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BCP Picks: Brazil, Peru, Mexico

Peru will grow most among Latin America's top economies this and next year.

BY WALTER T MOLANO

Brazil, Peru and Mexico are the top recommendations at BCP Securities, with Chile, Colombia and Argentina neutral and Ecuador and Venezuela underweight. All in all, Latin America's GDP should grow 4.4 percent this year and 5.4 percent next year.

PERU: HANDS ACROSS THE AMAZON

2010 GDP Growth Estimate: 5.7%
2011 GDP Growth forecast: 6.7%

A series of major infrastructure programs in roads, energy, ports, railroads and airports are triggering a productivity revolution that will sharply accelerate Peru’s economic development. The interesting thing is that much of the capital is being provided by Brazilian firms, as they seek to exploit Peru’s access to the Pacific Basin. Launched in 2000, as the Initiative for Infrastructure Integration of South America (IIRSA), the project’s main achievement was the onstruction of three highways and waterways that linked Peru to Brazil, thus allowing the two countries to perforate their formerly impenetrable mountains and jungles. Two of the three highways were completed last year, and the third one is more than 60 percent done. Sensing the opportunities at hand, Brazilian firms are hurling themselves into Peru, pouring billions of dollars to construct new ports and railroads that will bring their products to the oriental market. From CVRD to Petrobras to Odebrecht and Braskem, the titans of the Brazilian corporate world are converting Peru from a backwater of poverty into one of the more developed countries of the region. Meanwhile, other Latin American countries are taking on debt to attend to political issues; Peru is capturing international funds to improve its own productive capacity. The Olmos irrigation project, for  example, will greatly enhance the country’s agricultural exports. A new gas field discovered by Petrobras near Camisea is boosting Peru’s LNG exports. Four billion dollars of new hydroelectric plants at Inambari will allow Peru to interconnect its electricity grid with Brazil, providing its energy system with greater resilience and stability. These are the reasons why Peru was able to coast through the international credit crunch, and why it will probably be the fastest growing country in the region during 2010.

MEXICO: SIGNS OF LIGHT

2010 GDP Growth Estimate: 5.4%
2011 GDP Growth forecast: 5.6%

The Mexican economy started showing signs of life during the fourth quarter. The level of economic activity fell 2.3 percent y/y, but expanded 2 percent on a quarter-on-quarter basis. This brought the 2009 recession to a contraction of 6.5 percent y/y—making it the largest decline in Latin America. The decline was not as bad as initially expected, still it was the most severe since the Great Depression. Mexico’s deep trade ties excacerbated the situation. The government’s refusal to implement a fiscal stimulus plan also aggavated the country’s woes. However, Mexico is now emerging as a more balanced economy—with none of the inflationary pressures that are besetting many of the BRICs. In an attempt to ward off a repeat of 2009, the Mexican central bank announced that it would begin accumulate international reserves. With less than $100 billion in reserves, and a very open economy, its level of reserves are very low. Some analysts attribute the high degree of exchange rate volatility to this situation. Therefore, Banxico announced that it would focus on increasing its level of reserves.

ARGENTINA: BAD KARMA

2010 GDP Growth Estimate: 2.3%
2011 GDP Growth forecast: 4.0%

Argentina is on the verge of takeoff. With a new debt exchange in the works, and on the cusp of rehabilitating itself with the international capital markets, the country is still unable to accelerate to orbital speed. Each time it begins to gather momentum, a new crisis, internal or external, pulls it back to the launch pad. Although Buenos Aires has no control over what is happening abroad, such as the implosion of Lehman Brothers or the speculative attack against Greece, it can do a better job of managing its internal affairs. Argentina’s problems are solely political. With last week’s inauguration of the 128th congressional plenary session, President Cristina Fernandez de Kirchner found herself with a recalcitrant legislature that insisted on making itself felt. Although not completely compliant in the past, the congress usually cooperated closely with the Kirchners. This allowed the presidential couple to rule firmly, often with impunity— running roughshod over the country’s institutions. However, the growing power of the opposition, at the expense of the Kirchners, is complicating the so-called K-style of management. Sensing an opportunity to regain lost ground, many political actors, such as Duhalde and Menem, are now adopting more combative positions. These individuals lurked in the shadows during the last six years, refusing to take on the omnipotent presidential duo. The same went for the judiciary. However, mired by dwindling financial resources, distracted by her husband’s many business adventures and faced with plunging popularity at home, it is becoming doubtful that Cristina will make it to the end of her term. Therefore, with political uncertainty looming on the horizon, Argentina could fail to liftoff—yet again.

CHILE: EARTHQUAKE DAMAGE

2010 GDP Growth Estimate: 4.0%
2011 GDP Growth forecast: 6.2%

The devastation of the earthquake will put further stress on the fiscal accounts. The Bachelet Administration announced, in February, that the fiscal deficit was much larger than initially expected. The government shortfall was $7.2 billion. Copper revenues dropped 51.3 percent y/y and tax revenues dropped 20.4 percent y/y. Expenditures, however, increased 17.8 percent y/y, due to the government’s fiscal stimulus program. Finance Minister Andres Velaco came under fire from the opposition for allowing the fiscal accounts to deteriorate so badly.  President-elect Sebastian Pinera named the senior members of the new cabinet. The new economic group is highly regarded. At the top of the list was Felipe Larrain, who was appointed Finance Minister. Larrain is highly regarded economist, who was trained at Harvard. Juan Andres Fontaine will serve as head of the Economy Ministry. He was trained at the University of Chicago. Rodrigo Hinzpeter will head the Interior Ministry and Cristian Larroulet will be chief of staff. Unfortunately, one of the new tasks for the government will be to address the fiscal deficit, while rebuilding the country.

COLOMBIA: SETTING THE STAGE

2010 GDP Growth Estimate: 2.8%
2011 GDP Growth forecast: 3.5%

This month, 11 million Colombians went to the polls and set the stage for the upcoming presidential elections. They voted for 268 members of congress, of which 102 were senators and 166 were representatives. They also selected the final candidates for the Conservative and Green parties, thus narrowing the presidential slate. At the top of the list were the Conservatives and President Uribe’s U-party, which will dominate the senate. The U-party won 27 seats in the senate. The Conservatives secured 23, the Liberals 18 and the Greens only 5. The same pattern was repeated in the lower house, where the U-party and Conservatives won the lion share of the positions. The message from the electorate was one of continuity. The fact that the political right won so many seats is a confirmation that Colombia does not want to stray from its current direction. Former Bogota Mayor Antanas Mockus won the primary for the Green Party. Meanwhile, Noemi Sanin edged out Andres Felipe Arias in the Conservative primary. While this was good news for the Conservatives, since the selection of such a charismatic candidate increases their chances of winning the presidency. This could be bad news for Juan Manuel Santos, who could be forced to go into a second round on May 20th. Nevertheless, with two months to go until the elections, the presidential campaigns will now kick into gear.

BRAZIL: TINKERING WITH THE MODEL

2010 GDP Growth Estimate: 5.3%
2011 GDP Growth forecast: 5.9%

Brazil’s success during the past decade wass its adherence to the four pillars established by former-President Fernando Henrique Cardoso, which were central bank independence, flexible exchange rate regimes, fiscal discipline and the primacy of the private sector. Lula’s rethoric never wavered from his support for these policies, but the onset of the crisis allowed the state to surreptiously shift away. Through the investments made by the state development bank, BNDES, the government is taking on a growing role in the private sector. This year, state-owned banks surpassed private banks as the major providers of consumer credit. They were responsible for 41.4 percent, while the private sector institutions slipped to 40.4 percent. Last year. The private sector banks had a 6 percent advantage. However, the recent acquisition of major financial institutions by Brazilian state-owned banks changed the landscape. In the midst of the crisis, BNDES took a strategic stake in the beef sector, and the government is now promising to revive Telebras. Unfortunately, the government does not have such a good track record in managing private sector activities—which is why it was forced to divest many of these assets during the privatizations of the 1990s. Moreover, the growing interventionist policies are eroding the government’s fiscal accounts. Many locals believe that a victory by Minister Dilma Rousseff would only lead to more intervensionist policies. While Lula’s pragmatism often brought him to blows with members of his party, Dilma seems to be a better reflection of the PT’s leftisit constituents. Unfortunately, the prospects do not look that much better if the PSDB wins. Senior party officials already started floating the idea of abandoning the floating exchange rate regime and inflation targeting. The mere fact that senior PSDB officials would campaign on such monetary issues raises concerns about the future independence of the central bank.

ECUADOR: TAX THE RICH

2010 GDP Growth Estimate: 3.0%
2011 GDP Growth forecast: 3.3%

Ecuador’s President Correa took a new tack, as he sought to increase government revenues. He announced that there would be major tax increases for households earning more than $80,000 per year. However, the government is not doing anything on the corporate front. On the contrary, the government introduced new legislation to slash corporate tax rates by 15 percent if companies reinvested their profits in productive activities. Local analysts expect the proposed measures to increase investment by $600 million in 2010. President Correa seems to be trying to emulate Lula’s economic policies, by stressing growth over income redistribution. Nevertheless, the higher taxes on wealthy households will try to bolster government revenues in order to allow Quito to expand social programs.

VENEZUELA: TIME TO SELL

2010 GDP Growth Estimate: +2.0%
2011 GDP Growth forecast: 2.7%

If water shortages, food lines and multiple exchange rates were not enough, the imposition of rolling black outs across the major urban centers was sufficient to send Venezuelans over the edge. Years of mismanagement and poor investment brought the electricity grid to the brink of collapse. Its nationalization in 2005, converted one of the best run electricity utilities in Latin America into one of the worst. Unfortunately, its decayed conditions accelerated its demise. Faced with the growing possibility of a catastrophic failure, that would plunge the country into darkness for prolonged periods, the government decided to introduce a series of four hour-long rolling blackouts across the major urban areas. This would provide relief to the system for about four months, or until the onset of the rainy season in May. Venezuela's rural areas were already subject to extensive power rationing, and the country's large industrial facilities were operating at reduced levels in order to trim electricity demand. Nevertheless, Venezuela's electricity grid could not keep up. The government's decision to postpone the expansions of the Guri and Alto Caroni hydroelectric complexes were two of the major factors that constrained the country's generation capacity. However, the problems went much further. It was much more than a deficit in powe generation. Years of mismanagement destroyed the country's vast infrastructure. Incredulous Venezuelans in Altamira spontaneously took to the streets in response to the blackouts. With the crime rate out of control, the thought of having to endure such chaos for another four months was too much to handle. This is why the country erupted in protest. Ever the political pragmatist, President Chavez rescinded the blackouts the next day. However, many people now ask how the electrical grid will hold up without major investment. A calamity lies close on the horizon. The virtual implosion of the country's infrastructure is how we can finally contemplate the end of President Hugo Chavez.

Walter Molano is head of research at BCP Securities.

 

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