LATIN LETTERS
If
Argentina’s economy appears to be in the pink, the same cannot be said of the
Casa Rosada (Pink Palace) which is the presidential seat near the River Plate in
the middle of Buenos Aires. Only
one of the palace’s four exterior walls remains pink and it is said that a
shortage of funds is to blame. The
once-elegant statues positioned on the palace’s roof are covered with clumps
of moss and grass and at a recent press conference a large piece of plasterwork
fell in the palace’s main conference room.
Closer inspection of the economy will also reveal defects, despite
economic growth last year of 8.7 per cent (which was the second highest in the
world after China) and inflation remaining below 4 per cent.
Some buoyant analysts are comparing this reversal of fortunes with the
country’s halcyon period between 1890-1914 when Argentina had the world’s
sixth largest economy. But the Land
of Sorrow (Latin Letters, October, 2002, issue) is also the Land of Borrow where
the largest sovereign default in history occurred after the government ceased
regular payments on its domestic and external debt obligations (over US$12
billion). Businesses looking for
financing are having a hard time because banks are not offering credit; they
remain in limbo, wondering whether the government will compensate them fully for
the devaluation débâcle in January, 2002.
The same goes for securing foreign lending until Argentina resolves its
public debt. Finding money to paint
walls at Casa Rosada is the least of President Nestor Kirchner’s worries.
In
Brazil, President Luiz Inácio Lula da Silva´s economic policies during his
first year in office have been praised. The
Sao Paulo stock exchange more than doubled in US dollar terms (the country’s
sovereign bond market has seen the highest return of any emerging market in
2003) and exports have increased from US$58 billion in 2001 to an expected US$82
billion this year. Unlike
Argentina, banks are aggressively increasing their lending portfolios but rates
remain high (perhaps the highest of any major economy in the world) because they
reflect Brazil’s debt burden. At the end of the president’s first year in office
Brazil’s net debt reached 58.3 per cent of GDP (versus 55.5 per cent in 2002).
Besides fiscal reform, however, Brazil has to make a special effort to
tackle judicial reform. Unlike most other Latin American countries which have made
positive improvements to their judicial systems during the last two decades,
Brazil has fallen behind. The
return to democracy in the 1980s that spurred controversial economic reforms
also placed the judiciary in the middle of Brazil’s affairs but, unlike the
executive branch of government, the judiciary found it hard to adapt.
It has remained rigid in its procedures and practices, becoming even more
entrenched in its ways and a survey of Brazilian businessmen has suggested that
GDP growth is 20 per cent less than it might be because of an ossified
judiciary. The Supreme Court’s 11
judges, for example, dealt with 164,000 cases in 2003 whereas its counterpart in
the United States had less than 100 cases to hear.
The president’s intention to streamline the judiciary will require all
the tactical skills he is said to possess.
Chile
is also enjoying economic vibrancy, but is not, unlike Argentina and Brazil,
suffering from debilitating public debt. It
has an enviable credit rating because of a consistent economic policy and
prudent fiscal management. Interest
rates and inflation are heading towards historic lows and even unemployment at
7.4 per cent is at its lowest level in five years. Social policies (labour laws and health reforms, for example)
have been criticised, but President Ricardo Lagos says that 17 years of military
rule has taken its toll and that more time is needed to remedy the social
issues. Meanwhile, as I write, the
country’s mineral exports are robust and a construction industry boom means
that Santiago, the country’s capital, is experiencing an ever-changing
skyline. The strong demand for
copper – mainly from China – has seen prices close to a 10-year high but
exporters, on the other hand, are complaining about the increased value of the
Chilean peso (at the end of April the US dollar had depreciated against the peso
by 20 per cent since the beginning of 2003).
The exchange rate appreciation might eventually have an adverse impact on
GDP growth but so might external (and uncontrollable) forces.
Argentina,
Brazil and Chile walk on a tightrope trying to keep their economic balance and,
so far, there has been a safety net of low US dollar rates and Chinese demand.
But how secure is the safety net? When
US dollar rates rise, perhaps investors will exit Latin America for safer havens
(when this happened on previous occasions, it resulted in the Latin debt crisis
in the early 1980s followed by the 1994 Mexican financial fiasco). If the rampant Chinese economy slows rapidly, rather than
gradually, so will the demand for iron ore, soya and copper.
An absence of investor funds and a drop in commodity prices will make
that journey across the tightrope even more perilous.