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A year has passed since this column first appeared in SA Banker and the economic climate in Latin America during that time has been in a constant state of flux. In the case of Panama, however, the country is suffering from political, rather than economic, fatigue at the moment. Taiwan and China are at the centre of the plot: two adversaries, both with container ports operating through the Panama Canal, and each contributing towards the total of over 1 million containers which move through the waterway each year. Up to now, the canal has been controlled by the United States, but all this will change at the end of this year when control and sovereignty is passed to the Republic of Panama. A delicate diplomatic dance, worthy of Fred Astaire, will be needed if, after taking over the canal, Panama is to maintain the present status quo in its dealings with China and Taiwan. China is a bigger user than Taiwan of the canal and, with Hong Kong, is also a bigger trading partner, selling approximately US$1.3 billion of goods annually to Panama’s Colon Free Zone. On the other hand, much to China’s pique, Panama is one of Taiwan’s most important allies. Less than 30 countries recognise Taiwan and although the new government of Mireya Moscoso has stated that it plans to tread a middle path, Panama, like South Africa, might have to make a choice. Whilst Panama wrestles with considerations of finance and friendship, hawkish members of the United States Republican party see American interests under threat because China, through the Hong Kong conglomerate, Hutchinson Whampoa, has two ports at each end of the canal. Interesting times, as the Chinese would say, lie ahead.

NEW GOVERNMENTS, OLD PROBLEMS

Despite slowly recovering from a currency devaluation in January, Brazil’s living standards have fallen. Its sovereign bonds are trading at a gruelling 11 percentage points over those of the United States Treasury. Ecuador is in serious trouble and has announced the first-ever default on Brady bonds which were specially created to forgive, in particular, Latin American countries some of their 1980s commercial bank debts: it is a precedent that Latin America can do without. The country’s banks have collapsed and GDP could shrink by perhaps as much as 7 per cent. Colombia’s consistently healthy economy has crumbled and the country is now in its worst recession since the 1930s. A worsening civil war (12 foreigners were recently kidnapped by, allegedly, leftwing rebels) plus fiscal and banking problems are to blame. Industrial production for the first seven months of this year fell 18.45 per cent. Even a doubling of international oil prices has not helped oil-producing Venezuela; the political tactics of the new President, Hugh Chavez, are troubling businessmen and the economy could contract by 6 per cent this year.

Further south, Argentina has fallen on hard times too. A combination of political uncertainty, high interest rates and low consumer demand has affected new investment and impacted on key industrial sectors. Although there has been good news for exporters with a rebound in international prices for commodities such as petroleum and soybeans, combined with a weaker U.S. dollar in world currency markets, it must be remembered that exports only represent 8 per cent of the country’s GDP. A 10 per cent increase in exports would add under 1 per cent to GDP growth. At the heart of a recovery is the need to encourage domestic consumption. This is a hard task in a country where the unemployment rate is 14.5 per cent (around 2 million people are out of work) and salaries are falling as interest rates are rising. International markets worry that Argentina can maintain its fixed exchange rate. This concern will grow with the fact that a new and untested administration will now be at the helm. Fernando de la Rua, who represents the opposition Alianza coalition, has so far remained silent on the economy. Since 1991, "convertibility", the system by which one-to-one parity of the peso against the United States dollar is maintained, has been the foundation of Argentina’s economic stability and if it is to be preserved, the new government must seek ways of improving competitiveness. Liberalising labour rules, more public sector reform and bringing down the rates charged by privatised utilities are priorities.

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