UN LATIN AMERICAN, CARIBBEAN ECONOMIC COMMISSION FORECASTS MODEST ECONOMIC RECOVERY DURING 2003

UN LATIN AMERICAN, CARIBBEAN ECONOMIC COMMISSION FORECASTS

MODEST ECONOMICRECOVERY DURING 2003

SANTIAGO, 7 August (ECLAC) -- The economy of Latin America and the Caribbean will grow 1.5 per cent in 2003, recovering modestly from a 0.6 per cent drop in 2002, while per capital gross domestic product (GDP) will remain flat this year, at 2 per cent less than in 1997, completing the region’s sixth lost year, according to the preliminary version of its annual Economic Survey of Latin America and the Caribbean, 2002-2003, published by the Economic Commission for Latin America and the Caribbean, ECLAC.

The document presented today reveals that the year 2003 will be better than last year in terms of growth, employment, financial conditions and external accounts, although 2002 is a poor basis for comparison.

For this year, ECLAC forecasts a flattening of growth due to the lack of both a powerful drive from the world economy and a strong domestic reactivation.  The external engine is absent:  the United States is not growing as forecast, the European countries have turned in a surprisingly poor performance, and Japan remains stagnant.

Argentina will head the growth ranking (5.5 per cent) although its per capita GDP will be 17 per cent lower than in 1997 and Venezuela will post the lowest growth (-13 per cent), despite a significant recovery that began in the second quarter.

Chile’s growth will rise to 3.5 per cent, led by export sectors.  Both Chile and Brazil are building up medium-term growth capacity, according to ECLAC.  Brazil will grow for the third year running by 1.5 per cent.

Colombia is the only Andean economy with better prospects today than some months ago and is forecast to grow 2.5 per cent, while Peru, the country posting the highest growth in 2002 (5.3 per cent), should see GDP rise 3.5 per cent.  Of the economies including Cuba, Haiti, the Dominican Republic and Central America, Costa Rica will perform the best in 2003, with 4.5 per cent growth.  In Mexico, recovery has been delayed but 2003 is expected to move from less to more, with growth reaching 1.5 per cent.

Despite trends in the world economy, the current value of export goods in 2003 for the region should rise 4.4 per cent (3.5 per cent minus oil), after stagnating in 2002.  The Latin American economies posting the strongest export performance are those with the most competitive exchange rates or those concentrating investments in non-renewable natural resources.  Import values will rise 0.8 per cent in 2003, recovering slightly from their 6.7 per cent plunge in 2002.  This will improve the region’s balance of trade, with a surplus ($37 billion) for the second year running and should practically balance the current account, whose deficit should decline by $3.7 billion, just 0.2 per cent of GDP, for the first time since 1990.

The deterioration in the terms of trade, which began in 1997, has ceased and in the course of this year they should improve slightly, both for the oil (1.2 per cent) and non-oil (0.8 per cent) economies.

The ECLAC notes the Free Trade Agreement achieved between Chile and the United States and progress in negotiations for the Central American Common Market, also with the United States.  It also emphasizes the renewed importance that new authorities in Argentina and Brazil have assigned to the Southern Common Market (MERCOSUR) and integration with the Andean Community, which reflect a new stage in efforts to achieve greater trade integration within the region.

International financial conditions have been improving in 2003.  Net capital flows should reach $40 billion, although net transfer of resources abroad will still reach $15 billion, due to sizeable profit remittances and interest payments.  Access to international financial markets has improved, with spreads on sovereign debt declining from all-time peaks in the second half of 2002.  Likewise, countries have started to issue sovereign bonds again and, in the cases of Brazil, Mexico and Uruguay, include collective action clauses which should make any future renegotiations easier.

Three Significant Trends in Economic Policy

The ECLAC study points to three trends as being the most significant in terms of economic policy in 2003.  First, fiscal reforms became increasingly structural, and a move away from the short-term toward is clearly underway.

Almost all Latin American economies approved or are in the process of approving tax reforms, or proposed reforms that failed to prosper.  The consequence in the short term, however, is that fiscal policy will not include the reactivating force of domestic expenditure in 2003.  This has meant that the absence of an external engine is thus compounded by the absence of a fiscal engine capable of providing the driving force for a reactivation.

Second, monetary policy has gained greater freedom to manoeuvre.  To defend against foreign exchange pressures last year many economies shifted towards a more restrictive monetary policy stance, particularly in South America.  Now, one of the noteworthy events observed thus far in 2003 is that more countries are implementing more expansionary monetary policies.

Third, foreign exchange policy has faced a calmer year, especially for MERCOSUR economies.  Although so far this year 12 countries have seen real appreciation against the dollar, most are enjoying more competitive exchange rates than in 2001.

The ECLAC forecasts inflation in Latin America will average 8.6 per cent for the period from December 2002 to December 2003, representing a significant drop from last year’s 12.1 per cent.  Inflation’s pickup in 2002 and its current slowdown are mainly associated with changes in exchange rates.

In 2003, the labour outlook is expected to improve modestly.  During the first half of the year, some countries managed to boost the employment rate and reduce unemployment.  In contrast, in Brazil and Mexico, employment has performed poorly.  Overall, the number of unemployed will reach 13.6 million people.

The final draft of the report Economic Survey of Latin America and the Caribbean, 2002-2003 can be requested, in print format, from the ECLAC Document Distribution Unit, Casilla 179-D, Santiago, Chile, starting in September.  The chapter Current Conditions and Outlook is already available in Spanish and English on the Web site, at http://www.eclac.cl. 

For more information on the report, please contact Alfredo Calcagno, Economic Affairs Officer with the Economic Development Division, by e-mail at acalcagno@eclac.cl, or telephone (56-2) 210-2661, or Alejandro Ramos, Economic Affairs Officer Oficial with the same Division, at e-mail aramos@eclac.cl, or telephone (56-2) 210-2319.

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