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Latin America: Economic Outlook

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A country-by-country breakdown of GDP and inflation forecasts.

BY JOACHIM BAMRUD

Latin America is starting the year amidst much optimism despite what appears to be rising political tension, especially in Ecuador, and concerns over a slowdown in the US economy, the key export market for a majority of the countries in the region.

"In 2007 it will be another good year," predicts Rui da Costa, managing director for Latin America and Caribbean for U.S.-based HP, the world's largest computer manufacturer.

Jose Antonio Rios, international president for U.S.-based telecom equipment company Global Crossing, agrees. "Although there are some factors that could present challenges, the trend followed by most markets in improving trade conditions and increase access to credit demonstrate that the region's business community is maturing, which poses opportunities for growth," he says.

HIGHER GROWTH THAN US

Latin America's economies are expected to grow by 4.3 percent this year, according to the latest forecast from the International Monetary Fund (IMF). That compares to an estimated 4.8 percent growth last year. That means Latin America will see higher economic growth than the United States and the European Union, but lower than Africa, Asia and the Middle East, according to a  a Latin Business Chronicle analysis of IMF data.

Both the World Bank and the United Nations Economic Commission for Latin America (ECLAC) are even more optimistic, forecasting growth of 4.5 percent and 4.7 percent, respectively.

"Latin America is heading towards a fourth consecutive year of high growth," says Guillermo Perry, chief Latin America economist at the World Bank. "We expect continued high commodity prices, supported by high demand growth from Asia, and easy credit."

Much of the GDP growth will come from growing exports of commodities like copper, wheat, corn, gold, silver and oil, which have benefited from both increased demand and rising prices. Brazilian mining giant CVRD, for example, recently reached an agreement with China's steelmakers to raise the price for iron ore from CVRD by 9.5 percent in 2007. And Chilean copper producer Codelco, the world's largest, expects another strong year thanks to high demand from China.  

US TRADE

At the same time, Latin America will get a boost from increased trade with the United States thanks to bilateral free trade agreements and CAFTA, according to the Inter-American Development Bank. "In Asia, the hopes lay on the agreements being signed by Chile, Mexico and Peru within the APEC framework," the bank said in a recent report on Latin American trade. "The prospect of regional wide agreement, such as the one being considered among the Latin American countries of the Pacific basin, may also prove a boost to intraregional trade."

Panama is expected to post the highest growth, while Ecuador will see the worst results, according to IMF data. Countries that will do better than the regional average also include Argentina, Chile, Colombia, Costa Rica, Dominican Republic, Guatemala, Honduras and Peru. Both Brazil and Mexico, Latin America's two largest economies, will do worse then the regional average. Other countries that are expected to grow less than the Latin American average include Bolivia, Ecuador, El Salvador, Haiti, Nicaragua, Paraguay, Uruguay and Venezuela.

Measured by trade blocs, CAFTA will see the highest growth (4.6 percent), followed by Mercosur (4.4 percent) and the Andean Community (4.3 percent), according to a Latin Business Chronicle analysis of IMF forecasts.

"In the longer term, growth rates will depend on how countries take advantage of the present boom to reduce vulnerabilities and advance in structural reforms," Perry says. "Most countries continue to progress in these areas, though at a slower pace than would be desired. Major exceptions are, however, Argentina, Venezuela and Bolivia, where present policies may be planting the seeds of future difficulties."

POPULISM

And despite the growing populist policies in countries like Argentina, Bolivia, Ecuador and Venezuela, some investors say these policies will be offset by other good news.

Even countries marked by state interventionist policies offer good  business opportunities because of high export revenues for oil and other products, says Peter Rösler, deputy general manager of German business group Ibero-Amerika Verein.

"Latin America as a whole profits from high commodity prices as a result of rising demand, above all in Asia. The economies show a steady performance even in countries with acute political tensions on the domestic front," Rösler says. "One could even say that today Latin  America's economies are disconnected from internal political developments."

And trade between Latin America and Asia is expected to grow further thanks to liberalization of trade in Latin America, free trade agreements like the one recently signed between Chile and China and more Latin American trade missions to China and Hong Kong, says Stephen Wong, regional director for the Americas, Hong Kong Trade Development Council.

"Insofar as Latin trade with Asia and in particular with China/Hong Kong, I am quite optimistic and foresee that two-way trade will continue to grow," he says.

Inflation is expected to reach an average of 5.2 percent, slightly lower than the estimated 5.3 percent registered in 2006 and the lowest level in the IMF database, which goes back to 1980.  Latin America will see lower inflation than the Middle East, Commonwealth of Independent States and Africa, but still lag behind other regions in terms of having too high inflation, IMF forecasts show.

Measured by trade blocs, the Andean Community will see the lowest inflation (3.3 percent), followed by CAFTA (6.6 percent) and Mercosur (7.1 percent), according to our analysis.

CHALLENGES

Latin America's economies face several challenges this year. Despite the election cycle being over, political issues will still be a key factor in the region.

"Political uncertainty will remain a key challenge for doing business in Latin America," Rios warns.

Investors are particularly looking at political developments in countries like Bolivia, Ecuador and Venezuela, although countries like Mexico and Nicaragua also face some political uncertainty.

Other challenges include institutional weakness, slow and bureaucratic court systems, high and complex tax systems and high public debt, Rios says.  Meanwhile legal uncertainties and state interventionism are making it difficult for many foreign investors, according to Rösler.

The U.S. economic slowdown and a softening of commodity prices could also pose challenges for several countries in Latin America, says Peter Cardinal, executive vice president for Latin America, Scotiabank.

And despite trade liberalization and tariff reductions, Latin America needs to go even further, complains Wong. "The major barriers in Latin America are still the import barriers in the form of high import tariffs and other import regulations," he says.  "Trade flow could be further enhanced if these restrictions are removed."

The possible Ecuador debt default is also seen as dark cloud for emerging market investors in general, as it may have a spillover effect on stocks and bonds, experts warn. That follows a strong year when Latin American bonds increased more than fixed-income markets in Europe and Asia.

Latin America faces four key challenges for growth, according to the IDB:

  • Less favorable commodities prices, a trend being widely forecast and whose signs are already visible in key products such as soy and even copper.
  • The U.S. economy, a key driver in the current export boom, is expected to slow down, an outcome that will make export growth particularly harder for Mexico and Central America. 
  •  Asian competition in non-commodity markets worldwide are likely to intensify given their rising competitive advantages and the removal of quotas and other restrictions in key sectors and markets such as textile and apparel.
  • The steep appreciation experienced by most currencies in the region, when combined with the scenarios described above of intense Asian competition and slower growth in the US market, is likely to exact a high toll on export diversification and performance.

Here is a country-by-country breakdown of 19 economies in Latin America and the Caribbean:

ARGENTINA

Argentina's economy, Latin America's third-largest, is expected to expand by 6.0 percent this year, according to IMF data. The World Bank is more pessimistic, forecasting a GDP expansion of 5.6 percent.

Either figure is weaker than the estimated 8.0 percent GDP increase last year and the lowest growth since the 2002 crisis. By comparison, the average growth the past four years has been 8.8 percent, according to a Latin Business Chronicle analysis of IMF data.

"Failure to invest in energy and to create a trustworthy legal framework for foreign investors to substitute for local capital, will [sooner] or later prove to be crippling for the economy," says Beatrice Rangel, managing director and president of U.S-based AMLA Consulting.

However, the Argentine economy will grow more than any other Mercosur economy. And not everyone expects growth of 5 to 6 percent. BCP Securities, for example, is forecasting 8.0 percent growth this year, while BBVA expects an economic expansion of 7.9 percent.

Inflation is expected to reach 12.0 percent this year, which is higher than the 9.8 percent rate registered last year and the highest level since 2003, according to the IMF.  BBVA is less pessimistic, expecting inflation of 10.0 percent.

The price growth has been driven by a combination of factors, including high public spending and strong GDP growth. The government, however, blames the private sector for the rise in inflation and has pressured local and foreign retailers to impose price controls. However, inflation has continued to grow.

"This surge has ocurred despite price freezes in a number of sectors that have had negative consequences for sectoral investment and supply," the World Bank says.

Despite the failure of price controls, they will likely continue this year as well. "We think the government will continue quasiprice controls through 2007," Credit Suisse said in a recent commentary.

BOLIVIA

Bolivia's economy, South America's poorest  in per capita terms, is expected to grow by 3.9 percent this year, slightly lower than the 4.1 percent expansion in 2006 and its lowest level since 2004, according to the IMF. The World Bank is even more pessimistic, forecasting GDP growth of only 3.1 percent this year.

Inflation will likely reach 4.0 percent, which is a slight improvement from the estimated 4.1 percent in 2006 and the best result since 2003, according to the IMF.

BRAZIL

Brazil's economy, Latin America's largest, is expected to expand by 4.0 percent this year, according to IMF data. Others are less optimistic. BCP Securities expects growth of 3.5 percent, while the World Bank is forecasting a GDP expansion of 3.4 percent this year. Either way, 2007 is set to see higher growth than the estimated 3.2 percent GDP increase last year.

"While export growth is projected to slow, it will remain relatively robust thanks to continued strong demand from emerging Asian economies," the World Bank said in a new report, Global Economic Perspectives. "At the same time, lower domestic interest rates should contribute to a pickup in investment in 2007."

Inflation is expected to reach 3.4 percent this year, which is lower than the estimated 4.2 percent last year, the IMF says. However, private-sector economists forecast higher inflation: 4.0 percent, according to a survey among 100 economists published by the Central Bank in late December. Even the higher forecast means that Brazil will register the lowest inflation since 1998, when the country saw near-zero growth, IMF data shows.  That also means that Brazil for the second year in a row has lower inflation than the Latin America average, according to a Latin Business Chronicle analysis of IMF data.

CHILE

Chile's economy, Latin America's richest in per capita terms and fifth-largest in GDP size, is expected to grow by 5.5 percent this year, according to the IMF. The World Bank expects somewhat weaker growth of 5.3 percent. Either figure compares favorably with the estimated 5.2 percent expansion in 2006.  Chile is expected to benefit from growing trade with China after the two recently signed a free trade agreement.

However, some economists are less optimistic. BCP Securities forecasts GDP growth of only 4.9 percent. "Chile needs to break the grip of the narrow interest groups that are blocking the reforms needed to jump-start the economy," says Walter Molano, head of research at BCP Securities.

Inflation is expected to reach 3.1 percent this year, according to the IMF. That's worse than the 2.6 percent registered last year, which was the best result since 2002.

COLOMBIA

Colombia's economy, Latin America's sixth-largest, is expected to grow by 4.5 percent this year,  which is lower than the 5.2 percent expansion in 2006, according to the IMF. The World Bank expects slightly lower growth of 4.2 percent this year, while BCP Securities is even less optimistic, projecting growth of only 4.0 percent.

Inflation will likely reach 4.2 percent, which is a slight improvement from the 4.5 percent in 2006 and the best result since 1955, according to Economy.com.

COSTA RICA

Costa Rica's economy, Central America's richest in per capita and second-largest in GDP size, is expected to grow by 5.0 percent this year,  which is lower than the 6.5 percent expansion in 2006, according to the IMF.  The World Bank expects slightly lower growth of 4.6 percent this year.

"We are pretty bullish on the country’s fundamental prospects," Bear Stearns says in the latest issue of its Central America & Caribbean Monthly Report. "We believe that the prevailing positive momentum will extend into 2007, a year in which ratification and implementation of DR-CAFTA and passage of a substantial fiscal reform should help to underpin the continuation of robust growth and macro stability, and allow for higher spending in priority areas (social and infrastructure) that have been recently neglected for the sake of fiscal moderation."

Inflation will likely reach 10.4 percent, which is an improvement from the estimated 13.0 percent in 2006 and the best result since 2003.

DOMINICAN REPUBLIC

The economy of the Dominican Republic, the second-largest within the CAFTA trade group, is expected to grow by 6.0 percent this year. The World Bank expects 5.5 percent growth this year.  Either way, the economy is slowing down compared with the estimated 9.0 percent expansion in 2006. But the Dominican economy is set to grow more than any other CAFTA economy and will lag only behind Panama in terms of the best performance in Latin America this year, according to IMF data.

"The country’s economy is showing signs of very strong dynamism...and its monetary indicators remain in check," Bear Stearns says, pointing to falling interest and inflation rates a relatively stable currency and growing international reserves.

Inflation will likely reach 6.3 percent, which is an improvement from the estimated 7.8 percent in 2006.

However, the economy faces significant challenges such as a recent fiscal deterioration, the unresolved electricity sector problems and the central bank’s sizeable quasi-fiscal deficit.  "The country’s medium-term prospects will remain somewhat uncertain until such challenges are effectively addressed," Bear Stearns warns.

ECUADOR

Ecuador's economy, the eighth-largest in Latin America, is expected to grow by 3.2 percent this year, according to the IMF.  The World Bank expects 3.0 percent growth. That's lower than the estimated 4.4 percent growth in 2006 and the worst result in Latin America this year, according to IMF data.

Inflation will likely reach 6.3 percent, which is an improvement from the estimated 7.8 percent, in 2006.

However, economic growth may be significantly affected by a possible debt default as well as other radical policies promised by the incoming government of Rafael Correa, scheduled to take office on January 15. Inflation may also rise higher than originally predicted due to new economic policies.

EL SALVADOR

El Salvador's economy, the second-richest in Central America in per capita terms, is expected to grow by 3.5 percent this year, the same as last year, according to the IMF.  The World Bank is more pessimistic, forecasting a GDP expansion of only 3.1 percent. That means El Salvador will see the lowest growth within CAFTA.

However, the Salvadorian economy has done well in light of the damages from tropical storm Stan in 2005. "The economy has weathered the negative impact of high oil prices and of ... tropical storm Stan surprisingly well," Bear Stearns says. "After several years of sluggish growth, economic activity in El Salvador is showing lasting signs of increased dynamism, thanks to a large extent to the effective implementation by the Saca administration of an outward-oriented policy strategy."

Inflation will likely reach 3.5 percent, which is an improvement from the estimated 4.1 percent in 2006. That also means that El Salvador is set to have the lowest inflation in CAFTA this year.

GUATEMALA

Guatemala's economy, the largest in Central America, is expected to grow by 4.5 percent this year, the same as last year, according to the IMF.  The World Bank is somewhat less optimistic than the IMF and forecasts GDP growth of 4.0 percent this year, while Bear Stearns goes the opposite direction and forecasts 5.1 percent growth.

That means Guatemala will again see another strong year. The 2006 and 2007 growth figures are the highest since 1998, according to the IMF. In the interim seven years, average GDP growth was only 2.4 percent, a Latin Business Chronicle analysis of IMF data shows.

"The Guatemalan economy continues to show signs of increased strength and vitality," Bear Stearns says.

Inflation will likely reach 7.0 percent,  the same as last year, the IMF predicts.  Both figures are the best since 2003.

"All of this is happening at a time when foreign capital inflows (remittances, tourism, exports, FDI) remain robust, not only affording the country enough foreign exchange to comfortably meet its external financial obligations, but also allowing it to boost its net international reserve position to more than $4 billion, an all-time high," Bear Stearns points out. "We continue to view Guatemala as a solid credit capable of successfully overcoming its near-term challenges such as a widening trade deficit and noise related to next November’s presidential and congressional elections."

HAITI

Haiti's economy, the poorest in Latin America, is expected to grow by 4.0 percent this year, according to the IMF.  That's an improvement over the estimated 2.5 percent GDP growth in 2006 and the best result since 1996. However, the World Bank expects a mere 2.7 percent expansion this year.

Inflation will likely reach 9.2 percent. That is a strong improvement from the estimated 14.2 percent in 2005 and the lowest rate since 1999.

HONDURAS

Honduras' economy, the second-poorest in Central America, is expected to grow by 4.5 percent this year, according to both the IMF and World Bank.  That means a slight slowdown compared to the estimated 5.1 percent GDP growth in 2006 predicted by the IMF.

Inflation will likely reach 5.5 percent, the same as last year, the IMF predicts. Both figures are the lowest since 1988.

MEXICO

Mexico's economy, the second-largest in Latin America, is expected to grow by 3.3 percent this year, according to the IMF.  The World Bank is slightly more optimistic, forecasting growth of 3.5 percent this year, while BCP Securities goes the opposite way, forecasting growth of 3.1 percent. However, all agree that 2007 will see a slowdown compared with last year, when the economy grew an estimated 4.4 percent. The reduced growth rate is mainly due to an expected decline in demand from the United States, which accounts for 80 percent of Mexico's exports. That decline, in turn, is due to a slowdown in the U.S. economy.

Inflation will likely reach 3.5 percent, the IMF predicts. That would be the lowest recorded by the IMF in its database of 28 years. Last year, inflation reached 4.05 percent.

"In Mexico, there is still lot's of room for growth of the financial sector, " says Cardinal. "The financial sector in Mexico has outpaced growth in the economy by expanding the penetration of the population which remains underrepresented in the formal economy, and we see this trend continuing."

NICARAGUA

Nicaragua's economy, the poorest in Central America, is expected to grow by 4.2 percent this year, according to both the IMF and the World Bank.   That's an improvement over the estimated 3.7 percent GDP growth in 2006.

Inflation will likely reach 7.0 percent, the IMF predicts. That's better than the estimated 9. 2 percent in 2005 and the lowest since 2003.

The economci expansion will be driven by strong export growth, largely thanks to CAFTA. However, it could be weakened if the new government of Daniel Ortega, who assumed the presidency on January 10, introduces any major changes to economic policies.

PANAMA

Panama's economy, Latin America's seventh-largest in per capita terms, is expected to grow by 6.7 percent this year   —  the best performance of any country in Latin America this year,      according to the IMF.  The World Bank expects less growth: 5.7 percent. But even the IMF forecast is lower than the estimated 7.2 percent GDP growth in 2006.

Much of the growth will come from the start of a $5.2 billion, multi-year expansion of the Panama Canal as well as continued strong demand in real estate and healthy growth in exports.

Inflation will likely reach 7.0 percent, the IMF predicts. That's better than the estimated 9. 2 percent in 2006 and the lowest since 2003.

PARAGUAY

Paraguay's economy, South America's smallest, is expected to grow by 4.0 percent this year, which is higher than the estimated 3.5 percent GDP growth in 2006, according to the IMF.  The World Bank is less optimistic, forecasting GDP growth of 3.0 percent.

Inflation will likely reach 5.2 percent, the IMF predicts. That's better than the 12.5 percent rate of 2006.

PERU

Peru's economy, Latin America's seventh-largest,  is expected to grow by 5.5 percent this year,  according to both the IMF and the World Bank.  That marks a slowdown compared to the 7.5 percent expansion in 2006. However, the Peruvian economy will grow more than any other in the Andean Community.

Inflation will likely reach 1.9 percent, which is an improvement from the estimated 2.1 percent in 2006, the IMF predicts. Along with Panama, Peru will have the lowest inflation rate in Latin America.

"Peru continues to advance, the political and economic outlook is stable and the economy will continue to be propelled by the mining, energy and maritime sectors," says Cardinal.

URUGUAY

Uruguay's economy, Latin America's fourth-richest in per capita terms, is expected to grow by 4.2 percent this year,  the IMF forecasts. The World Bank is slightly more optimistic, forecasting GDP growth of 4.4 percent. However, either figure marks a slowdown compared with the estimated 6.5 percent expansion in 2005.  Within the five-nation Mercosur trade group, Uruguay does quite well. Its economy will show the second-best performance this year, according to a Latin Business Chronicle analysis of IMF data.

Inflation will likely reach 5.3 percent, the IMF forecasts. Bear Stearns expects somewhat higher inflation: 5.5 percent. Either way, inflation is falling compared with the 2006 rate 6.38 percent.


VENEZUELA

Venezuela's economy, Latin America's fourth-largest, is expected to grow by 3.7 percent this year,  which is lower than the 10.3 percent expansion in 2006. It will also be the lowest since the 2003 crisis, according to the IMF. The World Bank, however, expects higher growth this year: 6.0 percent (although that also marks a decline from the bank's estimate of 8.5 percent GDP growth in 2006). The slowdown is partly due domestic inflation, rising wages and domestic capacity constraints,  the World Bank says.

Inflation will likely reach 19.6 percent, the IMF predicts. That's worse than the 17.0 percent in 2006 and the highest rate in Latin America. Venezuela is also set to have one of the world's highest inflation rates. Only Eritrea, Myanmar and Zimbabwe are expected to post higher inflation this year, according to a Latin Business Chronicle analysis of IMF forecasts for Africa, Asia, Europe and the Middle East.

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