Latin Finance - March/April 2009 - 37

regional growth prospects equivalent to 1.5% of GDP. This year, he 17, they stood at 3.50 and 2.31 says, the deficit will increase to 3.0% of respectively. As a result, economists are busy revising GDP, mainly due to a reduction in revenue LatAm GDP forecasts down. For instance, in linked to commodities, as well as global crisis. Instead of using reserves to pump up September, when it was still not entirely the economy, Callegari says Colombia clear how the global slowdown would be should cut to 7.50% by the end of the year felt, Morgan Stanley predicted GDP expansion of 3.6%, later cutting to 1.5%. As from 9.00% in February. Mexico meanwhile unleashed a of February 18, it expects contraction of package valued at up to $50 billion. Most is 0.4%, while JPMorgan forecasts regional earmarked for infrastructure. The GDP will decline by 0.5%. The IMF, which government is using extra revenue from in October believed LatAm GDP would hedging oil to invest in stimulus while expand 3.25%, chopped its forecast in avoiding a fiscal deficit, says Andrew Selee, January to 1.1%. director of the Mexico Institute at the Morgan Stanley believes Mexican GDP Woodrow Wilson Center. He adds that will contract by 1.5%, while it previously predicted zero growth. Brazil, previously thought to grow by Commodities as Percentage of Exports 2.0%, will see no expansion in Highly dependent 2009, the shop says. Colombia and Chile are expected to gain 1.5% each. Ecuador Previous forecasts had them expanding 2.0% and 1.9%, Venezuela respectively. Peru, with its Chile forecast unchanged at 4.0%, will remain the country with Peru the most growth in 2009, says Morgan Stanley. Argentina Argentina is meanwhile expected to contract 2.2% while Brazil it was previously thought to be able to grow by 1.6%. Mexico Venezuelan expansion has been 0% 10% 20% 30% 40% 50% 60% 70% 80% cut to 1.0% from 2.0%. The Counterattack Source: Fitch In line with most industrial nations, LatAm is fighting to keep afloat. Among common strategies are aggressive rate cuts and stimulus packages. Peru’s finance ministry in late January announced the initiation of a stimulus plan valued at at least 4.5 billion soles. The idea is to keep GDP growing by more than 5% by investing in infrastructure and social sectors. The plan includes a10% reduction in the price of diesel and gasoline, investment in social safety nets and an acceleration in infrastructure programs. Callegari says Peru, with about $27 billion in reserves, is able to reduce its surplus and even run a deficit to increase spending and spur growth. He expects a deficit of around 1.5% of GDP this year. Colombia, on the other hand, has less room to maneuver, Callegari says, because it was already running a deficit in 2008 while Mexico cannot escape negative effects from a close relationship with the US, its finances have been well-managed. Argentina will meanwhile invest up to 57 billion pesos in 2009 in infrastructure as a countercyclical measure. Almost 33 billion pesos will come from 2009 budget, 2.5 billion pesos from multilaterals, 6.0 billion pesos from private financing, 12 billion pesos from the BNDES, Banco Nación and social security administrator Anses, and 3.5 billion pesos is sourced from savings generated by the elimination of certain subsidies. In the case of Venezuela, says Morgan Stanley, policies such as tapping into international reserves to finance public expenditures – such as the recent transfer of $12 billion in reserves to the government off budget discretionary spending fund (Fonden) – are inflationary. Venezuela’s inflation could reach 40% this year and stay there in 2010. LatAm is also in loosening mode. “The deterioration on the outlook for growth and the improvement in the prospects for inflation would increase the scope for a more frontloaded and deeper monetary easing cycle for most countries,” says Goldman Sachs. The shop forecasts that for the region – excluding Argentina and Venezuela – consolidated inflation will be 6.4% in 2008, 4.4% for 2009 and 4.0% in 2010. In 2007 it was 4.4% Colombia began easing in December and has now cut 100 basis points since the peak of 10.0%, keeping a 50 basis points cut pace at its January meeting. JPMorgan expects additional 150 basis points rate cut during the first half of 2009, with the policy rate heading to 7.50%. Peru started its easing cycle in February, cutting the policy rate to 6.25% from 6.50%. Goldman predicts inflation will drop to 2.70% by the end of this year from 6.53% in January. For Brazil, after March’s expected additional 100 basis points cut, JPMorgan envisions a 75 basis points easing in April, and a final 50 basis points cut in June, reducing the Selic to 10.50% by 90% 100% the end of the first half. Goldman, which revised GDP growth in Brazil to zero for 2009 from a previous 1.25%, expects 75 basis points cuts each in March, April and June followed by another 50 basis points in July, taking it to 10.00%. In Mexico, JPMorgan forecasts Banxico will cut to 6.25% by the end of 2009 from 7.75% in January. Meanwhile, Celfin Capital says Chile will loosen by 425 basis points this year, with a risk towards a larger cut. The central bank surprised twice in January and February. In the February meeting, where consensus was for 100-150 basis points, it slashed 250. The effectiveness of countercyclical measures remains to be seen as they depend on execution, says Fitch’s Shetty. She adds that on the monetary policy side, central banks must resist the temptation of easing too much, as this will not be taken lightly by rating agencies. On the fiscal policy side frontloading execution of stimulus plans should bring some relief. LF March/April 2009 LATINFINANCE 37
Latin Finance - March/April 2009

Table of Contents for the Digital Edition of Latin Finance - March/April 2009
