ECONOMY-LATAM: Optimistic Report from Spanish Banks

By Tito Drago Reprint | | Print |

Tito Drago

MADRID, Sep 15 1998 (IPS) - The foundations of Latin America’s economy stand firm against the world-wide tremors, states a report from the Argentaria Bank analysis service, one of Spain’s top five banking entities.

Growth for Latin America as a whole will stand at around three percent this year, compared with 5.3 percent in 1997, possibly decelerating to close on two percent in 1999, it says in an article in the ‘Argentaria Iberoamerica’ magazine here Tuesday.

In Brazil and Venezuela, growth will be non-existant or minimal, adds the article.

Argentaria was born of a fusion and privatisation process invloving the Banco Exterior de Espana, the Post Office Savings Bank, the Official Credit Bank and other minor entities, and is now heavily involved in the Latin American region.

The foundations of the Latin American economies are standing solid, despite the erosion caused by the crisis, while the policies applied are undergoing revision and adjustment, reads the report.

Argentaria considers a chain of big devaluations in Latin America unlikely, although large-scale devaluation is probable in Venezuela with additional depreciations in the currencies of Ecuador, Colombia and Brazil.

The report is based on analysis of the most recent events in the region and the consequences of the international financial crisis there.

According to the document, many of the problems are of a foreign origin (like the falling price of raw materials or the crisis in Southeast Asia) and forecasts are subject to a high level of uncertainty.

However, Argentaria added the economic perspectives of Latin America worsened notably in 1998 in relation to 1997 – an exceptionally good year – fundamentally as the result of external factors.

The first of these was the El Nino phenomenon, which made a heavy dent in agricultural production, as well as causing widespread damage to infrastructure.

Worst affected was Peru, although Ecuador, Chile, Colombia, the Central American nations, and to a lesser extent Argentina and Brazil, also felt its effects.

Another factor, with wider repercussions, was the crisis sparked in Southeast Asia in mid 1997, which worsened over the last few weeks as countries beyond this region, like Russia, were sucked into the vortex.

The Asian crisis was transmitted to Latin America via three routes, according to Argentaria.

Firstly, a reduction in imports in international trade, harsher competition and, above all, falling commodity prices.

Secondly, financially, due to the instability and collapse of exchange and stock markets, coupled with the reduction and increasing cost of international financiation.

And lastly, the increasingly tough economic policies required to confront the crisis.

Even taking these problems into account, the Argentaria experts are confident the bases of Latin America are solid, despite the erosive effects of such a long, intense financial crisis, and the policies applied are generally adequate.

But, given the external origin of current problems, development of the region in the near future will depend to a large measure on how the uncertainties of the world economy are resolved.

In this respect, the report does not predict a rapid solution to the problems of Japan and Asia, stating growth in the United States and, to a lesser extent, Europe, will slow in 1999.

These unfavourable factors will be compensated by other positive elements for the region, like a world context of lower interest rates, a certain depreciation of the dollar and a moderate improvement in commodity prices.

All considered, Argentaria is not expecting a chain of large- scale devaluations in the region, although some currencies, especially those of Venezuela and, to a lesser extent, Ecuador, Colombia and Brazil, will be affected, but without any substantial variations in their exchange regimes.

The Argentaria analysis service, highly regarded in Spain, predicts joint economic growth of around three percent for the region in 1998, compared with 5.3 percent the previous year.

Growth could decelerate somewhat, to rates slightly above two percent in 1999. Brazil, with zero growth, and Venezuela, with little over one percent, will surely be the countries with the poorest performance.

Meanwhile, Argentaria hopes Argentina, Mexico, Peru and Chile will reach higher growth of around four percent, and Colombia is set a little below this figure.

As for inflation, the report predicts it will fall a little to settle around eight percent in 1999. Only Colombia and Venezuela are expected to suffer an appreciable increase of inflationary tension linked to a depreciating exchange rate.

Following a strong deterioration this year, the global trade and current account deficit will pick up in 1999, but only moderately, again with the exception of Colombia and Venezuela, which will see favourable improvements.

The fiscal deficits, which increased notably in the area in 1998 from 2.9 percent of the Gross Domestic Product (GDP) to 3.6 percent, will tend to improve in a generalised manner, with global forecasts of a reduction to 2.6 percent.

Financiation needs in the region will reach a figure similar to that of 1998 in 1999, at around 800 billion dollars, or four percent of the GDP, where nearly 40 percent will correspond to Brazil.

In anything near normal conditions there would be no problem getting this amount of funding, but, even in a relatively favourable scenario it is to be expected that several countries will have difficulty obtaining the resources needed.