LatAm economies seen at risk in prolonged Iraq war

www.forbes.com Reuters, 03.19.03, 1:44 PM ET By Pablo Bachelet

WASHINGTON, March 19 (Reuters) - A rosier economic outlook for most of Latin America in 2003 could be clouded by a prolonged war in Iraq that would send oil prices upward, a group of global financial institutions said on Wednesday.

The Institute of International Finance (IIF) is forecasting a 2.4 percent growth rate for almost all countries in Latin America this year, reversing two straight years of economic contraction.

But that recovery depends on lower oil prices in the second half of the year and improved investor and consumer confidence that would in turn spur the U.S. and European economies, the main motors for a Latin American recovery.

The 2.4-percent growth forecast, which would be the highest since 2000, excludes Venezuela, which saw its economy shrink 8.9 percent last year and could see a further 10 percent drop in 2003, according to the IIF report, which is to circulate at the annual meeting of the Inter-American Development Bank (IDB), to be held in Milan on March 24 and 25.

Venezuela has been ravaged by political strife and a strike that hit oil exports, the lifeblood of its economy.

"We do believe that the region is largely well-positioned, I would even say poised, for some modest recovery on the critical assumption that in the second half of this year the global economy rebounds," said Charles Dallara, managing director for the industry group that represents most big banks and insurance companies worldwide.

Latin America, hard-hit by massive downturns in Uruguay, Argentina and Venezuela last year, has been struggling to regain its economic footing since private capital flows dried up in the late 1990s.

But now a war in Iraq could extend Latin America's hard times.

"So much depends upon the duration of the war and the ultimate effect on two key variables: oil prices and confidence among consumers and investors," Dallara told reporters at a briefing.

The Latin America forecast also assumes that Mexico and Brazil will undertake key fiscal reforms in the second half of the year to spur growth.

Latin America is viewed as less vulnerable to global economic shocks than in the past, Dallara said.

"We believe the commitment to sound macro policies and the commitment to flexible exchange rates creates some cushion to respond to global shocks," he told reporters at a briefing.

CHEAPER OIL

Even so, the base scenario behind the bullish Latin America forecast calls for oil prices to average $28 per barrel this year. This would enable the U.S. economy to grow 2 percent for the year, with a 4-percent jump in the second half of 2003. In early afternoon, international benchmark Brent crude oil was trading at $27.50 per barrel.

But the group's chief economist, Yusuke Horiguchi, said that an average $10 per barrel increase for the year in the price of oil would shave off 0.6 or 0.7 percentage point from gross domestic product growth in rich oil-importing economies. This would cool the growth of imports by 2.5 percentage points.

"The elasticity is pretty big," he said. "This affects exports" from Latin America to rich economies.

The IIF did not provide a specific growth number for a high-oil-price scenario. However, most economies, with the exception of big oil exporter Venezuela, would suffer.

Oil importer Chile would suffer a "double whammy" effect of higher crude import prices and cheaper prices for its copper exports, according to Frederick Jaspersen, director for the Latin America department at the IIF.

For oil producer Mexico, an annual price per barrel of $40 would translate into $6 billion in extra earnings. But that would be offset by a $9 billion drop in exports to the U.S., due to a slowing economy there.

"Mexico is affected in a counterintuitive way," he said.