Preliminary Overview of the Economies of Latin America and the Caribbean

Inter-American Dialogue Preliminary Overview of the Economies of Latin America and the Caribbean - 2006 José Luis Machinea Executive Secretary Economic Commission for Latin America and the Caribbean Washington DC, 15 December 2006

Our view of the economic situation of Latin America could be summarized in two words: Cautious Optimism Optimism because the region is growing faster and better than in the past But, cautious because of: Increasing uncertainty regarding the international economic context Concerns over the sustainability of the current rates of economic growth

GDP growth reached approximately 5.3% Latin America and the Caribbean: GDP growth, 2006 (annual growth rates) Venezuela Dominican Republic Argentina Panam a Uruguay Peru Caribbean Costa Rica Colombia Honduras South America Latin America and the Caribbean Central Am erica and Mexico Ecuador Mexico Guatem ala Bolivia Chile Paraguay El Salvador Nicaragua Brazil Haiti 5.3 5.3 5.1 6.8 (*) Central America includes Haiti and Dominican Republic 0.0 2.0 4.0 6.0 8.0 10.0

Forecast for 2007 Latin America and the Caribbean: GDP growth, 2007 (annual growth rates) Argentina Venezuela Dominican Republic Panam a Uruguay Peru Chile Caribbean South America Honduras Guatem ala Costa Rica Colombia Latin America and the Central America and Mexico Nicaragua El Salvador Ecuador Bolivia Mexico Paraguay Brazil Haiti 4.1 4.7 5.4 5.1 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0

A longer-term view: per capita GDP increases after a period of stagnation Growth rate 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0-1.0-2.0-3.0 2.2 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 2005 2006 2007 Growth Growth 2002-2007: 2002-2007: 16% 16% GDP growth rate Projected growth rate for 2007 Average growth rate 1980-2002 Per capita GDP (2000=100) 120 100 80 60 40 20 0

But less than in many other developing countries 6.0% Per capita GDP growth rate by sub-region 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% WORLD Developed Economies Latin America and the Caribbean 2004 2005 2006 Developing Economies Developing Economies (excluding China)

Unemployment drops Latin America and the Caribbean: growth of economically active population and employment, unemployment rate 3.5 11.5 Rates of Growth 3.0 2.5 2.0 1.5 11.0 10.5 10.0 9.5 9.0 8.5 Unemployment rate 1.0 2001 2002 2003 2004 2005 2006 Employment EAP Unemployment rate 8.0 Good news in the short run but over the long run faster productivity growth is needed

The percentage of poor and indigent persons has fallen sharply since 2004; trend is expected to continue. But it has taken 25 years to reduce poverty below the 1980 level. 60 Latin America: trends in poverty and indigence, 1990 2006 (percentage of individuals) 50 Percentage. 40 30 40.5 48.3 43.5 43.8 44.0 42.0 39.8 38.5 20 10 18.6 22.5 19 18.5 19.4 16.9 15.4 14.7 0 1980 1990 1997 1999 2002 2004 2005 2006 Indigent Non-indigent poor

A large group of countries saw reductions in their poverty and indigence rates, compared with both 2000/2002 and 1998/1999. Uruguay b/ Dominican Rep. Bolivia Costa Rica Paraguay Panama Brazil El Salvador Chile Honduras Peru Ecuador b/ Mexico Colombia Venezuela Argentina b/ Trends in poverty and indigence 2000/2002-2003/2005 1998/1999-2003/2005-20 -15-10 -5 0 5 Percentage points Uruguay a/ Bolivia Peru Argentina a/ Costa Rica Dominican Rep. Paraguay Brazil Panama a/ El Salvador Chile Honduras Mexico Colombia Venezuela Ecuador a/ -20-15 -10-5 0 5 Percentage points Poverty Indigence Poverty Indigence

Extreme poverty projections for 2006 show that the region is once again moving towards meeting the first target of the MDGs; progress is slightly better than expected. Progress in reducing extreme poverty between 1990 and 2006 (percentages) Latin America Argentina b/ Bolivia Brazil Chile Colombia Cos ta Rica Ecuador b/ El Salvador Guatemala Honduras Mexico Nicaragua Panama Paraguay Progress expected by 2006 Peru Uruguay b/ Venezuela (Bolivarian Rep. of) -10 0 10 20 30 40 50 60 70 80 90 100

Countries would have a better chance of meeting the poverty target if they reduced inequality in income distribution, especially those lagging furthest behind 7% Per capita GDP growth rates needed to halve the 1990 extreme poverty figure by 2015 6% 5% 4% 3% 2% 1% 0% -1% Chile Panama Peru Argentina Costa Rica El Salvador Uruguay Latin America Ecuador Mexico Bolivia Colombia Guatemala Nicaragua Brazil Honduras Venezuela (B.R) Paraguay Growth neede without a distributive change Growth needed with a 10% reduction in the Gini coefficient Per capita GDP growth 1990-2006

External conditions have boosted regional growth World growth Liquidity Improvements in terms of trade

Better terms of trade but with differences among sub-regions Variation in terms of trade between the 1990s and 2006 50% 47.3% 40% 30% 31.2% 25.5% 20% 17.1% 10% 0% -10% -20% -13.4% LATIN AMERICA AND THE CARIBBEAN SOUTH AMERICA SOUTH AMERICA (excluding Chile and Venezuela) CENTRAL AMERICA (incl. Haiti and Dom.Rep) MEXICO

World growth Liquidity External conditions have boosted regional growth Improvements in Terms of trade High level of remittances

Remittances are by far the main source of external financing in Central America Latin America and the Caribbean: resources from migrant workers transfers (percentages of current GDP) 2.5 2.0 2006 South America: 1.2 Central America: 11.1 Mexico: 2.8 1.5 1.0 0.5 0.0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 e e/ Estimated

More saving, investment and exports than in the previous upswing 16 14 12 10 8 Main features of the current macroeconomic cycle (1) Latin America: annual average growth rates 7.5 7.0 15.3 INCOME ELASTICITY OF IMPORTS: 1991 1994 : 3.6 2003 2006p : 2.4 8.5 8.1 10.4 6 4 2 0 4.3 5.6 4.3 4.2 4.2 National Income 4.4 growth 1991-1994 2003-2006p GDP Total Consumption Investment Exports of goods and services Imports of goods and services p/ Projected

Latin America s market share in total world imports increased during the last 15 years Latin American and Caribbean exports evolution, 1980-2005 (total LAC exports as a percentage of total world imports) 6.0 5.0 4.0 3.0 2.0 1.0 0.0 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 2005 South America Mexico, Central America and the Caribbean Latin American and the Caribbean

This is not a function of prices alone: LAC exports are outpacing world exports 16 14 12 10 8 6 4 2 0-2 1990 GDP and volume of exports, annual growth rates (percentages) 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006e 16 14 12 10 8 6 4 2 0-2 8.5% 6.1% World GDP Global exports LAC exports e/ Estimated

Main features of the current macroeconomic cycle (2) Surplus on the current account 6.0 4.0 2. 0 0.0-2.0-4.0-6.0 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 2005 2006p in percentajes GDP growth rate Current Account Balance / GDP p/ Projected

Main features of the current macroeconomic cycle (3) But with major differences among countries Current account balance as % of GDP, 2006 Ve ne zue la Bolivia Chile Arge ntina Pe ru LATIN AMERICA AND THE CARIBBEAN Brazil Ecuador Honduras Me xic o Haiti Colombia Uruguay Dominican Republic Paraguay Panama Guate mala El Salvador Cos ta Ric a Nic aragua -13.6 1.8 17.5 12.0-10 -5 0 5 10

350,000 Main features of the current macroeconomic cycle (4) More reserves and less external debt Latin America and the Caribbean: short-term external debt and international reserves 140.0% 300,000 250,000 200,000 150,000 100,000 50,000-120.0% 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Short-Term Debt (left axe) International Reserves (left axe) Ratio Short-Term Debt / International Reserves (right axe)

Main features of the current macroeconomic cycle (5) The primary fiscal surplus is high (compared to other periods) and growing 4 Latin America and the Caribbean: change in the principal fiscal indicators (as a share of GDP) 3 2 1 0-1 -2-3 1991-1994 1995-1998 2003-2006 Total Revenues Total Expenditures Primary Balance

Reduction in public debt 80 Main features of the current macroeconomic cycle (6) Public debt in Latin America, 1993-2006 (percentages of GDP) 70 60 50 40 30 1993 1994 1995 1996 1997 1998 1999 2000 Central Government 2001 2002 2003 NFPS 2004 2005 II-2006 Improvement in Structure of debt (maturity and local currency)

Main features of the current macroeconomic cycle (7) Better fiscal conditions 20.0 18.0 16.0 14.0 12.0 2.0 1.5 1.0 0.5 0.0-0.5 10.0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Revenues and Expenditures Primary Bala nce 22.0 2.5-1.0 Primary Balance Revenues Expenditures

Summary: some reasons for optimism External conditions are currently highly favorable Latin America and Caribbean is growing faster Unemployment is falling Extreme poverty has been reduced markedly in recent years The region seems to be less vulnerable now to external shocks than in the past

And some reasons for caution?

External conditions Some Caveats Uncertainties about the prospects for global growth

External conditions Some Caveats Economic policy challenges for LAC Despite the reduction in vulnerability, some countries in the region are still highly indebted and some financial systems are highly dollarized. The rate of investment is still insufficient.

The rate of investment is still insufficient (and differs substantially across countries) Latin America: gross capital formation as a percentage of GDP (in dollars at constant 2000 prices) Nicaragua Ecuador Chile Colombia Venezuela (BR.) Mexico Honduras Peru Latin America 90/99 Latin America 1998 Latin America 2006 Argentina Panama Brazil Guatemala Costa Rica Paraguay El Salvador Dominican Rep. Bolivia Uruguay 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0%

External Conditions Some Caveats Economic policy challenges for LAC Despite the reduction in vulnerability, some countries in the region are still highly indebted and some financial systems are highly dollarized. The rate of investment is still insufficient. Increases in public expenditures in some countries should be carefully monitored.

The trend in terms of trade is impacting fiscal revenues and putting pressure on public expenditures Latin America: revenues and primary expenditure of the central government, 2003-2006 (as percentage of GDP) 2003-2004 2005-2006 -4-2 0 2 4 6 Bolivia Venezuela Haití México Perú Brasil Colombia Argentina El Salvador R. Dominicana Paraguay Honduras Costa Rica Uruguay Guatemala Bolivia Venezuela Haití México Perú Brasil Colombia Argentina El Salvador R. Dominicana Paraguay Honduras Costa Rica Uruguay Guatemala -4-2 0 2 4 6 10 6 REVENUES PRIMARY EXPENDITURE

External Conditions Some Caveats Economic policy challenges for LAC Despite the reduction in vulnerability, some countries in the region are still highly indebted and some financial systems are highly dollarized. The rate of investment is still insufficient. Increases in public expenditures in some countries should be carefully monitored. Countries must place more emphasis on countercyclical policies and strengthen fiscal institutions. Perhaps there is room for relaxing monetary policy in countries in where inflation seems to be under control. This might help to sustain economic growth and reduce pressure on exchange rates.

8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% Inflation rate has been falling and real interest rates are rising 2004-M1 2004-M2 2004-M3 2004-M4 2004-M5 2004-M6 2004-M7 2004-M8 2004-M9 2004-M10 2004-M11 2004-M12 2005-M1 2005-M2 2005-M3 2005-M4 2005-M5 2005-M6 2005-M7 2005-M8 2005-M9 2005-M10 2005-M11 2005-M12 2006-M1 2006-M2 2006-M3 2006-M4 2006-M5 2006-M6 2006-M7 2006-M8 2006-M9 2006-M10 Average of interbank interest rate Inflation

Is there any scope for relaxing monetary policy in some countries? 12.0 Interest rate of monetary policy a/ 10.0 8.0 6.0 4.0 2.0 0.0-2.0-4.0 Brazil Colombia Mexico Peru Chile Argentina a/ Interest rate of monetary policy deflated by core inflation

There has been real exchange appreciation in some countries Latin America and the Caribbean: real effective exchange rate (October 2006 compared to October 2003 and for the 1990s) Guatemala Venezuela,BR Honduras Jamaica Trinidad & Tabago El Salvador Mexico Ecuador Chile Colombia Paraguay Costa Rica Uruguay Peru Panama Brazil Bolivia Nicaragua Argentina Compared to the average for 1990-99 Compared to October 2003 85.6% -25.0% -20.0% -15.0% -10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0%

But the causes of appreciation are beyond the control of monetary policy 30% Real Exchange Rate var. (%) (average 2005-2006 compared to the average 1990-99) 20% 10% 0% -10% -20% -30% PAN URU PAR CSR BRA PER BOL COL MEX NIC GUA CHI ECU ELS VEN HON R 2 = 0,448-10.0-5.0 0.0 5.0 10.0 15.0 20.0 25.0 Terms of Trade effect + Transfers as a % of GDP (average 2005-2006 compared to the average 1990-99)

External conditions Some Caveats Economic policy challenges for LAC In order to achieve a sustainable rate of growth, in the medium term it is necessary to: Increase human and physical capital. Strengthen innovation processes (adopt, adapt and create). Diversify the productive structure of the economy (continued dependence on primary exports). Address the challenge of financing the necessary upgrades in capabilities (human resources, innovations ) Using the rents generated from natural resources?