Latin America in 2006: Beyond the Political Cycle Javier Santiso Chief Development Economist & Deputy Director OECD Development Centre COFACE Country Risk Conference Paris  January 24 2006

Latin America 2006: The political cycle is back 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 - 2009 2006 2004 - 2005

The timing game: Political cycles and crises in Latin America used to be synchronized, 1970-2000 Nominal exchange rate depreciation Country`s Total Elections and government change 1 Colombia 13 1989 17 1,16 2 Costa Rica 11 1990 14 1,14 3 Guatemala 11 1991 3 4 Ecuador 10 1992 1,12 5 Chile 10 1993 10 1,1 6 Peru 10 1994 18 7 Honduras 10 1995 6 1,08 8 Paraguay 9 1996 8 1,06 9 Brazil 9 1997 7 10 El Salvador 9 1998 15 1,04 11 Republica Dom. 9 1999 12 1,02 12 Uruguay 9 2000 11 13 Mexico 9 2001 4 1 14 Argentina 8 2002 13 0,98 15 Nicaragua 8 2003 8 16 Panama 8 2004 6 0,96 Source: Frieden, Ghezzi y Stein, 2001 17 Venezuela 8 2005 5 0,94 18 Bolivia 7 2006 11 -9 -8 -7 -6 -5 -4 -3 -2 -1 1 2 3 4 5 6 7 8 9

Source: Jorge Blázquez and Javier Santiso, 2004. During the period 2000-2005, some countries achieved a decoupling: The case of Mexico Timing of Presidential Elections and Exchange Rate Depreciations in Mexico, 1975-2000 Election Year Election Year Election Year Source: Jorge Blázquez and Javier Santiso, 2004.

Source: Based on Juan Martínez and Javier Santiso, 2003. While others had overcome the test of fire more recently: The case of Brazil Source: Based on Juan Martínez and Javier Santiso, 2003.

But, above all, the macroeconomic starting point is very different: 1994 vs 2004 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 170% 109% 84% (% of exports) Source: BBVA

The stars have been lined up for Latin America: Global growth boosted exports Southeast Asia GDP Growth (%) 10 9 8 7 US 6 5 World 4 3 2 1 -1 -2 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 Source: WEO 2005

BBVA-MAP Index of Latin America commodity prices The stars have been lined up for Latin America: Commodity boom has been a bonanza Exports of commodities BBVA-MAP Index of Latin America commodity prices (100 =jan03) over total exports (2004) 170 160 Venezuela 83.1% 150 Peru 140 70.7% Without oil 130 Chile 59.1% 120 110 Colombia 46.3% TOTAL 100 Argentina 38.0% 90 80 Brazil 29.6% 70 Mexico 14.6% 60 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Latam 31.2% Source: BBVA Source: BBVA

(Annual Percentage variation) The stars have been lined up for Latin America: China became a major trading partner Growth of GDB in China (Annual Percentage variation) Exports to China in 2003 (Percentage of total) Source: Based on domestic sources Figures for 2004 and 2005 are forecasts

The stars have been lined up for Latin America: Asia is becoming a major growth pilar Exports of agricultural, energy and minery products (in % over the total) (2003) 100 90 Latin America 80 70 60 50 40 30 20 10 Chile India UK Ecuador Bolivia China Paraguay Venezuela Argentina Uruguay Colombia Peru Indonesia Brazil Spain US Italy Canada Thailand Mexico France Japan Malaysia Belgium Singapore Germany Taiwan Netherlands South Korea Hong Kong Source: WTO

The emergence of the political economy of the possible: The monetary anchor 1980-1996 average: 350% 1997-2005 average: 8%

Fiscal balance in Latin America (% GDP) The emergence of the political economy of the possible: The fiscal anchor Fiscal balance in Latin America (% GDP) 2 -2 -4 1990-2002 average -6 -8 1981-1989 average -10 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005(f) 2006(f) Source: BBVA; (f) forecast

Trade openness (trade flows over GDP; %) The emergence of the political economy of the possible: The trade anchor Trade openness (trade flows over GDP; %) 45 40 35 30 25 20 15 10 5 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Source: OECD, WTO and IMF

Brazil: trade openness and catching-up process 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.

Brazil: Firms began to expand overseas Top 100 firms in Latin-America 50 45 40 40 30 20 10 8 3 1 1 1 1 Brazil Mexico Chile Argentina Ecuador Colombia Peru Venezuela Source: America Economia 2005

Brazil: Firms rallied the Mexican multilatinas The 50 more profitable firms 20 19 Number of firms in Forbes 2000 16 35 15 30 25 10 20 7 15 5 10 3 5 1 1 1 1 1 India Spain China Brazil Mexico Chile Brazil Mexico Chile Argentina Colombia Ecuador Panama Peru Venezuela Source: America Economia 2005 Source: Forbes 2000

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

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