer more resilience to the sudden shifts in capital flows which often accompany global slowdowns. Latin America is a net importer of foreign capital and so the region suffers when the cost of that capital increases with rising interest rates.
The trend for foreign direct investment (FDI), as opposed to portfolio flows or external bond issuance, has rendered the Latin region less susceptible to the financial linkages which previously caused regional turmoil.
Of all developing nations outside China, Mexico and Brazil lead the world by a significant margin as the favoured destinations for FDI over the past decade. This powerful trend produces many collateral benefits, but the flip-side is that the financial linkages have been replaced by stronger economic linkages, making the region more sensitive to global economic cycles.
Against a global background of 2.5% growth, the Latin region may see economic growth slip from 4% in 2000 to a more moderate 3.5% in 2001, led by Brazil and Chile. From the second half of the year, Mexican growth should rebound in tandem with the US.
The Argentine economy will be the biggest winner as US interest rates fall. Peru will suffer for most of the year from the current political impasse that will not be resolved until the presidential election mid-year. Colombia's growth will match last year's and Venezuela's economy is likely to bounce from a low base of comparison. Inflation in the Latin region should witness a material improvement on the level seen last year, falling below 5% in 2001 from 8% in 2000. The risks to this forecast lie to the upside principally due to the region's currencies, which are more likely to weaken than strengthen over the year, producing higher inflation.
The rising commodity prices that provided windfalls for many Latin trade accounts in 2000 are unlikely to be repeated in 2001. Oil prices should not fall sharply, but rather moderate at these historically high levels as global growth slows. The oil producers Mexico and Venezuela were beneficiaries in 2000, while Brazil's dependence on imported oil was reflected in its weakened trade account. Copper prices should remain within a narrow price band unless the global outlook deteriorates into recession. Chile benefits from copper exports and its proximity to its fast growing Pacific neighbours.
The veil of political uncertainty will fall over some Latin markets this year. The Peruvian presidential elections in April will provide insight into the course of the Peruvian reform process. Argentine congressional elections in October could be raucous if GDP growth fails to meet expectations again this year.
The Brazilian presidential election occurs in 2002, but could overshadow policymaking for most of the second half of 2001.
Emily McLaughlin is manager of the Foreign & Colonial Latin American Investment Trust
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