LatAm economic boom
to boost Indian Exports

By R. Viswanathan

The Latin Americans had cheerful news on the economic front to add to their Carnival celebrations this year. The region's economies had done well in 2005 and the GDP growth of Latin American and Caribbean (LAC) economies was 4.3 percent. This comes after the 5.6 percent growth in 2004, the highest in the last two decades. This is the third consecutive year of growth since 2003. Projected growth for 2006 is 4.1 percent. What is significant is that this growth is part of the comprehensive and resilient turnaround of the region with strengthening of macroeconomic fundamentals. The growth of the LAC region has been good for India's growing business with this emerging new market. India's exports were $2.7 billion in 2005 and have raised hopes of reaching $5 billion in the next three years. Exports to Brazil were $1.2 billion followed by Mexico close to $1.0 billion. PTA with Mercosur and Chile which would become effective in 2006 would give a boost to India's exports.

The current account surplus of LAC region in 2005 was 1.3 percent. This is the third consecutive surplus since 2003. The combination of GDP Growth with current account surplus is without precedent in the last 50 years of LAC history. This has reduced the region's dependence on external capital inflows and borrowing. The average Inflation in 2005 was 5.4 percent, the lowest in more than 25 years. The inflation rate is likely to remain at the same level in 2006.Per capita GDP is estimated to have risen by about 3.0 percent and unemployment rate reduced from 10.3 percent in 2004 to 9.3 percent in 2005. Poverty indices decreased from 44 percent to 40.6 percent. Exports of the region surged in 2005 leading to record trade surplus for many countries. Brazil had a trade surplus of $44 billion dollars and Venezuela $28 billion.

The most remarkable news was that in December 2005 Argentina repaid $10 billion to IMF three years ahead of due date. This is incredible, coming within four years after the collapse of the economy and default on debt in 2001. Brazil also repaid $15.5 billion to IMF ahead of schedule in the same month. Besides saving on interest payments, these two countries have now freed themselves from the policy interference of IMF. There is a general reduction in the public debt to GDP ratio, which makes the region less vulnerable to external shocks. Their debt to GDP ratio, which peaked in 2002 at 61.3 percent of GDP declined to 45.9 percent of GDP by the end of 2005. Given this favourable situation and abundance of international liquidity, the region's risk premiums have descended to record lows. The currencies of the region have stabilized in general and appreciated against the dollar in 2005. A number of countries most notably Brazil, Chile, Colombia, Mexico and Peru have increased their reliance on domestic debt issuance, reducing their vulnerability to exchange rate risk and increasing the liquidity of local currency markets. In the past three years, Brazil, Chile, Colombia, Mexico and Uruguay have issued sovereign debt and global bonds denominated in local currencies.
Fiscal revenues in 2004 and 2005 were the highest since 1990. Fiscal management was in general prudent and many governments and provincial authorities have started exercising fiscal discipline. The surplus has been used to reduce debt. Consequent to these positive developments countries such as Brazil, Mexico, Chile, Peru and Uruguay have got upgrading of their credit ratings.
GDP growth in 2005 sub-region wise was as follows: South American GDP grew by 4.9 percent , Mexican and Central American by 3.1 percent and Caribbean by 4.1 percent. The stars of GDP growth in 2005 were Dominican Republic ( 9.3 percent), Venezuela ( 9.3 percent), Argentina ( 9.1 percent ) and Peru ( 6.7 percent). Brazil's GDP growth was 2.5 percent in 2005 and projected to be 3.0 percent in 2006. Brazil has retaken its position as the largest economy of Latin America in 2005 with a GDP of $794 billion, overtaking the Mexican GDP of $766 billion. Despite the appreciation of Real against dollar, the exports increased to $118 billion in 2005 leading to a record trade surplus of $44 billion.

The growth rate of Mexico in 2005 was a modest 3.0 percent and it is projected to increase to 3.6 percent in 2006. Exports increased to $214 billion and imports reached $221 billion in 2005. The Maquilladora ( export assembly units ) had started adding jobs in 2005 reversing the decline since 2000. The remittances reached $20 billion and the forex reserves $67.3 billion. Argentina, the third largest economy of the region grew by 9.1 percent, the highest in the last 13 years.

This comes after a sizzling growth of 9.0 percent in 2004 and 8.8 percent in 2003. Exports surged to $40 billion in 2005 from $26 billion in 2004. The government is trying to contain the inflation which reached 12.3 percent in 2005.
Venezuela's growth of 9.3 percent coming on the heels of 17.3 percent in 2004 has completely wiped off the contraction of the economy suffered during the years of political and economic crisis of 2002-03. Thanks to the high oil prices, Venezuela's exports reached a record $53 billion in 2005 with a trade surplus of $28 billion.
The Colombian economy also grew on the back of the high prices of oil, coffee and other exports. The 6.7 percent growth of Peru in 2005 was the highest in the last eight years. The notable factors which contributed to the performance of LAC economies in 2005 included strong internal demand, good growth of the US and other markets, high prices of commodities, growth in exports to China and commendable macroeconomic management by policy makers.
The positive performance of the LAC economies should be seen in perspective in view of the following challenges: high debt to GDP ratio in many countries, vulnerability to external shocks such as fall in commodity prices, weakening of the US and Chinese growth and increase in interest rates. The LAC countries continued to pursue regional integration to reinforce their stability and growth and gain collective strength through Mercosur, Andean Community, Central American Integration System (SICA) and Caricom.
Mercosur was expanded in 2005 with the addition of Venezuela. The summit meeting of the 10 South American countries in September reaffirmed their resolve to integrate their markets under the new entity " South American Community of Nations". Four of the SICA countries (El Salvador, Guatemala, Honduras and Nicaragua) had agreed to have a common Central American Passport. Guatemalans have already introduced this new passport since January 2006. A common currency for SICA region is also under discussion.
Six out of the 15 Caricom countries namely Jamaica, Belize, Trinidad and Tobago, Barbados, Suriname and Guyana signed the historic Single Market agreement on 30 January 2006. The following six countries Antigua and Barbuda, Dominica, Grenada, St Kitts and Nevis, St Lucia and St Vincent and Grenadines signed a declaration on the same occasion stating their intention to join the single market by June 2006. The Caribbean Single Market and Economy (CSME) will be fully operational by 2008. A single currency and harmonization of national economic policies are also part of CSME.
(The author is with Ministry of External Affairs, Government of India. Views expressed are personal).