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Jan 8, 2008 Outlook 2008: The Latin American Economy is 'Muy Caliente'

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Outlook 2008: The Latin American Economy is 'Muy Caliente'

Date: 2008-08-01
By Mike Caggeso
www.moneymorning.com

If  2007 proved one thing, it was that - next to China and India - Latin America is the world's next great emerging market.

The 19 countries in the Latin America-Caribbean region saw their Gross Domestic Product (GDP) advance at an average pace of 5.6% last year - marking the fifth-straight year of continued growth for a region historically known for its economic volatility.

Poverty in the region declined 35% in 2007, according to the United Nations Economic Commission for Latin America and the Caribbean (ECLAC). On top of that, unemployment fell by 8% last year.

And Latin America's rich commodity reserves and growing middle class drove a good portion of that growth. That's no small point, given that it proves the region is increasingly able to sustain itself, especially now that the turbulent U.S. credit crisis is hamstringing the American economy and thus threatening other countries' exports.

As it did in 2007, Latin America's projected growth for this year makes it a region where investors need to be.

Diverse Growth Across the Spectrum

A broad spectrum of political leaders - from Felipe Calderon of Mexico to Hugo Chavez of Venezuela - are operating within the boundaries of Latin America, and their economic policies often bump heads.

Furthermore, each region of Latin America has a different catalyst driving its economy: It's oil and natural gas for Venezuela and Bolivia, the service sector for Peru, copper for Chile [it accounts for nearly one-third of the world's supply], agriculture for Mexico, and so-called "soft commodities" for Argentina.  

But the elephant in the room is Brazil, the largest economy in Latin America and the ninth largest in the world. And Brazil's economy is sizzling. According to the International Monetary Fund, real GDP growth clocked in at 4.5% in 2007, topping the 3.75% growth of 2006. And, as of May, the 12-month CPI inflation was 3.2%, well below the IMF's target of 4.5%.

Much like India - though on a smaller scale in terms of population - the economy of Brazil is driven by organic growth, thanks largely to that South American country's big industrial markets, its manufacturing base, and its wealth of soft commodities - sugar, corn, soybeans, wheat -which are all rising in value because of growing worldwide demand.

Seeing dollar signs, many have left Brazil's crowded coastline metropolises to grow these commodities.

"Brazil experienced urban migration for the past 20 years and that's starting to reverse because of the agricultural growth that's happening," Alexander Carpenter, vice president and senior credit officer for Moody's Latin America Ltd., told Money Morning. 

Export growth has caused trade surpluses to balloon, and the government's tight fiscal policies have resulted in budget surpluses and declining public debt.

"Executive directors commended the authorities for the strong performance of Brazil's economy, which-against the backdrop of a favorable global environment-has been reaping the benefits of an impressive fiscal effort, sound monetary policy, and a reduction in vulnerabilities," the IMF said.

Brazil's all-around growth is fostering the expansion of a vast middle class that is, in turn, reinvesting its capital back into the country's massive service sector, and stock market.

Moody's Carpenter said more than 40 companies in Brazil went public in 2007.

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