Latin America waking from its economic siesta

Latin America may finally be waking from its economic siesta.

After five years of recession, Argentina's economy is expected to expand by more than 7 percent this year. Mexico's stock prices have risen more than 20 percent since January. And investor confidence is up in Brazil, thanks to a new agreement with the International Monetary Fund.

Now as the global economy starts to perk up, economists expect the rest of Latin America to follow suit in 2004.

"The pessimism of the last few years is over," says Marcelo Elizondo, head of Argentina's Export Foundation, a state body that advises exporters on increasing sales and winning new markets.

The big boost to Argentina has been last year's currency devaluation. A 1990s law pegged the peso to the dollar, creating an artificially strong currency that eventually caught the country's economy in a vise-like grip. Exports were prohibitively expensive to foreigners, imports remarkably cheap for locals. The result was a steep decline in domestic production, runaway unemployment, and eventually a bankrupt state.

Since the country broke the link with the dollar, the peso has lost 70 percent of its value, and the tables have turned. Exports are flourishing while local production cranks up to provide what the country can no longer afford to buy abroad.

The benefits of devaluation have reached far beyond the country's traditional exports of grains, beef, and oil. Sales of honey to Germany, construction materials to Japan, and cosmetics to other South American countries are booming. Designer clothes and leather goods are gaining rapid market share in the US and Europe.

In all, the government expects exports to total around $30 billion for the year, a 17 percent increase over 2002.

Meanwhile, factories are starting back up as they seek to replace imported goods Argentina can no longer afford. Last month, Japanese tiremaker Bridgestone announced a $50 million investment in its Argentine plant as it restarts production to replace Brazilian imports. US rival Goodyear says it's also looking at resuming production here, halted since 1998.

A cheaper peso also means that tourists have been flocking to what was once Latin America's most expensive country. Last year a record number of visitors came, and 2003 is expected to be another bumper year.

The region's 10 largest economies are expected to expand by 3.5 percent in 2004, compared to 1.3 percent this year, according to IDEAglobal, a consultancy based in New York.

Brazil has barely grown in 2003, but the consensus among economists is that its economy will expand by up to 5 percent next year. The government there has focused on curbing inflation, allowing the central bank to aggressively cut interest rates in recent months, and setting the stage for a monetary stimulus.

Meanwhile flat stock and bond prices in Mexico, Latin America's third-largest economy, are on the rise as a recovery in the US spills across the border. With the US economy expanding by 7.2 percent in the third quarter, factories saw a big jump in shipments heading north in September.

Another boon for the region is the boom in China. The Asian giant's insatiable appetite for raw materials is fueling the rise in Latin America's commodity prices. Brazilian iron ore and copper from Chile and Peru are being shipped in ever greater quantities to Asia. Asian demand for gold is helping push prices toward seven-year highs, a major boost for Peru, one of the world's biggest gold exporters. Ecuador and Peru are also readying themselves for a boost when flagship oil pipeline projects are expected to go live next year.

But despite the optimism, risks remain. This is particularly true of Argentina which many economists say is currently experiencing little more than a bounce from the effects of devaluation and has yet to see the start of sustained expansion.

Lisandro Barry, Argentina's former Secretary of Finance, says the country is currently undergoing "economic reactivation, not expansion," and has so far only started up some of its existing spare capacity.

Even 7 percent growth this year and a projected 5 percent in 2004 will only allow Argentina to win back a part of the 25 percent of its economy it lost between 1998 and 2002. And the government will need to improve the current business climate, say analysts.

"The main thing lacking in Argentina is a climate favorable to private investment," says Jose Piekarz, the former general manager of the central bank.

Until the government agrees to terms for restarting payments to holders of its defaulted bonds, or reforms the country's shaky financial system, major foreign investment is likely to avoid the country for the foreseeable future.

Without resolving these problems, Mr. Piekarz estimates that growth will slow to 1 percent by 2007, which would spell prolonged misery for Argentina's new poor.

According to Ricardo Amorim, head of Latin American research at IDEAglobal, the two main risks to growth in the region both come from the global economy.

"If the global recovery fizzles, demand for Latin America's exports and commodity prices will suffer," says Mr Amorim. "But too strong a recovery and central banks will have to raise rates and this will hit the inward flow of capital."

But, he says, "We see the most likely global scenario as friendly - increasing demand, rising commodity prices, and low interest rates all helping direct foreign investment toward Latin America."