INTERVIEW-World Bank upgrades Latin America growth hopes

reuters.com Wed February 26, 2003 06:02 PM ET By Anna Willard

WASHINGTON, Feb 26 (Reuters) - Latin America's economies should grow faster this year than originally expected despite the uncertain global economy, a top World Bank official told Reuters.

The bank is now expecting regional growth of around 2.2 percent in 2003, higher than the 1.8 percent it forecast at the end of 2002.

"2003 should be somewhat better than last year and we would expect capital flows to recover," the bank's chief economist for Latin America, Guillermo Perry, said in an interview by video link from Colombia on Tuesday. "We are expecting some recovery."

A lengthy war in Iraq could lower the forecast, but Perry said the bank has not yet calculated growth for such a scenario.

"Clearly you could have a combination of events...a more protracted Iraq war, turbulence in financial markets and a credit event in one country," he said.

"But the probability of this happening -- all of them together -- is relatively low at this moment."

Perry estimated that growth in the region shrank 1.2 percent in 2002, largely due to the economic crisis in Argentina, which had knock on effects for Uruguay, and political turmoil in Venezuela. The bank had predicted a drop of 1.1 percent.

Apart from Venezuela, where political unrest persists, Perry said that Argentina, Uruguay and most other countries in the region should see more economic stability this year.

"We are seeing a clear recovery in Chile, we are seeing a recovery in Colombia and Ecuador," he said. "We see Peru going well. We don't foresee any major problems there."

ARGENTINA COULD HAVE SHARP GROWTH

But several countries will have to be keenly focused to keep reforms on track. The government in Argentina, for example, has a lot of work to do, Perry said.

"Both us and the IMF encourage the present administration to deal with (reforms), but they prefer to leave it to the next administration," Perry said.

The interim government of President Eduardo Duhalde will stay in office until a new team is chosen in elections at the end of April.

Improving the capital base of the banks and regulatory supervision, taking moves to ensure sustainable long term fiscal stability and rebuilding the credibility of its institutions, particularly the central bank, are key challenges for Argentina.

"There are a lot of problems going forward for the long term fiscal stability," he said. "The loose structure with the provinces has to really be put in place in a more consolidated long term way."

If the government makes the necessary changes, there could be a sharp rebound in the economy as it profits from the competitive exchange rate, Perry said.

BRAZIL ON THE RIGHT TRACK

Brazil's economy is also looking better after turbulence in its financial markets last year.

"Brazil in our view is looking well. Obviously some risks remain. We all know that," he said.

But Perry did not comment on Brazil's enormous debt load. Investors were alarmed last year by fears that newly-elected president, leftist Luiz Inacio Lula da Silva, would not follow conventional economic policies, thereby threatening debt repayments.

"The debt dynamics (are) very sensitive to external or domestic shocks because of the composition of the debt," Perry said.

Brazil has said its total public sector debt should rise in 2003 to between $263 billion and $285 billion from $250 billion last year.

VENEZUELA DESPERATE

The future does not look so bright, however, for Venezuela. Perry estimates the economy, which is heavily dependent upon oil, shrank around 9 percent in 2002. He said estimates for this year vary from a contraction of 4 percent to market estimates for another 9 or even 10 percent decline in growth.

"It is difficult to predict, but obviously it is not going to be a good year in Venezuela," Perry said.

Opponents of President Hugo Chavez recently staged a two-month national strike during which the oil industry was particularly hard hit.

Perry called the country's decision to impose currency controls an "act of desperation" and said Venezuela should not keep them for longer than six months.

"We hope that is the case because otherwise it will be very, very costly," he said, adding that such controls can create distortion in the economy.

A recovery in oil production and some political stability would be preconditions for lifting the controls, Perry said.

CHALLENGES FOR URUGUAY

Uruguay is still facing some challenges, Perry noted.

"It was a very bad year for Uruguay, and they are not completely out of the woods yet," he said.

Perry said in the bank's view the country's debt situation in "not unmanageable" as long as it sticks to the fiscal targets agreed with the IMF.

"With those levels unless there are further shocks, Uruguay should be able to have a sustainable path for its debt," he said.

But the country does have liquidity issues for making debt repayments to international financial institutions like the bank and IMF this year and in 2005 and 2006.

"I think what they are working on is like a voluntary swap, and it should be able to work because they need something like this for liquidity purposes."