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2004
brings long awaited rebound
With 2004
just ended, the first actual indicators are trickling in. Even though most
indicators have yet to be released, big surprises in overall economic
Latin American developments should mark the exception. Therefore, now is
an opportune moment for review, taking a closer comparative look at the
surveyed countries before all attention is focused on 2005. Latin America
enters this year with new-found confidence. After two years of virtual
zero-growth and a paltry 1.5% expansion in 2003, last year brought the
long-waited rebound in economic activity. On average, the region’s
economy expanded by 5.3% in 2004, the highest growth rate observed in the
past decade. The Latin American economy easily exceeded expectations of
3.7% output growth expected at the beginning of last year. Moreover,
growth was broad-based, as not a single country experienced a recession in
2004. In fact, according to the latest estimates, economic growth
exceeded the 2% threshold in all countries. Nevertheless, growth is
likely to slow again this year to a lesser 3.7% pace, as the one-off
factors that lifted the economic performance in 2004 are drawing to an
end.
External
sector drives 2004 rebound amid strong global demand and high commodity
prices
Strong
global demand provided a backbone for the external sector, which was the
key growth engine for the region’s economies last year. According to the
latest Consensus estimates, the global economy expanded by 4.1% last year
based on market exchange rate weights. Based on purchasing power parity,
which favours the booming economies of China and India, the global economy
expanded at an even faster 5.1% clip, which would mark the strongest
expansion since 1976. The buoyant global economy triggered exceptional
growth in Latin American exports, which increased 21.1% over 2003 to an
unprecedented US$ 424 billion. Naturally, not all countries profited to
the same extent from the export boom. Commodity exporting heavyweights
were the most favoured countries, whereas those economies which export a
higher percentage of industrial goods benefited to a lesser extent.
Metal and
oil exporters benefit from surging prices
In
particular, oil and metal mining exporters were among the winners in
2004. Chile recorded the fastest growing exports in Latin America in the
past year. Boosted by a 60.7% increase in copper prices in 2004, copper
exports jumped by 86.5% in the first eleven months of 2004 compared to the
same period the prior year. The price rise was fuelled by decreasing
inventory levels and surging demand, particularly form China, which is
requiring an increasing amount of the metal to build the energy capacities
needed to meet its surging industrial expansion. With copper accounting
for 46.5% of total Chilean exports, overall exports surged by an
unparalleled 52.0% last year. Brazil also experienced a strong rise in
exports, as sales swelled 32.0% to US$ 96.5 billion, amid strong demand
and higher prices for its main commodities, in particular soy and coffee.
Oil prices
also continuously rose throughout the year, amid supply concerns resulting
from the ongoing war in Iraq, social unrest in Nigeria, uncertainty about
the future of Russian oil giant Yukos and inventory concerns in the United
States. With the average price for West Texas Intermediate (WTI) 34.0%
above 2003, net oil exporting countries Colombia, Mexico and Venezuela saw
exports lifted automatically. However, only in Venezuela, where oil
exports account for 83.0% of total exports, did the price boom translate
into a export surge, which lifted the total level by 24.1%. In Mexico,
where oil exports accounted for “only” 12.5% of total exports, the boom
was less pronounced and even remained below the regional average export
growth rate with a 14.1% expansion. The oil sector takes on a lesser role
in the Mexican economy. Instead, the Mexican export sector hinges on its
manufacturing exports to the United States, from companies that have
relocated manufacturing facilities to Mexico in the wake of the North
American Free Trade Agreement (NAFTA) boosting the so-called
maquiladora industry for many years. However, since China's entry
into the World Trade Organization (WTO) in 2001, Mexico has faced
increased competition in manufacturing, as China is increasingly seen as a
viable export platform for industrial goods. In spite of the fierce
competition, which is also emerging from other Asian countries,
manufacturing exports expanded a very solid 13.2% in the moving year up to
November, with a strong accelerating trend towards the end of the year.
Similar to Mexico, the oil sector plays a less important role in Colombia,
as non-traditional exports have gained an increasingly important role in
the external sector. Consequently, total exports increased “only” 12.0%,
despite the oil price boom.
Venezuela
leads growth in region, as strong oil prices drive cyclical rebound
Booming
exports also rekindled domestic demand in most countries throughout the
region, in particular towards the end of the year. The combination of
strong oil exports and recovering domestic demand has made Venezuela the
fastest growing economy in Latin America. According to the latest
Consensus estimates, Venezuelan output expanded by 15.8% in 2004, which
also marks the fastest growth pace the country has experienced in more
than a decade. However, the boom follows on two years of devastating
recession, which even last year’s double-digit boom will be insufficient
to compensate for. Perhaps next year’s less spectacular but still robust
4.3% growth will erode the effects of the destructive two-year blow.
Argentina
continues cyclical rebound for second year in row
Argentina
came in second among the major Latin American economies with an estimated
growth rate of 7.8%. Given the string of upward revisions to growth
forecasts, economic activity may even have come in higher than
anticipated. It is now obvious that the expected slowdown from the
cyclical rebound from the four-year long recession (1999-2002) has turned
out to be far less pronounced than expected.
In addition, the country seems to be in for yet another year of strong
growth, as the forecast for next year was lifted by 0.4 percentage points
over last month to 4.9%.
Colombia
marks the bottom, as the country fails to take advantage of global rebound
Colombia
came in at the bottom of the growth ranking for the Latin American
region. While the 3.9% expected growth rate for 2004 is not
disappointing, the figure shows that the country could not benefit to the
same extent as its regional peers from the propitious global economic
environment. In part, the lack of a stronger export performance can be
explained by the likely decline in export competitiveness resulting from
the strong currency appreciation last year. That said, private
consumption growth remains robust and the export sector is humming along,
amid strong global demand and high commodity prices. Moreover, low
interest rates, declining unemployment and an improved credit setting
should rekindle economic growth this year, when the economy is anticipated
expand by 3.7%, according to this month’s Consensus Forecast.
Prices
remain stable despite pickup in domestic demand
In
contrast to the typical pattern, higher economic growth observed last year
was not accompanied by a notable rise in inflation. At the end of 2004,
inflation averaged 6.7% in the region, 0.3 percentage points below 2003.
The decline was mostly driven by regional heavyweight Brazil, where
inflation declined 2 full percentage points from 9.3% at the end of 2003
to 7.3% at the end of 2004. The Brazil year-end figure is still based on
forecasts, as December consumer price data has not been released yet.
Despite the drop in annual inflation, monetary officials are likely to
have been unable to meet their inflation target for the fourth consecutive
year, despite pronounced monetary tightening in the latter half of the
year. The year-end rate is likely to have exceeded the central target of
5.5% but is seen as having remained within +/- 2.5% tolerance margin. In
Mexico, inflation rose, as monetary authorities failed to rein in
pressures on consumer prices emanating from higher oil and food prices, in
spite of an increasingly tighter monetary policy. As a result, the
Central Bank notably overshot its year-end target of 3.0% and even
exceeded its one percentage point tolerance margin with a year-end rate of
5.2%. However, core inflation came in significantly lower and the series
of tightening decisions enacted by monetary authorities in the second half
of the year has also lowered inflationary expectations for 2005 to 4.2%.
Venezuela carries the red lantern. The year-end inflation rate is more
than four times the rate of Mexico and with19.2%, Venezuela is now the
only major economy with a double-digit inflation rate – a reminder of the
not so distant past.
The lower
inflation trend in Mexico will help the regional average drop further to
6.0% by the end of this year.
Strong
economies and investor appetite for higher yields buttress currencies
across the region
With
regards to currencies, Latin America did not present the usual picture of
a weakening versus the US$. Of the seven major economies only two,
Argentina and Venezuela, experienced a depreciation in nominal terms
versus the US$. In Argentina, the depreciation was negligible at only
1.4%, reflecting continuous Central Bank intervention and in part a
reaction of the strong appreciation registered in 2003. In Venezuela, the
only major economy with a fixed exchange rate in Latin America, the
government decreed a devaluation in February 2004. A second devaluation
later in the year expected by some economists did not materialize, leaving
the Venezuelan Bolivar 16.7% weaker versus the US$ than at the beginning
of the year.
The other
major currencies appreciated between 0.7% (Mexico) and 15.2% (Colombia)
versus the US$. Last year’s strengthening reflected an increased
international investor appetite for emerging market assets, stronger local
economies, higher commodity prices and the weakening of the US$ in
international markets. This year, however, Consensus Forecast
participants anticipate the current appreciation trend to reverse, with
all currencies expected to depreciate versus the US$. |
