Latin America in 2006: Beyond the Political Cycle

1. Latin America in 2006:Beyond the Political Cycle Javier Santiso Chief Development Economist & Deputy Director OECD Development Centre COFACE Country Risk Conference Paris January 24 2006

2. Latin America 2006: The political cycle is back MÉXICO REPÚBLICA DOMINICANA HONDURAS GUATEMALA VENEZUELA NICARAGUA EL SALVADOR COSTA RICA PANAMÁ COLOMBIA ECUADOR BRAZIL PERÚ BOLIVIA PARAGUAY CHILE URUGUAY ARGENTINA Next presidential elections 2007 - 2009 2006 2004 - 2005

3. The timing game: Political cycles and crises in Latin America used to be synchronized, 1970-2000 Elections Nominal exchange rate depreciation Country`s Total andgovernment change 1989 17 1 Colombia 13 1,16 1990 14 2 Costa Rica 11 1991 3 3 Guatemala 11 1,14 1992 0 4 Ecuador 10 1,12 1993 10 5 Chile 10 1994 18 6 Peru 10 1,1 1995 6 7 Honduras 10 1,08 1996 8 8 Paraguay 9 1997 7 9 Brazil 9 1,06 1998 15 10 El Salvador 9 1,04 1999 12 11 Republica Dom. 9 2000 11 1,02 12 Uruguay 9 2001 4 13 Mexico 9 1 2002 13 14 Argentina 8 2003 8 0,98 15 Nicaragua 8 2004 6 16 Panama 8 0,96 2005 5 17 Venezuela 8 Source: Frieden, Ghezzi y Stein, 2001 2006 11 0,94 18 Bolivia 7 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9

4. During the period 2000-2005, some countries achieved a decoupling: The case of Mexico Timing of Presidential Elections and Exchange Rate Depreciations in Mexico, 1975-2000 Election Year Election Year Election Year Source: Jorge Blázquez and Javier Santiso, 2004.

5. While others had overcome the test of fire more recently: The case of Brazil Source: Based on Juan Martínez and Javier Santiso, 2003.

6. But, above all, the macroeconomic starting point is very different: 1994 vs 2004 1994 1997 2004 Inflation 340,1 10,8 6,8 (end of year, %) Fiscal budget -3,3 -3,2 -1,1 (% GDP) Current account -3,2 -3,2 1,2 (% GDP) Trade openness 28,8 36,3 44,6 (% GDP) Debt service 35% 37% 27% (% of exports) External debt 274% 207% 154% (% of exports) External public debt 170% 109% 84% (% of exports) Source: BBVA

7. The stars have been lined up for Latin America:Global growth boosted exports Southeast Asia US GDP Growth (%) 10 9 8 7 6 5 World 4 3 2 1 0 -1 -2 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 Source: WEO 2005

8. The stars have been lined up for Latin America:Commodity boom has been a bonanza Exports of commodities BBVA-MAP Index of Latin America commodity prices (100 =jan03) over total exports (2004) 170 160 Venezuela 83.1% 150 Peru 70.7% 140 Without oil 130 Chile 59.1% 120 Colombia 46.3% 110 TOTAL 100 Argentina 38.0% 90 Brazil 29.6% 80 70 Mexico 14.6% 60 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Latam 31.2% Source: BBVA Source: BBVA

9. The stars have been lined up for Latin America:China became a major trading partner Growth of GDB in China (Annual Percentage variation) Exports to China in 2003 (Percentage of total) Source: Based on domestic sources Figures for 2004 and 2005 are forecasts

10. The stars have been lined up for Latin America:Asia is becoming a major growth pilar Exports of agricultural, energy and minery products (in % over the total) (2003) 100 90 Latin America 80 70 60 50 40 30 20 10 0 India Chile UK China Bolivia Italy Peru US Ecuador Spain Uruguay Brazil Japan Colombia Paraguay Indonesia Argentina Taiwan France Venezuela Mexico Canada Thailand Malaysia Belgium Germany Singapore Hong Kong Netherlands South Korea Source: WTO

11. The emergence of the political economy of the possible: The monetary anchor 1980-1996 average: 350% 1997-2005 average: 8%

12. The emergence of the political economy of the possible: The fiscal anchor Fiscal balance in Latin America (% GDP) 2 0 -2 -4 1990-2002 average -6 -8 1981-1989 average -10 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005(f) 2006(f) Source: BBVA; (f) forecast

13. The emergence of the political economy of the possible: The trade anchor Trade openness (trade flows over GDP; %) 45 40 35 30 25 20 15 10 5 0 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Source: OECD, WTO and IMF

14. Brazil: trade openness and catching-up process Successful Asian emerging countries were able to simultaneously combine growth with a trade openness proccess. Brazil has recently started to open up its economy. It is also obtaining record trade surpluses: nearly 45 billion dollars in 2005; up 25% from the previous year.

15. Brazil: Firms began to expand overseas Top 100 firms in Latin-America 50 45 40 40 30 20 8 10 3 1 1 1 1 0 Brazil Mexico Chile Argentina Ecuador Colombia Peru Venezuela Source: America Economia 2005

16. Brazil: Firms rallied the Mexican multilatinas The 50 more profitable firms 19 20 Number of firms in Forbes 2000 16 35 15 30 25 10 20 7 15 5 10 3 1 1 1 1 1 5 0 0 Brazil Mexico Chile Argentina Colombia Ecuador Panama Peru Venezuela India Spain China Brazil Mexico Chile Source: America Economia 2005 Source: Forbes 2000

17. The political economy of the possible:The Latin American silent great transformation “In dealing with the multiple and complex problems of development, we have learnt that we must be deaf, like Ulysses, to the seductive chant of the unique paradigm”. Albert Hirschman

18. Thank youfor your attention!