The economic outlook for Latin America in a world full of risks

Transcription

1 The economic outlook for Latin America in a world full of risks David Anthony Senior Economist, Latin America and the Caribbean Director, Country Risk Alerts

2 Outline of presentation International context Regional context Outlook for Dominican Republic Risks Opportunities: the FTAA

3 International context

4 Key points Global economy currently very weak Expect only a gradual return to normal pace of growth in OECD Emerging markets will be sluggish as a result 2004 will be better, but no dramatic rebound

5 EIU forecast in a long run context... 8 World GDP growth, % Y-on-Y

6 Zooming in Y-on-Y 99 Q1 Q3 00 Q1 Q3 01 Q1 Q3 02 Q1 Q3 03 Q1 Q3 04 Q1 Q3 World GDP growth, %

7 Global themes in Business sector suffers from over capacity, poor access to capital Personal sector reluctant to spend These things work out over time Policy can provide an offset fiscal policy is the key Lower oil prices will help But balance sheet issues will dominate

8 Key risk: War with Iraq Assumed in the global forecast short and contained war brief oil price spike, followed by significant fall economic impact has already occurred Assessing the risks oil supply oil distribution prolonged and dispersed war would be damaging

9 Non-US risks North Korea Brazil Turkey Deflation in Germany Israel / Palestinian violence Chinese slowdown India/ Pakistan Japanese meltdown / capital controls

10 Regional context

11 Non-war risks US domestic imbalances excessive personal debt / low savings rate corporate debt and capacity overhang policy response? US external imbalances dollar collapse could damage Europe and Japan more than America depends on policy response

12 United States: economic outlook Next six months will be sluggish Gradual acceleration in second half of 2003 positive factors start to impact oil, fiscal policy, gradual easing of corporate capacity and debt constraints Growth to rise slightly above trend during 2004

13 US GDP growth, % Q-on-Q ann 97 Q1 97 Q4 98 Q3 99 Q2 00 Q1 00 Q4 01 Q3 02 Q2 03 Q1 03 Q4 04 Q3

14 Latin America: political outlook Employment and growth will be political issues social tensions, strikes, possible violence Fiscal adjustment will generate tension neo-liberal model will be questioned Little room for economic stimulus public and social investment to suffer US distracted, less room for negotiation

15 Latin America: economic outlook Better than but still appalling worst performing region Little benefit from OECD pick-up unlikely to see much lending or investment into region Venezuela shrinks dramatically Brazil s solvency still cause for concern GDP growth, % Y-on-Y

16 Venezuela: political outlook Divided society Politics is polarised along class lines Government: inefficient and unrealistic Opposition: fragmented and lacking credibility Chavez is still the most popular figure Probably he would win fresh elections Constitution would give him anadvantage in a referendum Another coup attempt appears unlikely Most likely scenario is that Chavez stays Implication: prolonged political crisis Alternative scenario: if Chavez is overthrown, he may form a guerrilla movement

17 Venezuela: economic outlook Deep recession Exchange and price controls create distortions Risk of another maxidevaluation in Economic panorama Real GDP growth Inflation

18 Brazil: political outlook Lula and the PT have enjoyed a good start Hysteria in mid-2002 turned to euphoria at the end of the year Economic programme is prudent and innovative Almost enjoys a majority in Congress The honeymoon is coming to an end Vested interests will hamper structural reform It will be difficult to balance fiscal austerity with social spending: could lose support rapidly Administrative inexperience could leave him at the risk of taking wrong decisions

19 Brazil: economic outlook Huge external and internal debts Vicious circle in the internal debt structure Debt service takes almost 50% of budget spending Fiscal austerity and monetary tightening will impeded economic recovery Sentiment key to solvency Perfil de la deuda interna brasileno Vinculado con el tipo de interes flotante 44% Otro 2% Tipo de interes fijo 4% Vinculado a la inflacion 12% Vinculado con el dolar EEUU 38%

20 Outlook for Dominican Republic

21 Domestic politics: governability assured but tense relations with opposition and public The government has reinforced its grip on power in mid-term elections in May 2002 dominates most organs of state overturned ban on consecutive presidential re-election Still likely to face a difficult second part of its term corruption scandals recurrent blackouts economic slowdown strained relations with the opposition Political climiate will become tense in run-up to 2004 polls

22 Election watch: could uncertainty about 2004 destabilise the peso further? Will Hipolito Meijia stand again, despite his insistence that he will not run? Will any of the candidates be able to decisive lead in the campaign? If not, could Dom Rep suffer in 2004 the type of financial market instability that has affected other Latin countries in election years? If the final result of the elections is close, will the losing side accept defeat?

23 Public finances: central government finances are in good shape compared to Central America and Jamaica Central America Jamaica Trinidad Dominican Republic

24 Cost of capital: higher in real terms than its subregional competitors even though Dom Rep has grown faster Jamaica Trinidad Dominican Republic

25 Public debt: much less of a burden in the Dom Rep, although it has been on an upward trend since Jamaica Trinidad Dom Republic

26 Economic activity: both investment and exports (including tourism) have disappointed in recent years Inversion Exportaciones PIB

27 Economic activity: domestic demand was running well above GDP growth in the mid- 1990s. An adjustment was required when the tourism sector slowed % real change GDP growth Internal demand

28 Economic activity: unemployment has fallen over the decade but remains high. Real income growth has slowed sharply since % Real GDP growth per head Unemployment

29 Economic activity: the Dominican Repbulic has outperformed its CBI competitors in all but two years in the past decade Central America Jamaica Trinidad Dominican Republic

30 Inflation: has stabilised rapidly since early 1990s, but still remains slightly high for the subregion and pressures have recent reappeared Central America Jamaica Trinidad Dominican Republic

31 Inflation: pressures have reappeared recently % _I 2001_III 2002_I 2002_III 12-month rate of inflation

32 Exchange rate: in real terms still fairly strong over the decade but undermined by fiscal concerns and low international liquidity % crecimiento real Dominican Republic Jamaica Trinidad

33 Current account balance: an area of weakness for the Dominican Republic Jamaica Trinidad Domininican Republic

34 Current account balance: large services surplus and transfers needed to offset trade imbalance Trade Services and transfers Incomes Current account balance

35 Financing needs: these are high, despite modest debt indicators Jamaica Trinidad Domininican Republic

36 Financing: dominated by FDI in recent years, though MLT debt inflows are significant 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Net FDI inflows Medium and long term debt inflows

37 External debt: moderate level of debt by subregional standards Central America Jamaica Trinidad Dominican Republic

38 External debt service: very modest level by emerging markets standards, but has risen slightly since Central America Jamaica Trinidad Dominican Republic

39 Risks

40 Overall country credit risk: was running well below Latin American average, but has deteriorated in recent years. 65 Country credit risk: measure of a country's overall creditworthiness. Scores range from 0 (lowest risk) to 100 (highest risk) Q2 99Q2 00Q2 Oct-00 Feb-01 Jun-01 Oct-01 Feb-02 Jun-02 Oct-02 Dominican Republic Latin America Global

41 Solvency risk: still moderate, but large current account deficit, slower growth, and low savings has caused strong deterioration in recent years Solvency risk: examines variables central to a country's capacity to meet its obligations in the medium term. Scores range from 0 (lowest risk0 to 100 (highest risk). 98Q2 99Q2 00Q2 Oct-00 Feb-01 Jun-01 Oct-01 Feb-02 Jun-02 Oct-02 Dominican Republic Latin America Global

42 Liquidity risk: the worst rated category. Low level of reserves, high import levels, and strong monetary growth leave Dom Rep vulnerable Liquidity risk: examines variables that determine a country's capacity to meet its external obligations in the short term. Scores range from 0 (lowest risk) to 100 (highest risk). 98Q2 99Q2 00Q2 Oct-00 Feb-01 Jun-01 Oct-01 Feb-02 Jun-02 Oct-02 Dominican Republic Latin America Global

43 FTAA: fantasy or reality?

44 Fantasy? A comprehensive accord will not be reached by the start of 2005 as planned little time left, US distracted There will be a lot resistance to the liberalistion of sensitive sector lack of will by major players competition will impede consensus Bilateral treaties with the US could jeopardise the FTAA integration process

45 Reality? There will be some type of accord in effect in 2005 Some benefits will be shared by all Spurred by the expansion of the EU in 2004 Member states of the FTAA may surprise us US, Brazil and Mexico are the keys

46 The end.