Preliminary Overview of the Economies. of Latin America and the Caribbean

Transcription

1 2007 Preliminry Overview of the Economies of Ltin Americ nd the Cribben

2 The Preliminry Overview of the Economies of Ltin Americ nd the Cribben is n nnul publiction prepred by the Economic Development Division in collbortion with the Sttistics nd Economic Projections Division, the Ltin Americn nd Cribben Institute for Economic nd Socil Plnning (ILPES), the ECLAC subregionl hedqurters in Mexico nd Trinidd nd Tobgo, nd the Commission s country offices in Argentin, Brzil, Colombi, the United Sttes of Americ nd Uruguy. We re grteful to the centrl bnks nd sttisticl offices of the countries in the region for their vluble coopertion in supplying the sttisticl informtion used in the preprtion of the Preliminry Overview. The ntionl ccounts dt presented in this edition of the Overview re bsed on the officil figures issued by the countries covered in this report; for purposes of comprison between countries, however, these sttistics re expressed in constnt 2000 dollrs. Thus, in some cses there my be pprent discrepncies with the informtion issued by individul countries. Explntory notes The following symbols re used in tbles in this edition of the Preliminry Overview: Three dots ( ) indicte tht dt re not vilble or re not seprtely reported. A dsh ( ) indictes tht the mount is nil or negligible. A point (.) is used to indicte decimls. Use of hyphen (-) between yers (e.g., ) indictes reference to the complete period considered, including the beginning nd end yers. The word tons mens metric tons nd the word dollrs mens United Sttes dollrs, unless otherwise specified. References to nnul rtes of growth or vrition signify compound nnul rtes, unless otherwise specified. Individul figures nd percentges in tbles do not necessrily dd up to the corresponding totls becuse of rounding. United Ntions publiction ISBN ISSN printed version: ISSN online version: LC/G.2355-P Número de vent: E.07.II.G.161 Copyright United Ntions, December All rights reserved Printed in Chile Request for uthoriztion to reproduce this work in whole or in prt should be sent to the Secretry of the Publiction Bord, United Ntions Hedqurters, New York, N.Y , United Sttes of Americ. Member Sttes nd their governmentl institutions my reproduce this work without prior uthoriztion, but re requested to mention the source nd to inform the United Ntions of such reproduction.

3 Preliminry Overview of the Economies of Ltin Americ nd the Cribben 2007 Index Summry... 9 Regionl pnorm Chpter Introduction...13 A. The externl context nd globl imblnces B. The blnce-of-pyments current ccount C. Output, income nd the components of demnd E. Prospects, threts nd chllenges F. Looking further hed Chpter II Mcroeconomic policy...27 A. Fiscl policy The period Revenue Spending Public debt B. Exchnge-rte policy C. Monetry policy Nominl interest rtes Bnk lending Chpter III Domestic Performnce...43 A. Economic ctivity nd investment B. Domestic prices C. Employment nd wges... 52

4 Economic Commission for Ltin Americ nd the Cribben (ECLAC) Chpter IV Externl sector A. The blnce-of-pyments current ccount Introduction The current ccount s whole Trde in goods nd services Commodity prices Terms of trde Trnsfer blnce nd income blnce B. Cpitl movements South Americ Argentin Bolivi Brzil Chile Colombi Ecudor Prguy Peru Bolivrin Republic of Venezuel Uruguy Mexico nd Centrl Americ Cost Ric El Slvdor Guteml Hondurs Mexico Nicrgu Pnm The Cribben Bhms Brbdos Belize Cub Guyn Hiti Jmic Dominicn Republic Surinme Trinidd nd Tobgo Estern Cribben Currency Union (ECCU) Sttisticl Annex Tble Index Regionl Pnorm Tble I.1 World growth rtes Tble II.1 Ltin Americ nd the Cribben: centrl government fiscl indictors Tble II.2 Ltin Americ nd the Cribben: chnge in centrl government fiscl indictors, Tble II.3 Ltin Americ nd the Cribben (31 countries): exchnge-rte regimes, selected yers Tble II.4 Ltin Americ nd the Cribben (11 countries): bnk lending... 42

5 Preliminry Overview of the Economies of Ltin Americ nd the Cribben 2007 Tble III.1 Tble III.2 Ltin Americ nd the Cribben: consumer nd wholesle price indices nd nominl exchnge rtes 2005, 2006 nd Yer-on-yer growth in employment, wge employment, own-ccount work, forml employment nd verge rel forml wges South Americ Argentin: min economic indictors Bolivi: min economic indictors Brzil: min economic indictors Chile: min economic indictors Colombi: min economic indictors Ecudor: min economic indictors Prguy: min economic indictors Peru: min economic indictors Bolivrin Republic of Venezuel: min economic indictors Uruguy: min economic indictors Mexico nd Center Americ Cost Ric: min economic indictors El Slvdor: min economic indictors Guteml: min economic indictors Hondurs: min economic indictors Mexico: min economic indictors Nicrgu: min economic indictors Pnm: min economic indictors The Cribben Bhms: min economic indictors Brbdos: min economic indictors Belize: min economic indictors Guyn: min economic indictors Hiti: min economic indictors Jmic: min economic indictors Dominicn Republic: min economic indictors Surinme: min economic indictors Trinidd nd Tobgo: min economic indictors Estern Cribben Currency Union (ECCU): min economic indictors Sttisticl Annex Tble A-2 Ltin Americ nd the Cribben: gross domestic product Tble A-3 Ltin Americ nd the Cribben: per cpit gross domestic product Tble A-4 Ltin Americ nd the Cribben: gross fixed cpitl formtion Tble A-5 Ltin Americ nd the Cribben: finncing of gross domestic investment Tble A-5b Ltin Americ nd the Cribben: gross domestic investment, ntionl income nd sving Tble A-6 Ltin Americ nd the Cribben: blnce of pyments Tble A-7 Ltin Americ nd the Cribben: exports of goods f.o.b Tble A-8 Ltin Americ nd the Cribben: imports of goods, f.o.b Tble A-9 Ltin Americ nd the Cribben: terms of trde for goods f.o.b / f.o.b Tble A-10 Ltin Americ nd the Cribben: net resource trnsfer Tble A-11 Ltin Americ nd the Cribben: net foreign direct investment Tble A-12 Ltin Americ nd the Cribben: totl gross externl debt Tble A-13 Ltin Americ nd the Cribben: interntionl reserve ssets Tble A-14 Ltin Americ nd the Cribben: stock exchnge indices Tble A-15 Ltin Americ nd the Cribben: overll rel effective exchnge rtes Tble A-16 Ltin Americ nd the Cribben: prticiption rte Tble A-17 Ltin Americ nd the Cribben: open urbn unemployment Tble A-18 Ltin Americ nd the Cribben: employment rte Tble A-19 Ltin Americ nd the Cribben: trend in rel verge wges

6 Economic Commission for Ltin Americ nd the Cribben (ECLAC) Tble A-20 Ltin Americ nd the Cribben: monetry indictors Tble A-21 Ltin Americ nd the Cribben: representtive lending rtes Tble A-22 Ltin Americ nd the Cribben: consumer prices Tbl A-23 Ltin Americ nd the Cribben: centrl government blnce Tble A-24 Ltin Americ nd the Cribben: revenue nd expenditures of the centrl government Tble A-25 Ltin Americ nd the Cribben: public debt Figure Index Regionl Pnorm Figure I.1 Ltin Americ nd the Cribben: gdp growth rtes, Figure I.2 Ltin Americ nd the Cribben: per cpit gdp Figure I.3 Ltin Americ nd the Cribben compred with other middle-income countries Figure I.4 90-Dy libor Figure I.5 Ltin Americ nd the Cribben: vrition in the terms of trde in 2007 versus the verge for the 1990s Figure I.6 Ltin Americ nd the Cribben: profit remittnces Figure I.7 Ltin Americ nd the Cribben: gross fixed cpitl formtion Figure I.8 Ltin Americ nd the Cribben: blnce-of-pyments sources nd uses Figure I.9 Ltin Americ nd the Cribben: bsolute nd reltive risk, 2006 nd Figure I.10 Ltin Americ nd the Cribben: gdp growth rtes, by country, Figure I.11 Ltin Americ: exports to the United Sttes, Figure I.12 Ltin Americ nd the Cribben: centrl government revenues, primry spending nd primry blnces Figure II.1 Ltin Americ (6 countries): primry blnce of the non-finncil public sector, Figure II.2 Ltin Americ nd the Cribben: chnges in centrl government revenues nd expenditure, , nd Figure II.3 Ltin Americ nd the Cribben: centrl government fiscl revenues, Figure II.4 Ltin Americ nd the Cribben: centrl government revenues in countries specilizing in non-renewbles Figure II.5 Ltin Americ nd the Cribben: composition of centrl government spending Figure II.6 Ltin Americ nd the Cribben: public debt of the non-finncil public sector Figure II.7 Ltin Americ nd the Cribben: public debt of the non-finncil public sector Figure II.8 Ltin Americ nd the Cribben: extrregionl rel effective exchnge rte Figure II.9 Ltin Americ (16 countries): chnge in net trnsfers, Figure II.10 Ltin Americ nd the Cribben (22 countries): totl rel effective exchnge rte Figure II.11 Ltin Americ nd the Cribben (6 countries): infltion trgets nd ctul infltion Figure II.12 Ltin Americ nd the Cribben (4 countries): interntionl reserves Figure III.1 Ltin Americ nd the Cribben: nnul rte of gross domestic product growth, by subregion Figure III.2 Ltin Americ: nnul rte of gdp nd per cpit gdp growth Figure III.3 Ltin Americ: verge nnul gdp growth rtes t constnt prices, nd Figure III.4 Ltin Americ: qurterly gdp growth rte, percentge chnge on the previous qurter Figure III.5 Ltin Americ: rte of growth in gross fixed cpitl formtion, by component Figure III.6 Ltin Americ: gross fixed cpitl formtion s percentge of gdp Figure III.7 Ltin Americ: finncing of gross domestic investment Figure III.8 Ltin Americ: GDP growth nd contribution to the rise of net exports nd domestic demnd Figure III.9 Ltin Americ: growth in gdp nd gross disposble ntionl income, by subregion Figure III.10 Ltin Americ: food nd beverges consumer price index Figure III.11 Figure III.12 Ltin Americ nd the Cribben: nnulized monthly vrition of the consumer price index nd food nd beverges ctegory Ltin Americ nd the Cribben (16 countries): trends in lbour-mrket prticiption, occuption nd unemployment Figure III.13 Ltin Americ (9 countries): qurterly employment nd unemployment rtes Figure IV.1 Ltin Americ nd the Cribben: structure of the current ccount blnce, Figure IV.2 Ltin Americ nd the Cribben: current ccount blnce Figure IV.3 Export growth, volumes nd unit vlues, Figure IV.4 Import growth, volumes nd unit vlues,

7 Preliminry Overview of the Economies of Ltin Americ nd the Cribben Figure IV.5 Ltin Americ nd the Cribben: price of certin export commodities, jnury 2005 september Figure IV.6 Ltin Americ nd the Cribben: vrition in merchndise terms of trde f.o.b./f.o.b., Figure IV.7 Ltin Americ nd the Cribben: merchndise terms of trde f.o.b./f.o.b., Figure IV.8 Ltin Americ nd the Cribben: foreign direct investment (fdi) nd reptrition of profits, Figure IV.9 Ltin Americ nd the Cribben: sources nd uses of the blnce-of-pyments Figure IV.10 Ltin Americ nd the Cribben: foreign direct investment Figure IV.11 Morgn Stnley Cpitl Interntionl emerging mrkets index, Figure IV.12 Embi+ index: Ltin Americ nd emerging mrkets Figure IV.13 Ltin Americ nd the Cribben: chnge in net interntionl reserves South Americ Argentin: GPD, infltion nd unemployment Bolivi: GPD nd infltion Brzil: GPD, infltion nd unemployment Chile: GPD, infltion nd unemployment Colombi: GPD, infltion nd unemployment Ecudor: GPD, infltion nd unemployment Peru: GPD, infltion nd unemployment Bolivrin Republic of Venezuel: GPD, infltion nd unemployment Uruguy: GPD, infltion nd unemployment Mexico nd Centrl Americ Cost Ric: GPD nd infltion El Slvdor: GPD nd infltion Mexico: GPD infltion nd unemployment Pnm: GPD nd infltion The Cribben Dominicn Republic: GPD nd infltion Box Index Box I.1 Bsic blnce in Ltin Americ Box III.1 Recent economic expnsion in the Centrl Americn countries: why re those economies growing? Box IV.1 Long-term commodity prices... 63

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9 Preliminry Overview of the Economies of Ltin Americ nd the Cribben 2007 Summry During much of 2007, the Ltin Americn nd Cribben region witnessed gret del of voltility in finncil mrkets owing to uncertinty bout the impct tht the finncil crisis in the United Sttes could hve on tht country s nd the world s rel economies. This crisis hs not, however, hd ny significnt repercussions in terms of the level of economic ctivity or interntionl trde, nd most of the economies in the region hve continued to grow rpidly. This growth estimted t 5.6% for the region s whole hs been driven primrily by domestic demnd, with prticulrly shrp increses being noted in privte consumption nd gross cpitl formtion. The strength exhibited by domestic demnd pushed up imports shrply, while the volume of goods exports rose more slowly thn the region s GDP for the first time in six yers. All the sme, most nturl-resource exporters hve benefited from higher price levels, nd the region mrked up yet nother improvement (this time of bout 2.6%) in its terms of trde. Higher export prices were lso contributing fctor in the region s fifth consecutive surplus on the blnce-of-pyments current ccount. The considerble upswing in imports brought the surplus down from 1.7% of GDP in 2006 to 0.7% in 2007, however, thus reversing the upwrd trend in the current ccount surplus observed since The region lso received lrger inflow of foreign direct investment thn t ny time since 1999 (bout US$ 95 billion), s well s somewht less remrkble but still sizeble inflow of portfolio investment. These flows were reflected in hefty surplus on the finncil ccount. As result, net interntionl reserves climbed steeply (by the equivlent of 3.5% of regionl GDP), while the region s externl debt, mesured s percentge of GDP, continued to shrink; however, its levels of country risk rose in response to turbulence in finncil mrkets. Economic policymkers were fced with vriety of chllenges. Fiscl revenues were up, thnks to high growth rtes, efforts to stremline tx collection nd, in some countries, the high prices brought by nturl resources. Public spending lso rose steeply, however, nd, s result, the overll blnce on the countries centrl government ccounts (which, s simple verge, hd yielded surplus in 2006) showed deficit in The primry surplus ws smller s well. At the world level, fuel nd food prices were on the rise. In some countries, this trend ws excerbted by dverse wether conditions tht depressed the supply of griculturl products. In some cses, demnd pressures were lso contributing fctor. The end result ws tht, for the first time since 2002, the region s infltion rte ws close to 6%, s compred to 5.0% in Since, in mny cses, this increse in price levels ws combined with strong domestic demnd, in mny countries the uthorities decided to rise interest rtes. In number of instnces, these decisions involved number of trde-offs, since the copious foreign-exchnge inflows triggered by current ccount movements (trde surpluses, remittnces from emigrnt workers), together

10 10 Economic Commission for Ltin Americ nd the Cribben (ECLAC) with sizeble inflows on the finncil ccount (foreign direct investment nd portfolio investment), s well s the wekness of the dollr nd higher infltion, resulted in the pprecition of mny of the countries currencies in rel terms. The trends observed in the region s lbour mrkets in erlier yers crried over into Job cretion remined brisk nd ws once gin centred round wge employment. This led to reduction in the unemployment rte from 8.6% in 2006 to 8.0% in The upturn in forml employment ws prticulrly outstnding feture of this trend, while rel wges rose t mesured pce (1.5% t the regionl level). The increse in totl wges contributed to further reduction in poverty nd to notble increse in household consumption. In mny countries, these fctors, combined with considerble expnsion of credit, generted significnt demnd-side impulse for economic growth. Thus, number of the economic fetures seen in recent yers were repeted in 2007: high economic growth rtes in historicl terms (lthough other world regions ttined higher rtes), surpluses on the primry fiscl nd current ccounts, n improvement in the terms of trde, lower unemployment, higher interntionl reserves nd smller externl debt. There were lso some chnges, however, lthough on the whole they were firly moderte: slckening of the growth rte in the volume of exports, higher infltion nd reversl of the stedy upwrd trend in the fiscl surplus. The outlook for 2008 will depend, to lrge extent, on developments in the world economy. Although the most likely scenrio is slowdown in the United Sttes economy followed by prtil recovery, the possibility of recession cnnot be ruled out. The more probble outcome, however, remins tht of firly slight slckening of the pce of growth in the world economy tht would hve limited impct on emerging economies. In the cse of Ltin Americ nd the Cribben, these fctors re expected to result in modertely lower economic growth rte in 2008 (4.9%) thn in 2007.

11 Preliminry Overview of the Economies of Ltin Americ nd the Cribben Regionl pnorm

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13 Preliminry Overview of the Economies of Ltin Americ nd the Cribben Chpter I Introduction Since 2003, economic conditions in Ltin Americ nd the Cribben hve been very fvourble, nd this hs been reflected in strong growth performnce virtully crossthe-bord. In 2007, however, the region ws confronted with worsening externl finncil sitution cused by high level of voltility in interntionl finncil mrkets nd rising uncertinty, both lrgely the result of the crisis originting in the United Sttes finncil mrket. Despite this, most of the region s economies continued to grow t brisk pce thnks to strong domestic demnd, which ws driven both by privte consumption nd by gross cpitl formtion. Consequently, ECLAC is projecting GDP growth rte of 5.6% for Ltin Americ nd the Cribben in 2007 nd estimtes the region s 2008 growth rte t 4.9% (see figure I.1). If these projections re borne out, 2008 will be the sixth consecutive yer of growth nd, by its end, per cpit GDP in the region will hve mrked up cumultive increse of 23%, equivlent to 3.5% per yer.

14 14 Economic Commission for Ltin Americ nd the Cribben (ECLAC) Venezuel (Bol.Rep.of) Dominicn Republic Antigu nd Brbud Ltin Americ Ltin Americ nd the Cribben Prguy Guteml Trinidd nd Tbgo Sint Kitts nd Nevis Surinme Sint Vincent nd the Grendines Figure I.1 LATIN AMERICA AND THE CARIBBEAN: GDP GROWTH RATES, 2007 Pnm Argentin Peru Uruguy Colombi Cost Ric Cub Hondurs Chile Brzil El Slvdor Guyn Bolivi Sint Luci Brbdos Cribben Mexico Hiti Bhms Grend Belize Nicrgu Ecudor Jmic Dominic 1,0 1,5 2,7 3,0 3,0 3,0 3,3 3,3 3,3 4,0 4,0 4,0 3,9 4,5 4,5 5,0 5,0 5,5 5,5 5,5 5,5 5,3 5, Source: Economic Commission for Ltin Americ nd the Cribben (ECLAC), on the bsis of officil figures. Preliminry figures. The lst period of sustined per cpit GDP growth of over 3% per yer ws 40 yers go, during the regionl growth phse tht occurred between the lte 1960s nd the first oil price shock in the erly 1970s, when the region s economy expnded t comprble rtes for seven yers in row (see figure I.2). The lst few yers hve been exceptionl ones for the world economy, which hs now been growing t over 3% nnully for four yers running. Thus, the performnce of the Ltin Americn nd Cribben 5,6 5,6 6,0 6,0 7,0 7,0 7,0 7,5 7,5 8,2 8,6 8,5 9,5 Figure I.2 LATIN AMERICA AND THE CARIBBEAN: PER CAPITA GDP (Annul growth rtes) 6% 5% 4% 3% 2% 1% 0% -1% -2% -3% -4% -5% Source: Economic Commission for Ltin Americ nd the Cribben (ECLAC), on the bsis of officil figures. Note: The sttistic given for 2007 is bsed on preliminry figures; the figure for 2008 is projection. economies is not n isolted occurrence but is rther tking plce ginst generl bckdrop of growth. In this connection it should be noted tht, while the region s growth rtes re high by pst stndrds, they re not high by comprison with those in other regions of the developing world. A comprison of per cpit GDP growth rtes between 2003 nd 2006 in group of middle-income countries (the ctegory into which ll the region s countries fll, with the exception of Hiti) shows tht the regionl verge is lower thn those for ll ctegories of middle-income countries (see figure I.3). At the country level, the best performers re Trinidd nd Tobgo, where growth hs been driven by the production of hydrocrbons, nd Argentin, Uruguy nd the Bolivrin Republic of Venezuel, where it represents bounce-bck from domestic crises. In ddition, number of Cribben countries hve been mong the top performers of recent yers

15 Preliminry Overview of the Economies of Ltin Americ nd the Cribben Figure I.3 LATIN AMERICA AND THE CARIBBEAN COMPARED WITH OTHER MIDDLE-INCOME COUNTRIES (Annul per cpit GDP growth rtes, ) Trinidd nd Tobgo Chin Argentin Indi Uruguy Antigu nd Brbud Surinme Venezuel (Bol. Rep. of) Pnm Subtotl Cribben Sint Vincent nd the Grendines Peru Dominic Upper-middle-income countries Cost Ric Middle-income devel. countries (exc. Chin) Ecudor Chile Lower-middle-income devel. countries (exc. Indi) Sint Luci Colombi Dominicn Republic Sint Kitts nd Nevis Belize Brbdos Ltin Americ nd the Cribben Subtotl Ltin Americ Grend Nicrgu Hondurs Mexico Brzil Prguy Bolivi Jmic Bhms El Slvdor Guteml Guyn Hiti During 2007, mny of the chrcteristics of the current economic growth phse tht hve been nlysed in erlier ECLAC 1 reports continued to be observed. These fetures include continuing (lbeit substntilly smller) current-ccount surplus, further (lthough less mrked) improvement in the terms of trde, continuing positive primry blnce in fiscl ccounts, flling unemployment, rising interntionl reserves nd lower externl debt s percentge of GDP. At the sme time, some ltertions in the trends of recent yers hve been observed. While these chnges re unlikely to dmpen the region s growth prospects for 2008, undoubtedly represent n economic policy chllenge for the yers to come. Some developments worthy of specil mention re the steeper increse in public spending, which represents setbck in reltion to the overll fiscl blnce chieved by the region in 2006; the wekened momentum of goods exports, whose volume grew by less thn GDP for the first time in mny yers; rise in infltion tht interrupted the downwrd trend of the lst four yers; nd n increse in the sovereign risk of the region s countries ginst the bckdrop of the finncil mrket turbulence tht begn in My. -2% 0% 2% 4% 6% 8% 10% 12% Source: Economic Commission for Ltin Americ nd the Cribben (ECLAC), on the bsis of officil figures. A. The externl context nd globl imblnces The first thing to remember is tht, while the events triggered by the crisis in the subprime mortgge mrket eclipsed the globl risks ssocited with the United Sttes blnce-of-pyments current ccount deficit, these risks remin ltent, which mens tht globl demnd for dollr ssets still needs to be shored up in order to cover the imblnce. Interest in the subject ws overshdowed from mid-2007 onwrd, however, by the thret from incresing voltility in interntionl finncil mrkets fuelled by the mortgge crisis nd the dnger tht its negtive effects might spred to other res of the finncil mrket nd end up by generting credit shock tht could curb globl demnd. Although there re still more questions thn nswers bout economic developments in 2008, these risks do cst some doubt upon the prospects for 1 See ECLAC, Preliminry Overview of the Economies of Ltin Americ nd the Cribben, 2006 (LC/G.2327-P), Sntigo, Chile, December 2006; nd Economic Survey of Ltin Americ nd the Cribben, (LC/G.2338-P), Sntigo, Chile, July 2007.

16 16 Economic Commission for Ltin Americ nd the Cribben (ECLAC) continution of the externl boom tht hs been so beneficil for Ltin Americ nd the Cribben. While slowdown in the United Sttes economy involving slower household consumption growth, higher sving nd deprecition of the dollr would not necessrily be negtive for the world economy, its ultimte impct will lrgely depend on the speed nd form tken by the djustment. If it turns out to be slow nd grdul, it could enhnce the stbility of globl growth; hrd lnding, on the other hnd, could be deeply destbilizing. The initil perception of the risk of slowdown in the United Sttes economy ws bsed on three fctors: (i) the decline in property vlues nd thus in household consumption (becuse of the welth effect) nd home-building; (ii) the effects of the subprime mortgge problem on lending spreds, prticulrly in reltion to risk rtings, nd on the workings of credit mrkets in generl, nd (iii) drop in property-secured lending nd mortgge refinncing, which could led to further slowdown in consumption. 2 The rpid response of the United Sttes Federl Reserve, which incresed liquidity nd reduced monetry-policy reference rtes, quickly restored clm to finncil mrkets, together with widely shred initil confidence tht even if shocks like those seen midwy through the yer were repeted, the Reserve nd other centrl bnks would crry on intervening to ensure the necessry liquidity ws in plce so tht djustments would be s untrumtic s possible. This confidence held up s the yer went on, lthough it ws less widely shred thn it hd been initilly, s there ws n incresing fer tht deteriortion in the conditions underlying finncil ctivity might begin to undermine the effectiveness of centrl bnk intervention. If the illiquidity tht initilly ffected property trnsctions spreds on lrge scle to other segments of finncil ctivity, it is possible tht bnks might reduce the supply of funds on the interbnk mrket in order to mintin liquidity in context of uncertinty. 3 Growing demnd for liquidity, nd concern mong credit providers bout the risks of n economic slowdown tht might reduce lon sset qulity, could excerbte the credit constrints ffecting firms nd consumers nd ct s self-fulfilling prophesy tht would counterct the efforts deployed by centrl bnks. The recent trend of the interbnk rte in the London finncil mrket is n indiction of worsening voltility, one of the risk fctors pointed to in the previous prgrph (see figure I.4) jn 17-jn 31-jn 14-feb 28-feb 14-mr 28-mr 11-pr 25-pr Figure I.4 90-DAY LIBOR 9-my 23-my 6-jun Source: Economic Commission for Ltin Americ nd the Cribben (ECLAC), on the bsis of dt from Bloomberg. Not ll recent indictors re discourging, however. The rise in net exports from the United Sttes nd improved lbour mrket indictors, which could hve fvourble effect on disposble income nd thus on consumption nd investment in mchinery nd equipment, re developments tht could go some wy towrds offsetting the slowdown in consumption tht is likely to ensue in the wke of turbulence in the property mrket nd lower consumer confidence in the immedite prospects of the country s economy. In ddition, in erly December the United Sttes government nnounced n emergency progrmme to support the renegotition of mortgge lons s mens of lleviting the sitution of borrowers nd mitigting the dnger of finncil system insolvency. 20-jun 4-jul 18-jul 1-ug 15-ug 29-ug 12-sep 26-sep 10-oct 24-oct 7-nov 21-nov 5-dec 2 See M. Feldstein, Housing, credit mrkets nd the business cycle, Working Pper, No , Ntionl Bureu of Economic Reserch (NBER), October 2007, for n nlysis of the effects of the crisis in the United Sttes subprime mortgge mrket. 3 See J. Yellen, Speech to the Settle Community Development Roundtble nd the Settle Chmber of Commerce Bord of Trustees, Federl Reserve Bnk of Sn Frncisco, December 2007, for description of the concerns roused by the sitution in the United Sttes finncil mrket in lte 2007.

17 Preliminry Overview of the Economies of Ltin Americ nd the Cribben In consequence, nd given the fct tht the reduction in infltionry pressures gives the Federl Reserve greter scope for the ppliction of n expnsionry strtegy, the most likely outcome is grdul slowdown between lte 2007 nd erly 2008, followed by recovery in the second hlf of tht yer. 4 Tble I.1 WORLD GROWTH RATES (Clculted on the bsis of United Sttes dollrs t 2000 prices) b 2008 c World Developed countries United Sttes Europen Union (27) Jpn Developing countries Afric Ltin Americ nd the Cribben Est nd South Asi Chin Indi West Asi Trnsition countries World growth rte (weighted verges bsed on PPP dollrs) Source: Economic Commission for Ltin Americ nd the Cribben (ECLAC), on the bsis of World Economic Sitution nd Prospects, 2008 (forthcoming). Bsed on weighted verges (GDP in dollrs nd exchnge rtes for 2000) of the countries growth rtes. b Estimtes. c Projections. Growth in the Europen Union is expected to slow becuse of rising interest rtes, some tightening of lending conditions nd the pprecition of the euro. Growth is projected t 2.9% in 2007 nd t bout 2.5% in Much the sme holds for Jpn, where growth is projected to slip from 2% in 2007 to bout 1.7% in These fctors point to moderte slowdown in the world economy, chiefly becuse of slower growth in the developed countries, which my hve limited nd differentited effects on emerging economies in B. The blnce-of-pyments current ccount Growth ws once gin ccompnied by current ccount surplus in 2007, lthough it ws smller thn in previous yers (0.7%, s ginst 1.7% in 2006). This contrst with the sitution of growing surpluses in erlier yers is chiefly due to the deteriorting trde blnce (see chpter IV). Among the fctors ssocited with this ggregte, the min developments in the lst few yers hve been the rise in the terms of trde of 4 At its 11 December meeting, the Federl Reserve decided to cut the monetry-policy reference rte (i.e., the Federl Funds rte) by one fourth of point to 4.25%.

18 18 Economic Commission for Ltin Americ nd the Cribben (ECLAC) the region s whole nd the increse in remittnces from emigrnt workers. The terms of trde for the region s whole re estimted to hve risen by bout 2.5%, on verge, in 2007, thereby exceeding their verge 1990s vlue by some 33%, lthough with very mrked differences cross countries (see figure I.6) Figure I.5 LATIN AMERICA AND THE CARIBBEAN: VARIATION IN THE TERMS OF TRADE IN 2007 VERSUS THE AVERAGE FOR THE 1990s in the region s whole in 2007, but ccounted for bout 11% of GDP in Centrl Americ nd 2.8% in Mexico. In the three English-speking Cribben countries tht re the lrgest recipients of remittnces in the subregion (Grend, Guyn nd Jmic), the verge is bout 20% of GDP. Another chrcteristic of the blnce-of-pyments current ccount in recent yers hs been the shrp rise in profit remittnces sent by foreign compnies, prticulrly from South Americ, to their hedqurters. This sitution tht cn be ttributed in prt to the rise in certin commodity prices nd the fct tht the development of nturl resources is often in the hnds of foreign firms (see figure I.6). Chile nd Peru ccount for over hlf of this outflow of foreign exchnge, even though they produce only 8% of the region s GDP in current dollr terms Figure I.6 LATIN AMERICA AND THE CARIBBEAN: PROFIT REMITTANCES (Percentges of GDP) 2.5 Source: Economic Commission for Ltin Americ nd the Cribben (ECLAC), on the bsis of officil figures. Preliminry figures In ddition, mny Centrl Americn countries nd Mexico re the lrgest recipients of emigrnt workers remittnces. Lrge inflows of foreign exchnge were gin recorded under this heding in 2007, lthough the growth rte declined, owing t lest in prt to the worsening employment sitution of mny emigrnt workers, prticulrly in the construction sector, nd the restrictions plced on migrtion by the United Sttes. Remittnces represented bout 2% of GDP Source: Economic Commission for Ltin Americ nd the Cribben (ECLAC), on the bsis of officil figures. Preliminry figures. 5 This subject is nlysed in greter detil in ECLAC, Economic Survey of Ltin Americ nd the Cribben, (LC/G.2338-P), Sntigo, Chile, July 2007.

19 Preliminry Overview of the Economies of Ltin Americ nd the Cribben C. Output, income nd the components of demnd One feture of the lst few yers is tht the gross disposble ntionl income (GdNI) of the region s countries hs been growing t higher rte thn GDP. In 2007, this ggregte rose by 6.5% while GDP grew by 5.6%, lrgely becuse of the improvement in the terms of trde, which ws equivlent to 3.7% of GDP. At the ntionl level, the effects of the different components ccounting for the difference between GDP nd GdNI hve been quite heterogeneous. With the rise in the region s GdNI, ntionl sving gin grew over the previous yer (lbeit t slower rte) owing to the dynmism of consumption. It represented 21.2% of GDP t current prices nd, s hs been the cse for some yers, ws enough to finnce regionl investment in its entirety. Domestic demnd in the region s countries incresed by 7.7% in 2007, driven by growth in gross fixed cpitl formtion (11.6%) nd, to lesser extent, by higher privte consumption (6.8%), the result of improved lbour mrket indictors nd considerble expnsion of bnk lending to the privte sector (see chpter III). Gross fixed cpitl formtion, which hs been the most buoynt component of demnd, incresed t n nnul rte equivlent to bout 10% between 2004 nd This expnsion reflects the dynmism not just of construction but lso, nd prticulrly, of investment in plnt nd equipment, whose contribution hs ccounted for bout two thirds of the rise in this indictor over the lst four yers. As percentge of GDP, gross fixed cpitl formtion exceeded 21% in 2007, the highest level recorded in the period (see figure I.7). Differences in the performnce of the region s economies re lso reflected in the behviour of the most dynmic components of demnd in recent yers: investment nd exports. Among other things, the increse in cpitl formtion hs clerly been higher in the South Americn countries, boosted by the improved Figure I.7 LATIN AMERICA AND THE CARIBBEAN: GROSS FIXED CAPITAL FORMATION (Percentges of GDP t 2000 prices) Source: Economic Commission for Ltin Americ nd the Cribben (ECLAC), on the bsis of officil figures. The sttistic given for 2007 is bsed on preliminry figures. terms of trde. The volume of goods exports rose by 5.4% in 2007, following 7.3% increse the yer before. This chnge is lrgely due to the shrp drop in the volume of exports from the Bolivrin Republic of Venezuel. Lstly, it is interesting to note the current growth in exports of rel services in some of the region s countries. For one thing, their verge growth rte hs been higher thn tht of goods in mny cses. In the lst four yers, furthermore, El Slvdor hs joined the better-known cses of Pnm nd Cost Ric s country where growth exceeds the regionl verge. Also striking is the strong growth in number of South Americn countries, principlly Argentin, Brzil, Peru nd Uruguy. 6 6 See ECLAC, Ltin Americ nd the Cribben in the World Economy Trends 2007 (LC/G.2341-P), Sntigo, Chile, August 2007, for brekdown of developments in rel services.

20 20 Economic Commission for Ltin Americ nd the Cribben (ECLAC) Menwhile, driven by rising ctivity nd currency pprecition, the volume of goods nd services imports rose rpidly once gin in 2007, by 13.3%, s result of which net exports hd negtive impct on growth, s hs been the cse since D. Externl ssets nd libilities nd mcroeconomic vulnerbility In 2007, Ltin Americ nd the Cribben s net libility position with the rest of the world continued to improve, contributing to n ongoing reduction in the region s externl vulnerbility s externl libilities shrnk even s reserves incresed. The bsic blnce is estimted t over 3% of GDP, reflecting the reduction in the current ccount blnce, which is put t 0.7% of GDP, nd the rise in net FDI, projected t bout 2.3% of regionl GDP. In ddition to the surpluses deriving from positive bsic blnces, most of the region s countries re seeing lrge inflow of privte cpitl. This development, which begn in Brzil in 2006, becme quite widespred in 2007, t lest in the erlier prt of the yer. 8 The combintion of currency inflows nd sound bsic blnces plced further pressure on exchnge rtes nd led to lrge build-up of interntionl reserves, owing to the decision by some centrl bnks in the region to prevent or t lest limit currency pprecition (see chpter II). These movements hve diminished s result of the turmoil in interntionl mrkets in the second hlf of 2007, but they could recur if the strins in the interntionl cpitl mrkets recede, something tht might be ssisted by the prospect of stedy reduction in interest rtes by the United Sttes Federl Reserve nd the Europen Centrl Bnk. The bsic blnce surplus plus the incentives creted by lower domestic interest rtes nd more flexible currencies hve shrply reduced the foreign debt burden in the lst few yers, both in GDP terms nd s percentge of exports. 9 Although externl debt remins high in some countries, the net externl debt/goods nd services export rtio hs dropped to bout 0.29, fter verging 1.7 in the second hlf of the 1990s. As in other regions, the countries of Ltin Americ nd the Cribben hve been building up interntionl reserves t n incresingly rpid rte. Indeed, in 2006 nd 2007 the pce of reserves growth in the countries picked up s result of currency mrket intervention motivted by the concern of some centrl bnks (prticulrly those of Argentin, Brzil nd Colombi) bout the level of their rel exchnge rtes (see figure I.8). Reserves incresed by the equivlent of 1% of GDP in 2004 nd 1.6% in 2006, nd it is estimted tht the 2007 increse will top 3.5% of regionl GDP As nlysed in greter detil in the Economic Survey of Ltin Americ nd the Cribben, , imports re still growing with n verge elsticity of bout It should be noted tht bout two thirds of the privte-sector cpitl inflows into Brzil in 2006 were to finnce the tkeover of Cndin mining firm by CVRD. 9 In both cses, considertion should lso be given to the behviour of the vribles ffecting the denomintor of these rtios. 10 The subject is nlysed in J.L. Mchine, O. Kcef nd J. Weller (2007), Améric Ltin en el 2007: situción económic y del mercdo de trbjo, document presented t the nnul meeting of the CIDOB Foundtion (Centre for Interntionl Reltions nd Development Studies), Brcelon, 26 October 2007.

21 Preliminry Overview of the Economies of Ltin Americ nd the Cribben Figure I.8 LATIN AMERICA AND THE CARIBBEAN: BALANCE-OF-PAYMENTS SOURCES AND USES Figure I.9 LATIN AMERICA AND THE CARIBBEAN: ABSOLUTE AND RELATIVE RISK, 2006 AND Jn/07 Feb/07 Mr/07 Apr/07 My/07 Jun/07 Jul/07 Aug/07 Sep/07 Oct/07 Nov/07 Dec/07 Source: Economic Commission for Ltin Americ nd the Cribben (ECLAC), on the bsis of officil figures. Preliminry figures. b A negtive vrition implies n ccumultion of reserves. Source: Economic Commission for Ltin Americ nd the Cribben (ECLAC), on the bsis of informtion from J.P. Morgn. Menwhile, incresed voltility in interntionl finncil mrkets 11 cut short the pronounced downwrd trend of country risk in the region s countries. The EMBI+ reched record lows (168 bsis points) in lte My 2007 fter which, with some fluctutions, it begn to climb, ending the yer t round 270 bsis points. At the sme time, Ltin Americ s EMBI+ incresed reltive to tht of emerging mrkets in generl (see figure I.9). The region s reltive risk hd incresed becuse of developments with bond prices in Argentin nd the Bolivrin Republic of Venezuel even before the ltest bout of globl finncil voltility, nd it stbilized in the second hlf of 2007 t level more thn 10 bsis points higher thn the emerging mrket verge. As we hve repetedly stressed, the region s countries re much better plced thn formerly to cope with sitution like the one chrcterizing the interntionl finncil mrkets in the second hlf of This is becuse verge bsic blnces re in surplus, debt levels re lower nd hve better profiles in respect of repyment terms, rtes nd issuing currencies, nd interntionl reserves re higher. As box I.1 explins, while the externl surplus chieved by the region s whole is lrgely due to the terms of trde, which could be ffected by shift in the globl GDP trend, the bsic blnce deficit of 1% of GDP tht Ltin Americ nd the Cribben would hve if the terms of trde returned to their 1990s levels does not seem excessively high when set ginst stock of interntionl reserves equivlent to 12% of regionl GDP. Agin, we would be highly unlikely to see rpid return to 1990s levels even if the trend in interntionl commodity prices were reversed. 11 Voltility in interntionl finncil mrkets begn to intensify well before the subprime mortgge crisis. In My 2006, number of emerging economies liquidted debt in response to heightened risk version cused by expecttions of rising infltion in the United Sttes nd possible tightening of monetry policy. In lte Februry nd erly Mrch 2007 nother shock occurred, this time triggered by the nnouncement of economic policy djustments in Chin to restrin the rise of sset prices in tht country, which led to the Shnghi stock mrket flling by some 9%.

22 22 Economic Commission for Ltin Americ nd the Cribben (ECLAC) Box I.1 BASIC BALANCE IN LATIN AMERICA The bsic blnce is the sum of the current ccount blnce nd net foreign direct investment. Since the ltter is reltively stble component of the blnce of pyments, once ny vrition in interntionl reserves hs been discounted, the bsic blnce reflects country s externl borrowing requirements. Since 2003, high rw-mteril prices, coupled with high growth rtes in export volumes, hve resulted in series of surpluses on the region s current ccount. The occurrence of these surpluses in tndem with growth phse such s the one now being experienced by Ltin Americ nd the Cribben is n unprecedented event. This combintion of economic growth nd current ccount surpluses is positive feture in tht it reduces externl vulnerbility, which is especilly importnt t time when interntionl finncil mrkets re exhibiting greter voltility, incresing illiquidity nd more risk version. Since this result depends, however, on the recent trend in the terms of trde (nd on migrnt workers remittnces), the question rises s to wht would hppen if commodity prices were to fll bck to lower levels. Bering in mind tht the upswing in the terms of trde begn in the 1990s, the bsic blnce hs been clculted using verge reltive prices for goods nd services trded in For this purpose, unit vlue indices (UVI) (2000=100) were used for ech country s exports nd imports of goods nd services. The current figures for the goods (services) exports of the different countries were then corrected by deflting them by the UVI of exports of goods (services) nd inflting them by the UVI of imports of goods (services). Intuitively, this djustment is quite simple. Current figures for ech country s exports re converted to verge 1990s prices, nd the series re then retrieved t current prices for ech yer using import price indices, thus obtining clcultion of wht the figures would be t current prices if the terms of trde for 2007 were equl to the verge for the 1990s. The counterprt item for the hefty foreign-exchnge ernings from rwmteril exports on the current ccount is the reptrition of profits by foreign compnies tht re developing nturl resources in the different countries of the region (Chile nd Peru being emblemtic cses). It is therefore necessry to correct this item on the income blnce in order to determine wht the net effect on the bsic blnce would be if export prices were to fll bck to their 1990s levels. In the bsence of specific defltors for this item, the sme djustments were mde s for goods exports. This pproch is bsed on the ssumption tht either the reptrition of profits is directly relted to the production nd hence interntionl price levels of commodities, or else tht these price trends re relted to the level of ctivity nd hence to corporte profits. The figure below shows the bsic blnce for Ltin Americ (19 countries) s percentge of GDP t current prices, clculted on the bsis of both the terms of trde for ech yer nd the verge terms of trde for The effective bsic blnce (tht is, t current prices) yields surplus of 3.4% of GDP in 2007, wheres, when clculted on the bsis of the terms of trde for the 1990s, it shows deficit of -1.1% of GDP. This level is not excessively high when compred, for exmple, with the region s interntionl reserves, which re somewhere bove 12% of the region s GDP. LATIN AMERICA (19 COUNTRIES): BASIC BALANCE, (Percentges of GDP) Efective Totl Preliminry figures.

23 Preliminry Overview of the Economies of Ltin Americ nd the Cribben Box I.1 (conclusion) A c o u n t r y - b y - c o u n t r y comprison lso proves interesting. As shown in the second figure included in this box, return to the terms of trde of the 1990s would, on the whole, be very prejudicil to the hydrocrbon- nd metl-exporting countries of the region (with the exception of Bolivi), which hve benefited the most from the improvement in the terms of trde. By contrst, the Centrl Americn countries would find themselves in better position. The lrger MERCOSUR countries would not see their sitution chnge significntly, wheres Prguy nd Uruguy would be in better position. It should be dded tht these estimtes re bsed on firly extreme ssumptions, since, even though commodity prices could conceivbly fll nd the terms of trde for the region worsen, it is difficult to imgine the sitution reverting in the short term to the conditions tht previled in the 1990s. LATIN AMERICA (19 COUNTRIES): BASIC BALANCE, 2007 (Percentges of GDP) Source: Economic Commission for Ltin Americ nd the Cribben (ECLAC), on the bsis of officil figures. E. Prospects, threts nd chllenges Despite the recent turmoil in finncil mrkets nd the prospect of slowdown in the United Sttes economy, the reltive stbility of the region s economies provides grounds for cutious optimism. As stted t the beginning of this Introduction, the growth rte in 2007 is expected to be 5.6%, nd if the projections re right then 2008, with forecst growth of bout 4.9%, will be the sixth consecutive yer of growth nd the fifth with rte in excess of 4%, implying n increse in per cpit output of more thn 3% yer. These forecsts depend to some extent on whether the strtegies implemented to control the sitution in interntionl finncil mrkets s of lte 2007 ctully succeed in preventing deeper retrenchment tht could ffect the sustinbility of world growth nd, in context of greter finncil mrket voltility, led to mounting risk premiums nd further deteriortion in finncil conditions for emerging economies. Figure I.10 LATIN AMERICA AND THE CARIBBEAN: GDP GROWTH RATES, BY COUNTRY, Source: Projection prepred by the Economic Commission for Ltin Americ nd the Cribben (ECLAC), on the bsis of officil informtion

24 24 Economic Commission for Ltin Americ nd the Cribben (ECLAC) Even if the sitution develops positively in the region, the slowdown in United Sttes growth cn be expected to ffect Mexico nd Centrl Americ the most, s their exports re more oriented towrds the United Sttes mrket nd consist minly of mnufctures, mny of which re subject to very specific rules of origin nd re thus hrder to reposition in the short run (see figure I.11). 12 While investment is expected to remin the principl driver of demnd, prticulrly given tht current levels re still not high enough to sustin growth rte of some 5% to 6%, the heightened uncertinty is csting doubt over the future prospects for this ggregte. At the sme time, the impct of net exports is going to turn negtive gin owing to the loss of export dynmism since the strt of the current expnsion nd to the growth of imports, driven by the higher level of ctivity nd the strengthening of rel exchnge rtes. México Ecudor Venezuel (Rep. Bol. de) Cost Ric Rep. Dominicn Améric Ltin Colombi Nicrgu Perú Chile Hondurs Bolivi Guteml Uruguy Pnmá Brsil El Slvdor Argentin Prguy Figure I.11 LATIN AMERICA: EXPORTS TO THE UNITED STATES, 2006 (Percentges of GDP) Source: Economic Commission for Ltin Americ nd the Cribben (ECLAC), on the bsis of officil informtion. Another encourging feture of the current sitution hs been the drop in the unemployment rte, which is projected t 8.0% in 2007 nd less thn this in 2008, returning it to levels similr to those of the erly 1990s before the succession of crises tht hd such negtive repercussions on the region s lbour mrkets. Furthermore, unemployment is flling t time when employment qulity is improving nd this, in conjunction with economic growth, is hving positive effect on poverty indictors. Improved lbour-mrket indictors nd lower poverty, combined with n incipient lessening of inequity (s reveled by lower Gini coefficients in some economies), could boost consumption nd thus support domestic demnd in the region s countries. The current sitution is obviously not free of risk. Where the interntionl context is concerned, globl imblnces hve not gone wy nd the expected slowdown in the United Sttes economy, whose rmifictions re still difficult to identify, is being compounded by series of exogenous fctors tht could influence developments in the region s economies, s nlysed in previous sections. Other wrning signs hve come from the region itself nd relte to the mcroeconomic policy pplied in the countries. One of them is the persistent strengthening of exchnge rtes in certin South Americn economies, despite the mesures tken by the monetry uthorities of some of them to restrin this currency pprecition. At the sme time, infltion is ccelerting in number of countries, reflecting the emergence of pressures from both the supply side (rising food nd energy prices) nd the demnd side (prtly reflecting sustined economic growth, but lso prtly consequence of certin policy decisions). With the exception of Brzil, this sitution hs cused the infltion rte to exceed the upper limit of its bnd in countries where monetry policy sets explicit infltion trgets (see chpter II). In ddition to the bove, public spending hs tended to increse everywhere not only by more thn nominl output, but by more thn revenues. This procyclicl behviour of public spending does not rise fiscl problems in the short term becuse resources hve been incresing, but it does give grounds for some concern becuse of the possibility tht it might signl chnge of course in economic policy (see chpter II). 12 The short-term income elsticity of United Sttes imports is estimted t 2.3. See P. Hooper, K. Johnson nd J. Mrquez, Trde elsticities for the G-7 countries, Princeton Studies on Interntionl Economics, N o. 87, August 2000.