1

Latin America in 2006:Latin America in 2006:Beyond the Political CycleBeyond the Political Cycle

COFACE Country Risk Conference

Paris January 24 2006

Javier SantisoChief Development Economist & Deputy Director

OECD Development Centre

2

VENEZUELA

ECUADOR

PERÚ

PARAGUAY

ARGENTINA

URUGUAY

MÉXICO

BRAZIL

COLOMBIA

CHILE

EL SALVADOR

NICARAGUA

HONDURAS

COSTA RICA

GUATEMALA

PANAMÁ

REPÚBLICA DOMINICANA

BOLIVIA

Next presidential elections

2007 - 200920062004 - 2005

Latin America 2006: The political cycle is Latin America 2006: The political cycle is backback

3

The timing game: Political cycles and crises The timing game: Political cycles and crises in Latin America used to be synchronized, in Latin America used to be synchronized,

1970-20001970-2000

Nominal exchange rate depreciationand government change

0,94

0,96

0,98

1

1,02

1,04

1,06

1,08

1,1

1,12

1,14

1,16

-9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9

Source: Frieden, Ghezzi y Stein, 2001

Country`s Total Elections 1 Colombia 13 1989 172 Costa Rica 11 1990 143 Guatemala 11 1991 34 Ecuador 10 1992 05 Chile 10 1993 106Peru 10 1994 187 Honduras 10 1995 68 Paraguay 9 1996 89Brazil 9 1997 7

10 El Salvador 9 1998 1511Republica Dom. 9 1999 1212 Uruguay 9 2000 1113Mexico 9 2001 414 Argentina 8 2002 1315 Nicaragua 8 2003 816Panama 8 2004 617 Venezuela 8 2005 518 Bolivia 7 2006 11

4

During the period 2000-2005, some During the period 2000-2005, some countries achieved a decoupling: The case countries achieved a decoupling: The case

of Mexicoof Mexico

-30

-20

-10

0

10

20

30

40

50

60

7001

/01/

1975

01/1

0/19

76

01/0

7/19

78

01/0

4/19

80

01/0

1/19

82

01/1

0/19

83

01/0

7/19

85

01/0

4/19

87

01/0

1/19

89

01/1

0/19

90

01/0

7/19

92

01/0

4/19

94

01/0

1/19

96

01/1

0/19

97

01/0

7/19

99

01/0

4/20

01

Source: Jorge Blázquez and Javier Santiso, 2004.

Timing of Presidential Elections and Timing of Presidential Elections and Exchange Rate Depreciations in Mexico, Exchange Rate Depreciations in Mexico,

1975-20001975-2000 Election Year

Election Year

Election Year

5

While others had overcome the test of While others had overcome the test of fire more recently: The case of Brazilfire more recently: The case of Brazil

20%

25%

30%

35%

40%

45%

-180

-80

20

120

220

320

420

520

bp

Voter intention for Lula in the opinion polls

(left)

Spread Brazil-Emerging Countries and Electoral Polls1994

20%

22%

24%

26%

28%

30%

32%

-100

-50

0

50

100

150

200

pb.

Voter intention for Lula in the opinion polls

(left)

Spread Brazil-Emerging Countries and Electoral Polls1998

Source: Based on Juan Martínez and Javier

Santiso, 2003.

20%

25%

30%

35%

40%

45%

0

200

400

600

800

1000

1200

1400

Voter intention for Lula in the opinion polls

(left)

bp.Spread Brazil-Emerging Countries and Electoral Polls2002

Source: Datafolha, JP Morgan

6

1994 1997 2004

Inflation (end of year, %) 340,1 10,8 6,8

Fiscal budget (% GDP) -3,3 -3,2 -1,1

Current account (% GDP) -3,2 -3,2 1,2

Trade openness (% GDP) 28,8 36,3 44,6

Debt service (% of exports) 35% 37% 27%

External debt (% of exports) 274% 207% 154%

External public debt (% of exports)

170% 109% 84%

Source: BBVA

0

200

400600

800

1000

1200

14001600

1800

2000

dic-

91

sep-

92

jun-

93

mar

-94

dic-

94

sep-

95

jun-

96

mar

-97

dic-

97

sep-

98

jun-

99

mar

-00

dic-

00

sep-

01

jun-

02

mar

-03

dic-

03

sep-

04

jun-

05

Spread EMBI+ LatAmb.p.

Re c e s s io ns in Latam

Source: BBVA using JP Morgan data

average

+sd

-sd

But, above all, the macroeconomic But, above all, the macroeconomic starting point is very different: 1994 vs starting point is very different: 1994 vs

20042004

7

The stars have been lined up for Latin The stars have been lined up for Latin America:America:

Global growth boosted exportsGlobal growth boosted exports

-2

-1

0

1

2

3

4

5

6

7

8

9

1019

70

197

3

197

6

197

9

198

2

198

5

198

8

199

1

199

4

199

7

200

0

200

3

GDP GrowthGDP Growth (%)(%)

World

Source: WEO 2005

US

Southeast Asia

8

Venezuela 83.1%

Peru 70.7%

Chile 59.1%

Colombia 46.3%

Argentina 38.0%

Brazil 29.6%

Mexico 14.6%

Latam 31.2%

Source: BBVA

over total exports (2004)

Exports of commodities

60

70

80

90

100

110

120

130

140

150

160

170

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

Source: BBVA

BBVA-MAP Index of Latin America commodity prices (100 =jan03)

TOTAL

Without oil

The stars have been lined up for Latin The stars have been lined up for Latin America:America:

Commodity boom has been a bonanzaCommodity boom has been a bonanza

9

Source: Based on domestic sources

Figures for 2004 and 2005 are forecasts

0

1

2

3

4

5

6

7

8

9

10

1997 1999 2001 2003 2005

Growth of GDB in China(Annual Percentage variation)

0

1

2

3

4

5

6

7

8

9

10

Chile

Arg

enti

na

Perú

Bra

sil

Uru

guay

Venezu

ela

Colo

mbia

Méxic

o

Exports to China in 2003(Percentage of total)

The stars have been lined up for Latin The stars have been lined up for Latin America:America:

China became a major trading partnerChina became a major trading partner

10

Latin America

0

10

20

30

40

50

60

70

80

90

100Ecu

ad

or

Para

gu

ay

Boliv

ia

Ven

ezu

ela

Ch

ile

Arg

en

tin

a

Uru

gu

ay

Colo

mb

ia

Peru

Ind

on

esi

a

Bra

zil

Can

ad

a

Neth

erl

an

ds

Ind

ia

Th

aila

nd

Sp

ain

Mala

ysi

a

Mexic

o

Belg

ium

UK

Fran

ce

US

Sin

gap

ore

Italy

Ch

ina

Germ

an

y

Sou

th K

ore

a

Taiw

an

Hon

g K

on

g

Jap

an

Source: WTO

Exports of agricultural, energy and minery productsExports of agricultural, energy and minery products(in % over the total) (2003)(in % over the total) (2003)

The stars have been lined up for Latin The stars have been lined up for Latin America:America:

Asia is becoming a major growth pilarAsia is becoming a major growth pilar

11

3429004121.0481.440520

0

50

100

150

200

25019

8019

8119

8219

8319

8419

8519

8619

8719

8819

8919

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

05(f

)20

06(f

)

Source: BBVA; (f) forecast

Inflation in Latin America (in %)

1997-2005 average: 8%

1980-1996average:

350%

The emergence of the political economy The emergence of the political economy of the possible: The monetary anchorof the possible: The monetary anchor

12

-10

-8

-6

-4

-2

0

219

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05(f

)20

06(f

)

Source: BBVA; (f) forecast

Fiscal balance in Latin America (% GDP)Fiscal balance in Latin America (% GDP)

average 1981-1989

average1990-2002

The emergence of the political economy The emergence of the political economy of the possible: The fiscal anchorof the possible: The fiscal anchor

13

0

5

10

15

20

25

30

35

40

451

98

01

98

11

98

21

98

31

98

41

98

51

98

61

98

71

98

81

98

91

99

01

99

11

99

21

99

31

99

41

99

51

99

61

99

71

99

81

99

92

00

02

00

12

00

22

00

32

00

4

Source: OECD, WTO and IMF

Trade openness (trade flows over GDP; %)Trade openness (trade flows over GDP; %)

The emergence of the political economy The emergence of the political economy of the possible: The trade anchorof the possible: The trade anchor

14

Brazil: trade openness and catching-up Brazil: trade openness and catching-up processprocess

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.

-1,0

-0,8

-0,6

-0,4

-0,2

0,0

0,2

0,4

0,6

0,8

1,0

0,0 0,2 0,4 0,6 0,8 1,0 1,2

Thailand Taiwan South Korea Japan India China

2001-04

1951-55

2001-04

1951-55

Trade openness and development

Real tradeopenness(as a % of GDP)

Dev

iation

ofRea

l GDP pe

rcap

ita with

resp

ectt

owor

ldav

erag

e(in

loga

rith

ms)

Source: BBVA using Penn World Tables and IMF data

1951-55

2001-04

0%

5%

10%

15%

20%

25%

30%

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

Brazilian Real Trade Openness(as a % of GDP)

Source: BBVA

15

Top 100 firms in Latin-America

45

40

8

31 1 1 1

0

10

20

30

40

50

Brazil Mexico Chile Argentina Ecuador Colombia Peru Venezuela

Source: America Economia 2005

Brazil: Firms began to expand overseasBrazil: Firms began to expand overseas

Rk Firm Sector Exports04 (US$ Mill) % of sales % of sales

3 Petrobras Petroleum 6.728,7 16,5 11,212 Vale do Rio Doce Mining 2.433,5 23,5 30,632 Grupo Votorantim Holding 1.544,6 26,6 18,948 Usiminas Steel 1.137,3 24,7 9,121 Gerdau Steel 1.066,7 14,4 11,663 Gerdau Açominas Steel 935,6 24,5 22,440 Telesp Telecom 821,7 16,4 -66 CSN Steel 746,6 20,2 20,2

144 CST Steel 611,9 31,9 53,594 Cemig Electricity 521,7 19,4 -20 Electrobras Electricity 487,2 6,5 -62 Embraer Aerospace 473,1 12,3 86,952 Ambev-CBB Drinks 437,6 9,7 -

208 Aracruz Celulose Paper 402,5 31,3 61,8102 Balgo Mineira Steel 391,6 15,5 -143 Cosipa Steel 363,2 18,8 33,531 Telemar Norte Leste Telecom 345,5 5,9 -16 Odebrecht Holding 320,2 3,9 -

Utility

16

Number of firms in Forbes 2000

0

5

10

15

20

25

30

35

India Spain China Brazil Mexico Chile

Source: Forbes 2000

Brazil: Firms rallied the Mexican Brazil: Firms rallied the Mexican multilatinasmultilatinas

The 50 more profitable firms

19

16

7

3

1 1 1 1 1

0

5

10

15

20

Brazil Mexico Chile Argentina Colombia Ecuador Panama Peru Venezuela

Source: America Economia 2005

17

“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

The political economy of the possible:The political economy of the possible:The Latin American silent great The Latin American silent great

transformationtransformation

18

Thank youThank youfor your attention!for your attention!