World Economic Imbalances and their Impact in Latin America LILIANA ROJAS-SUÁREZ Center for Global Development Mexico, June 2005

World Economic Imbalances and their Impact in Latin America

LILIANA ROJAS-SUÁREZ

Center for Global Development

Mexico, June 2005

Summary

• In contrast with 2004, 2005 is a year of very varied economic growth among industrial nations. While economic recovery is expected to continue in the US, and Latin America is expected to benefit in general from this recovery, European and Japanese growth appears weak.

• The extremely high prices of non-agricultural commodities benefit the fiscal accounts and balance of payments of many nations in the region.

• Latin America has also benefited from very low international interest rates.

• But 2005 results are very fragile, and the Latin American region faces significant risks stemming from the need to correct macroeconomic imbalances in industrialized nations and China, aside from the vulnerabilities specific to each country in the region.

• More macroeconomic imbalances are created in international markets. This due to the following:

– The need for monetary policy “adjustments” in industrial nations to prevent inflationary episodes and/or disorderly exchange rate movements.

– Fiscal imbalances in many industrialized nations, especially the United States and Japan, which are unsustainable for the medium term.

– The enormous US current accounts deficit, correction of which requires exchange rate adjustments.

– An “overheated” Chinese economy.

– Conflicts with the Arab world and possible terrorist attacks.

• Given the need for global level adjustments, the greatest risk faced by Latin America is that 2004 – 2005 growth results are regarded as “permanent” and the relatively favorable international context for necessary reforms is overlooked.

The need for global macroeconomic adjustments will reduce growth in 2005 and 2006.

Real GDP Growth for the World and for Latin America: 2004 - 2006 (percentages)

0

1

2

3

4

5

6

7

8

9

10

World UnitedStates

Japan Euro Area Latin America Emerging Asia

China

2004

2005F

2006F

Sources: IMF, Market Estimates

The Unusual Global Economic Growth of 2004 will not be repeated in 2005-2006

Latin America also reflects the global outlook. Although 2005 still looks favorable, estimates point to slower growth in 2005-2006, especially in Argentina and Ecuador.

Real GDP Growth for Latin American Nations: 2004 - 2006

0

2

4

6

8

10

12

14

16

18

20

Argentina Brazil Chile Colombia Mexico Venezuela Peru Ecuador

2004

2005F

2006F

Source: Market Estimates


Most Central American nations reflect the world economic outlook.

Real GDP Growth in Central American Countries: 2004 - 2005

0

1

2

3

4

5

6

7

Costa Rica El Salvador Guatemala Honduras Nicaragua Panama Dominican R.

2004

2005F

Source:CEPAL


I. In contrast with 2004, this year the US Federal Reserve is less worried about consolidating the economic recovery and more about inflation. That is why rates will rise continuously.

What policy decisions made by the industrialized world help explain the current

economic cycle?

Since Japanese growth rates are still very low, the nominal interest rate will be zero in 2005. However, European rates are under pressure to rise.

US Fed Funds Rate(percentages)

-2

-1

0

1

2

3

4

5

6

7

1999 2000 2001 2002 2003 2004 May-05

Nominal Real

Sourece: IMF, International Financial Statistics and Federal Reserve

Japan Overnight Call (percentages)

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

1999 2000 2001 2002 2003 2004 May-05

Nominal Real

Source: IMF, International Financial Statistics and Central Bank of Japan

Euro Area Main Refinancing Rate

(percentages)

-1

0

1

2

3

4

5

2001 2002 2003 2004 May-05

Nominal Real

Source: IMF, International Financial Statistics and Central Bank of Europe

I. Low interest rates allowed a significant rise in housing prices and this induced a “wealth” effect that kept consumption stable in the United States, in spite of the stock market drop of 2000-2002.

US authorities maintained this expansive monetary policy until investment recovered. Once investment recovered in 2004, monetary policy gradually reverted ---and will remain subject to adjustments during 2005-2006, introduced to contain possible inflation episodes.


economic cycle?

GDP and Components Growth (percentages)

-10

-5

0

5

10

15

1998 1999 2000 2001 2002 2003 2004 2005 2006

Invstmnt Consump GDP Growth

Estimate

Fuente: Deutsche Bank

II. An expansive monetary policy was supplemented by an expansive fiscal policy in industrial nations.

But, in contrast with the estimated monetary adjustment (at least in the US), no significant reduction is foreseen in the fiscal deficits of industrialized nations. The fiscal adjustment will be slower than the monetary adjustment.

Fiscal Statements

(% of GDP)

2003 2004 2005

USA -2.9 -3.5 -3.2

Japan -7.8 -7.7 -7.2

Europe -2.7 -2.9 -2.7

Source: National Statistics, IMF and market estimates


economic cycle?

III. The export-centered growth strategy pursued by China and other Asian emerging nations has increased the global products supply. This main factor helps explain the coexistence of expansive policies with low inflation levels in the industrialized world.

What Asian policy decisions help explain the current economic cycle?

To a large extent the Asian current account surplus finances the high current account deficit of the United States.

III. Higher than 8% growth in China will not fall in 2005. What may be questioned is the sustainability of this growth (as will be seen ahead).

The role of China as a significant world economic player is manifested in the extremely rapid growth of its trade.

What Asian policy decisions help explain the current economic cycle?

Comparison between the Trade Indexes of China and the World

0

1000

2000

3000

4000

5000

6000

7000

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

1977

= 1

00

Chinese Trade in Goods Total World Trade

Source: Lardy, IIE (2004)

The “productivity” effect is reflected in global economic behavior

While Asia and North America stand out for their impressive productivity growth during the last decade, productivity growth in Europe and Latin America has slowed down.

Global Growth of Productivity

-6 -5 -4 -3 -2 -1 0 1 2 3 4

South Asia

East Asia / Pacific

Middle East

Africa

Latin America

North America (NAFTA)

Eastern Europe / Central Asia

Southern Europe

Western & Northern Europe

World Average

1990-95

1995-2003

Sources: GGDC; The Conference Board

THE INTERNATIONAL CONTEXT AND ITS EFFECTS ON LATIN AMERICA

• The dramatic rise in the price of non-agricultural commodities has benefited many nations in the region, but has negatively affected net oil importers.

Goldman Sachs Commodity Index(January 1998 = 100)

0

100

200

300

400

500

600

700

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Source: Bloomberg

But a series of agricultural “commodities” such as sugar and coffee have also shown significant recovery.


The Price of Coffee (in New York)

0

50

100

150

200

250

300

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

US

cen

ts p

er p

ou

nd

Other Mild Arabicas Brazil

Sources: IMF, International Financial Statistics & International Coffee Organization

Improved commodity prices influence the non-oil mining products exported by Latin America. For example the prices of gold and copper have risen significantly, and market estimates indicate the price of gold will continue to rise in 2005 and 2006. Although a moderate drop is predicted for copper forward prices, not all analysts agree and some expect the excess global demand that keeps prices high to be maintained.

The combination of low interest rates in industrialized nations, a weak dollar and volatile stock markets has supported rising prices in precious metals in recent years.


Gold Prices: Spots and Futures

0

100

200

300

400

500

600

Dec

-90

Dec

-91

Dec

-92

Dec

-93

Dec

-94

Dec

-95

Dec

-96

Dec

-97

Dec

-98

Dec

-99

Dec

-00

Dec

-01

Dec

-02

Dec

-03

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

US

Dó

lare

s/O

nza

Source: World Gold Council y NYMEX

Futures

Copper Prices: Spots and Futures

0

500

1000

1500

2000

2500

3000

3500

199

0

199

1

199

2

199

3

199

4

199

5

199

6

199

7

199

8

199

9

200

0

200

1

200

2

200

3

200

4

200

5

200

6

US

Dó

lare

s/T

on

ela

da

Mé

tric

a

Futuros

Fuente: Bloomberg and NYMEX

Capital inflows in emerging nations will continue in 2005 and Latin America will benefit from this.

Net Private Inflows into Emerging Markets, by Region(in billions of dollars)

2002 2003 2004e

2005p

Total 124.9

210.6

279.0 275.8

Latin America 17.3 25.2 26.1 39.4

Europe 45.6 65.6 97.4 101.1

Africa/Middle East 1.5 3.5 9.2 9.8

Asia/Pacific 60.5 116.3

146.3 125.6

Source IIF, 2005


The larger volume of capital inflows is due to a combination of factors, including the following:

- Still ample liquidity at the global level (although diminishing)- A weakening dollar creates incentives for capital outflows to other

countries, including emerging nations.- A greater interest in “funds dedicated to emerging nations” counters a

reduction in international bank loans. - Increased foreign direct investment motivated by the US economic

recovery and the favorable macroeconomic figures of many nations in the region, including current account statements that still show a surplus (although diminishing). Brazil and Mexico will receive the largest portion of direct foreign investment in the region.

- Improved foreign debt sustainability indicators, since various regional nations took advantage of low interest rates to place “relatively cheap” longer-term bonds in order to repurchase expensive debt.


One additional positive factor is that not only has Foreign Direct Investment increased; the Latin American share of total Foreign Direct Investment in developing nations has remained stable, and seems to be more “resistant” to international interest rate variations as well.


Latin American Share of Total Net Private Direct Foreign Investment in Emerging and Developing Nations

(in billions of US dollars)

0

50

100

150

200

250

1996 1997 1998 1999 2000 2001 2002 2003 2004F 2005F

Latin America OthersSource: IMF, WEO (September 2004)

The improved international situation is reflected in a higher EMBI (bond prices), with the exception of Argentina.


Latin America EMBI 1994 - 2005(December 1994 = 100)

0

100

200

300

400

500

600

700

800

Dec

-94

Apr

-95

Aug

-95

Dec

-95

Apr

-96

Aug

-96

Dec

-96

Apr

-97

Aug

-97

Dec

-97

Apr

-98

Aug

-98

Dec

-98

Apr

-99

Aug

-99

Dec

-99

Apr

-00

Aug

-00

Dec

-00

Apr

-01

Aug

-01

Dec

-01

Apr

-02

Aug

-02

Dec

-02

Apr

-03

Aug

-03

Dec

-03

Apr

-04

Aug

-04

Dec

-04

Apr

-05

Argentina

Brazil

Ecuador

Latin America

Mexico

Peru

Venezuela

MexicanCrisis

AsianCrisis

RussianCrisis

BrazilianCrisis

EcuadoranCrisis

ArgentineanCrisis

Fuente: JP Morgan

However, the projected reduction in global liquidity generated by expectations surrounding US interest rate adjustments has led to greater variability in the price of bonds, and considerably lower returns for investors, for the period 2004-May 2005 compared with 2003.


EMBI+(2003) Percentage Return(percentage)

0

20

40

60

80

100

120

Ecuad

or

Brasil

Nigeria

Venez

uela

Latin

o

Turqu

ía

EMBI+

Perú

Rusia

No La

tino

Colom

bia

Egipto

Argen

tina

Ukran

ia

Filipina

s

Panam

á

Méx

ico

Bulgar

ia

Sudáf

rica

Polonia

Fuente: JP Morgan

EMBI+(2004-May 2005) Percentage Return(percentage)

0

5

10

15

20

25

Venez

uela

Panam

á

Rusia

Nigeria

Brasil

Ecuad

or

Latin

o

EMBI+

No La

tino

Colom

biaPer

ú

Filipina

s

Ukran

ia

Egipto

Méx

ico

Bulgar

ia

Turqu

ía

Polonia

Sudáf

rica

Argen

tina

Fuente: JP Morgan

THE RISKSThe greatest risk to global economic stability is that the governments of key nations (the United States, Europe and China) fail to adopt the necessary measures to correct major macroeconomic imbalances.

• Europeans and Asians believe the principal imbalance is the low level of savings (especially fiscal savings) and excessive imports from the US.

• The US government says the opposite, that is, the problem is excessive Asian and European savings and very low levels of imports by those nations.

• Europeans and Asians believe the most important solution is the revaluation of the Chinese currency and thus more Chinese imports and less exports. What is ironic about this proposal is that a revaluation of the yuan would mean that China would reduce its purchases of US Treasury Bonds!

All of them are right. No single measure (fiscal and/or monetary/exchange) would in itself suffice.

I. THE TIMING AND MAGNITUDE OF INTEREST RATE HIKES IN THE UNITED STATES

1. ExpectationsInternational financial markets expect the Fed to rise interest rates to a “neutral” position, that is, to a rate compatible with the return to “full employment growth” and a stable inflation rate (of about 2%).

Market estimates suggest a “neutral rate” of about 4%, but also including “overshooting” to curtail inflation episodes and/or excessive depreciation of the dollar.

This expected path has allowed investors to “adjust” their positions and prevented distortions in international financial markets.

THE RISKS

Fed Funds Rate Market Estimate(percentages)

0

1

2

3

4

5

6

2004T1 2004T2 2004T3 2004T4 2005T1 2005T2 2005T3 2005T4 2006T1 2006T2 2006T3

Source: Market estimates

United States: House Price Index / CPI

80

90

100

110

120

130

140

93

T1

93

T4

94

T3

95

T2

96

T1

96

T4

97

T3

98

T2

99

T1

99

T4

00

T3

01

T2

02

T1

02

T4

03

T3

04

T2

Office of the Federal Housing Enterprise Oversight, IFS

2. Uncertainty• Although the “long term” focus of US interest rates is known, there is

great short term uncertainty due to the following:• The Federal Reserve may accelerate interest hikes if :

– Inflation rises rapidly beyond expectations– The depreciation of the dollar leads to financial instability– Very slowly rising interest rates produce a mortgage market “bubble” …

…And already some significant signs point to an overheated mortgage market…

THE RISKSI. THE TIMING AND MAGNITUDE OF INTEREST RATE HIKES IN THE

UNITED STATES

2. UncertaintyBesides, the Federal Reserve gives great significance to “unit labor costs” as an inflation indicator, and these costs have been rising significantly while productivity growth has slowed down.


UNITED STATES

Unit Labor Costs and Productivity in the US

-3

-2

-1

0

1

2

3

4

5

6

2002 2003 2004 2005

cam

bio

% a

nu

al

Productivity Unit Labor Costs

Source: Bureau of Labor Statistics, Deutsche Bank

• An excessive interest rate hike may revert capital flows into the region.

• The greatest problem is the “rebirth” of the debt sustainability problems of several Latin American nations.


UNITED STATES

• The General Motors and Ford downgrades led to significant losses in financial institutions (including hedge funds) that had collateral in the stocks and bonds of those companies.

• This has raised risk aversion among investors and is increasing the cost for companies of obtaining financing through bonds.

II. INTERNATIONAL LIQUIDITY IS ALSO AFFECTED BY THE DOWNGRADING OF MAJOR INTERNATIONAL COMPANIES

THE RISKS

III. FISCAL DEFICITS IN THE INDUSTRIALIZED WORLD, ESPECIALLY IN THE UNITED STATES, CAN PRODUCE UNCERTAINTY IN INTERNATIONAL MARKETS.

• Due to medium term fiscal pressures originated in social security and Medicare in the US (stemming from the relative increase in the retirement age population), short term fiscal correctives are required. Otherwise the fiscal position runs the risk of becoming unsustainable, which would then require an excessively strong and prolonged adjustment. The negative effects produced in Latin America by a strong adjustment related to economic contraction in the US are obvious, especially in the context of new free trade treaties.

Scenarios of the United States' Federal Budget 2004 - 2014

-1000

-800

-600

-400

-200

0

200

400

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

US

$ B

illio

ns

Scenario 1 Congressional Budget Office Projection

Scenario 1:- Temporary tax cuts are extended.- AMT is reformed (Alternative Minimum Tax)

Source: Baily, IIE (2004) and Congressional Budget Office (CBO), USA

THE RISKS

• Given the new Bush administration’s intent of making the 2001 tax breaks “permanent,” there is greater risk that the fiscal deficit may increase in the coming years.

• If a higher fiscal deficit materializes, additional pressure may be generated for a strong interest rate hike, with the resulting negative effects on Latin America.

THE RISKS

III. FISCAL DEFICITS IN THE INDUSTRIAL WORLD, ESPECIALLY IN THE UNITED STATES, CAN PRODUCE UNCERTAINTY IN INTERNATIONAL MARKETS.

IV. THE ENORMOUS US CURRENT ACCOUNT DEFICIT REQUIERES GREATER DEPRECIATION OF THE DOLLAR WITH RESPECT TO THE EURO AND ASIAN CURRENCIES

• Correcting this imbalance is believed to require close to a 20% depreciation in the effective real exchange rate of the US.

The Parallel Deficits: Fiscal Deficit and Current Account Deficit in the United States

(as % of GDP)

-7

-6

-5

-4

-3

-2

-1

0

1

2

3

1996 1997 1998 1999 2000 2001 2002 2003 2004

Fiscal Balance Current Account Balance

Source: Congressional Budget Office and Bureau of Economic Analysis

THE RISKS

… and forward markets reflect the long term trend, especially regarding the yen.

In spite of the recent slight appreciation of the dollar, long term equilibrium is expected to require a more depreciated dollar.

THE RISKSIV. THE ENORMOUS US CURRENT ACCOUNT DEFICIT REQUIERES

GREATER DEPRECIATION OF THE DOLLAR WITH RESPECT TO THE EURO AND ASIAN CURRENCIES

USD per EUR: Spot and Forward

0.6

0.7

0.8

0.9

1

1.1

1.2

1.3

1.4

1.5

Jan-

01

Jul-0

1

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Forward

Fuente: JP Morgan

JPY per USD: Spot and Forward

60

70

80

90

100

110

120

130

140

Jan-

01

Jul-0

1

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Forward

Fuente: JP Morgan

IV. WHAT ARE THE RISKS FACED BY LATIN AMERICA DUE TO THE US BALANCE OF PAYMENTS IMBALANCE?

• The first one is that a strong depreciation of the dollar would raise production costs for US companies (due to more expensive imports) and lead to a generalized reduction in imported inputs. An attenuating factor, however, is the possibility of substituting US imports from markets with “appreciated” currencies by markets whose export products are denominated in dollars.

• The second one is that a severe depreciation of the US dollar would raise the US inflation rate, leading the Fed to sharply raise interest rates.

• The third one is that a severe depreciation of the US dollar would reduce the real value of the international reserves kept in Latin American nations. This is why certain sales of dollars by the central banks of both emerging and industrial nations (such as Norway, for example) have been recently observed.

THE RISKS

V. THE POSSIBLE OVERHEATING OF THE CHINESE ECONOMY INVOLVES SYSTEMIC RISKS DUE TO CHINA’S GROWING IMPORTANCE IN INTERNATIONAL COMMERCIAL AND FINANCIAL MARKETS.

China: Inversión como participación del PIB, 1999 - 2004

30

35

40

45

50

55

1999 2000 2001 2002 2003 2004

Fuente: National Bureau of Statistics of China

China is the world’s largest consumer of copper, zinc, iron and steel, and the world’s second oil importer (after Japan). It is therefore relevant in determining the prices of commodities.

T

The tremendous expansion of investment in China, financed with sharp growth in domestic credit (achieved especially through government banks) is not sustainable. Although some analysts argue that the Chinese economy will gradually cool down, crisis risks are still present because current policies implemented by authorities to curtail excessive growth in money and credit are still very limited. China already had this experience in the early 1990s, but then it lacked the international importance it now has.

THE RISKS

• Although international reserves have increased significantly, domestic credit has been growing at excessively high rates, increasing potential financial fragility.

• The good news is that the probability of a financial crisis in China is still modest –but it will continue to increase of efforts are not made to “cool” the economy.

• Another fragility indicator is the accelerated growth seen in mortgage market prices.

THE RISKS

China: Credit and International Reserves

10

11

12

13

14

15

16

17

18

19

2001 2002 2003 2004

Tri

llio

nes

RM

B

150

200

250

300

350

400

450

500

550

600

650

Bill

on

es U

SD

Préstamos en RMB Reservas Internacionales

Fuente: IMF, International Financial Statistics (Marzo 2004) y Banco Central de China

China: Residential Property Sales Price Index(annual change in percentages)

0

2

4

6

8

10

12

Mar

-00

Jun-

00

Sep

-00

Dec

-00

Mar

-01

Jun-

01

Sep

-01

Dec

-01

Mar

-02

Jun-

02

Sep

-02

Dec

-02

Mar

-03

Jun-

03

Sep

-03

Dec

-03

Mar

-04

Jun-

04

Fuente: CEIC, datos oficiales

V. THE POSSIBLE OVERHEATING OF THE CHINESE ECONOMY INVOLVES SYSTEMIC RISKS DUE TO CHINA’S GROWING IMPORTANCE IN INTERNATIONAL COMMERCIAL AND FINANCIAL MARKETS.

The risks originate in the possible effects in international markets of a “hard landing” of the Chinese economy.

• Pressure for a drop in the price of export commodities from many Latin American nations, not only due to reduced direct demand from China, but also to the indirect effect produced on aggregate demand from the rest of Asia.

• Global recessive pressures stemming from the fact that China accounts for more than 20% of the growth in global trade in recent years.

• Pressures that reduce demand for US Treasury Bonds, which further exposes the balance of payments imbalances of the US.

• Increased volatility in international financial markets. Experience demonstrates that this volatility tends to increase risk aversion and reduce the financing available to emerging nations.

• Given the large accumulation of international reserves, no devaluation of the yuan is foreseen, nor any short term improvement in Chinese international competitiveness that could harm Latin American nations that compete with Chinese exports.

THE RISKSV. THE POSSIBLE OVERHEATING OF THE CHINESE ECONOMY INVOLVES

SYSTEMIC RISKS DUE TO CHINA’S GROWING IMPORTANCE IN INTERNATIONAL COMMERCIAL AND FINANCIAL MARKETS.

V. AN ADDITIONAL RISK ORIGINATED IN CHINA

The expiration of the textile trade quotas that took place towards the end of 2004 (for WTO member nations) may produce additional pressure in favor of textile price reductions (and these products are also exported by some Latin American nations).

Nevertheless international analysts don’t think this represents a major risk, because US importers prefer not to concentrate their trade on China, especially after the temporary imposition of import quotas on Chinese products headed for the US and given that Europe is also considering restrictions on Chinese imports.

THE RISKS

VI. CONTINUED HIGH OIL PRICES POSE A MAJOR GLOBAL RISK

This is due to already mentioned factors (economic recovery in the United States, overheating in China), the high frequency of weather shocks that raise demand for energy products, and supply factors, including those derived from the Irak conflict.

Although estimates point downward, prices in the futures market are extremely high. This is because the price of oil has experienced a “permanent” increase due to a substantial increase in global demand.

THE RISKS

Oil Prices (West Texas Intermediate): Spot and Futures

0

10

20

30

40

50

60

Feb

-99

Aug

-99

Feb

-00

Aug

-00

Feb

-01

Aug

-01

Feb

-02

Aug

-02

Feb

-03

Aug

-03

Feb

-04

Aug

-04

Feb

-05

Aug

-05

Feb

-06

Aug

-06

Feb

-07

US

D

llar

s p

er

bar

rel

Futures

Source: Bloomberg and NYMEX

VI. BESIDES, THE PROBLEM WITH ESTIMATES IS THAT ANALYSTS SYSTEMATICALLY SUBESTIMATE THE OBSERVED PRICE OF OIL.

And this happened again in 2005.

THE RISKS

Price of Brent Oil: Estimates and Observed Price

10

15

20

25

30

35

40

45

1999 2000 2001 2002 2003 2004 2005

US

Do

llars

per

bar

rel

Estimated price at start of year Observed price

Source: Deutsche Bank, Reuters, Bloomberg

VI. THE RISKS THAT HIGH OIL PRICES RAISE FOR LATIN AMERICA:

• One risk basically consists of pressure exerted to “accommodate” oil price increases by relaxing monetary policy. Fortunately this risk has not materialized because most Latin American nations have implemented a restrictive monetary policy.

• Another important risk is the fact that recent estimates calculate that each sustained increase of US $10 per barrel in the price of oil reduces global growth by about ½ percent per year.

THE RISKS

VII. A “LATIN AMERICAN EXPORT” RISK: DISSATISFACTION WITH THE RESULTS OF DEMOCRACY AND THE MARKET ECONOMY.

• Recent surveys point to a high level of dissatisfaction with democracy and the results of reform in the population. The percentage of dissatisfied respondents is higher than 50% in all nations.

• This poses a serious risk to the continuation of the reform processes that the region requires, and must be addressed to prevent reform reversals.

THE RISKS

Source: Latinobarómetro

Percentage of respondents who are“barely satisfied" or "not satisfied"

with democracy and its results.

A RISK SUMMARY

• The greatest risk for Latin America is a reduction in global liquidity, given that the Federal Reserve will continue to raise interest rates in order to correct, at least in part, global macroeconomic imbalances.

A SUMMARY OF OPPORTUNITIES

• Since the resolution of macroeconomic imbalances in leading nations in 2006 will imply a reduction in global growth, higher international interest rates and reduced capital flows into the region, 2005 looks like a “window of opportunities” for Latin America.

• This is the best time to consolidate fiscal accounts, avoid debt problems and accelerate institutional reforms.

• Delaying these efforts may be very costly for the region. However, given the level of discontent among the population with the results of reforms already implemented, the inclusion of different social segments and the search for a consensus are essential.

Documents

World Economic Imbalances and their Impact in Latin America LILIANA ROJAS-SUÁREZ Center for Global Development Mexico, June 2005