IIF Predicts Modest Recovery In Latin American Economy

sg.biz.yahoo.com Thursday March 20, 1:40 AM

WASHINGTON -(Dow Jones)- Improving policies in Latin America should promote a modest recovery in economic growth this year and next, barring a decline in the U.S., the Institute of International Finance said Wednesday.

Excepting a 10% collapse in Venezuela's gross domestic product, Latin America as a region should expand its economy by 2.4% in 2003 and another 3.2% in 2004, the IIF said.

"The commitment to sound macro policies, both monetary and fiscal, coupled with flexible exchange rates have provided some flexibility to respond to a slowing world economy," IIF Managing Director Charles Dallara told reporters.

The group, representing some of the largest banks and financial institutions around the world, also predicted a moderate recovery in net private capital flows to the region to $36 billion in 2003, before rising to $42 billion next year. In 2001, net private flows to Latin America dropped to a historic low of $28 billion.

The forecasts assume the U.S., the largest trading partner for most countries in the region, will experience an average rise in economic growth of about 2.4% for the year, reflecting 1.5% in the first half and almost 4.0% in the second. Oil prices have been penciled in at an average of $28 a barrel for 2003.

Dallara acknowledged the fate of the predictions depends first and foremost on the outcome of an impending U.S. war with Iraq and its impact on oil prices and investor and consumer confidence. "Today is an especially dubious time to be sharing exact forecasts, but the trends are there," he said.

IIF Chief Economist Yusuke Horiguchi reckons a $10 increase in the benchmark average for crude oil shaves 0.6% to 0.7% off of the forecast for U.S. GDP. The effects of higher-than-expected oil prices on the economies of individual Latin American countries differs as many are oil producers. On balance, the effect of higher oil prices is negative for the region because the resulting slower economic activity in some trading partners hurts non-oil exports and offsets revenue gains, the IIF said.

For example, an average oil price of $40 per barrel would raise Mexico's oil earnings by $6.0 billion, but reduces its exports to the U.S. by $9.0 billion, resulting in a net loss, IIF Director for Latin America Fred Jasperson said.

Still, most countries are better positioned to handle the economic uncertainty thanks to more responsible fiscal and monetary policies and flexible exchange rates, Dallara said.

In Brazil, which faced a crisis in market confidence during presidential elections last year, the new government is building credibility and shows a "very real" commitment to pension reform -a key factor in controlling public spending, Dallara said. The IIF predicts 2.0% GDP growth there for 2003.

Mexico has maintained public deficits and is reducing debt as a share of GDP, and is expected to continue a program of tax and energy reforms, the IIF said, predicting growth this year of 2.5%. Peru, the star performer in the region with a forecast for 3.8% GDP growth this year, should continue to do well as long as newly autonomous regional governments don't destabilize public finances.

The IIF sees growth picking up in Colombia to 2.0% this year and then rising to 3.0% next year.

Even Argentina should see a rebound of 3.3% this year, following four years of recession. The outlook there depends on the outcome of presidential elections next month, and whether the winner garners support from the legislative elections in October, the IIF said.

Venezuela, locked in escalating political violence and an imploding economy, is suffering an even greater output drop than the 8.9% contraction in 2002, the IIF said. A possible drop in oil prices following a quick U.S. war with Iraq would only worsen the situation there.

On the whole, the region is improving, the IIF said. External debt is declining to an expected 186% of exports this year from 227% in 1999, according to the IIF. The interest service ratio has fallen to 13% of exports. The trade surplus is expected to exceed $40 billion, or 2.5% of GDP while the current account deficit is dropping to under 1.0% of GDP. Foreign reserves have risen to the highest level ever, the IIF said.

-By Elizabeth Price, Dow Jones Newswires; 202-862-9295; elizabeth.price@dowjones.com