The world of forking paths – report by InterAmerican Development Bank (IADB) March 2012

" The world of forking paths – Latin America and the Caribbean facing global economic risks " is the title of the report IADB released during its annual meeting in Montevideo this month. The report has projected different global scenarios and their possible impact on Latin America. They have also given some policy recommendations to the Latin American governments.

The major factors which will impact the region are: commodity prices, Chinese growth, European crisis, inflow of capital, the role of foreign and particularly European banks in the region and US recovery. A deceleration of Chinese growth is likely to affect producers of metals more than producers of grains.

The report concludes, " while the world is one of forking paths and it is impossible to know which alternative will become a reality, Latin America has good reason to be optimistic thanks to the new set of tools it has developed and the experience it has gained deploying them effectively". This is based on their following assessment:

-The region has made substantial economic progress both in terms of growth and in the ability to respond to external shocks.

-Many of the region's economies have achieved reduction in external public debt and increase in a greater proportion of public sector debt issued in local currency, have been able to use effective countercyclical fiscal policies, have greater possibilities of employing the exchange rate as a shock absorber while maintaining stable prices and have deployed several macro-prudential tools.

On the other hand vulnerabilities remain due to excessive commodity dependence of most South American countries, capital inflow and credit boom and the role of the European banks.

I must compliment the IADB for choosing the most appropriate and interesting title for their report. The inspiration for the title is " The garden of forking paths " a story written by the famous Argentine author Jorge Luis Borges. The story is about the revelation of a labyrinth that had many paths that forked once and then forked again and again providing many alternative realities. The main characters in the story is a Chinese professor acting as a German spy in England and his ancestor who wanted to construct a vast and intricate labyrinth in which all men would lose their way.

Fiction is becoming a reality...In the real Latin American economic story, the Chinese are playing a similar important role, opening many labyrinths, as in the Borges fiction. The Latin Americans should not get lost in the labyrinth. They should play their part smartly and find their best way forward...

Latin America prepared for the Changing Global Economic Landscape

" Negative global economic trends will affect Latin American countries, but much of the region has more capacity than before to shape its own destiny, potentially maintaining GDP growth and stability during the coming years. Indeed, we project that Latin America could grow at an average rate of 3.5%-4% in 2012, about two percentage points faster than developed countries". This is the conclusion of a report of Standard and Poors with the title " The Changing Global Economic Landscape And Its Impact On Latin America" dated 14 march.

Excerpts from the report:

- The Latin American region as a whole enjoys higher average sovereign ratings today than before the recent global recession. Standard & Poor's has investment-grade ('BBB-' or higher) ratings on 6 Latin American sovereigns (accounting for more than 80% of the region's GDP). By contrast, only 35% of the region's sovereigns (as measured by GDP) had investment-grade ratings in 2007. Many countries now enjoy more capacity to respond to adverse shocks than before.

- On the whole, Latin America has acquired greater economic resilience in recent years, with lower inflation, less dependence on external funding, and greater policy flexibility to respond to an external shock. The strengthening of creditworthiness in many countries has paralleled encouraging social trends that augur well for political stability in coming years.

- The ability to control inflation—along with steps to gain more exchange rate flexibility—has set the stage for developing domestic capital markets in many countries. As a result, sovereigns throughout the region have been able to reduce their dependence on external funding, shifting a greater share of their debt into the local market.

- New laws and regulations have also encouraged the growth of domestic financial institutions, especially pension funds, which provide an alternative source of funding for both sovereign and nonsovereign borrowers. The banking systems in much of the region are funded locally, with deposits exceeding loans in most countries.

- The improving net external position of many Latin American countries stems in large part from the growth of domestic capital markets as well as fiscal reforms that have contained the growth of public-sector debt. According to the IMF, the average maturity on outstanding domestic debt in Latin America exceeded eight years (in 2010) compared with about four years in 2003. Maturities on new sovereign bond issuances are now averaging 14 years. The growing capacity of sovereigns to issue debt in their local currency for longer maturities and increasingly at fixed nominal interest rates has reduced their vulnerability to a sudden loss of external liquidity or to a sharp spike in interest rates. That, along with flexible exchange rates, has strengthened sovereign creditworthiness.

- The level of income inequality has declined in Latin America, though it remains the most unequal region in the world. Much of Latin America is becoming middle class, at least when using a very broad definition of that group. This encouraging social trend has potentially positive political implications, likely reducing the appeal of populism and boosting public support for policies that favor stability and moderation. Lower political risk augurs well for long-term stability and growth by reducing the likelihood of a sudden reversal of recent economic policies.

- The U.S. has become less involved in local politics and less inclined to actively support or oppose particular governments and their economic policies. In sum, the international context gives Latin America more political space to pursue its own policies. Increasingly, Latin America's fate lies in its own hands.

While highlighting these positive and optimistic points, the report has also pointed out the challenges and problems faced by the region such as vulnerability to the global uncertainties, pressures on currencies arising from the low interest rates in developed markets, FDI inflows, changes in price and demand of commodities and lower productivity levels in the region.

India's trade with Latin America in 2011

-India's trade with Latin America increased to 25 bn $ in 2011 from 23 bn in 2010

-India's exports went up by 28 % in 2011 reaching 11.6 bn from 9 bn in 2010.

-India's imports declined to 13.5 bn in 2011 from 14 bn in 2010

-Brazil is the leading trade partner followed by Venezuela, Mexico, Chile, Argentina and Colombia

-Colombia is the third largest export destination of India after Brazil and Mexico.

-crude oil is the main item of India's imports accounting for 8 bn $. Copper imports were about 2 bn and Soy oil imports were over a billion.

-Reliance imported 7.5 bn worth crude from Latin America in 2011, of which 5 bn came from Venezuela

-These are preliminary trade figures obtained from Mercosur Online, a reliable source.

-The figures are for January- december 2011

-Chinese trade with Latin America in 2011 was 241.5 bn$ up from 164.3 bn in 2010

- In 2011 Chinese exported 121.7 bn and imported 119.8

- In 2011, Latin America's imports reached 1.01 trillion dollars. Exports were 1.07 trillion. The GDP in 2011 was 4.8 trillion dollars. The GDP growth in 2011 was 4.7%. Projection for 2012 is 3.7%. Besides this positive market scenario, there is a favourable Latin American mindset which wants to reduce overdependence on China, diversify their import sources and try the benign, spiritual and Gandhian India which inspires them with a vibrant democracy amidst a vast diversity.

INDIA – LATIN AMERICA TRADE FIGURES - YEAR 2011

INDIA	IMPORTS In U$S Millions	EXPORTS in U$S Millions	TOTAL TRADE In U$S Millions
1) BRAZIL	3200	6000	9200
2) VENEZUELA	5000	580	5580
3) MEXICO	1250	2000	3250
4) CHILE	1780	400	2180
5) ARGENTINA	1210	560	1770
6) COLOMBIA	600	880	1480
7) PERU	240	510	750
8) ECUADOR	24	160	184
9) PARAGUAY	74	78	152
10) PANAMA	28	96	124
11) COSTA RICA	14	95	109
12) URUGUAY	20	86	106
13) HONDURAS	2	62	64
14)DOMINICAN REP.	11	42	53
15)CUBA	6	46	52
16) GUATEMALA	3	37	40
17) EL SALVADOR	2	32	34
18) BOLIVIA	28	4	32
19)) NICARAGUA	2	25	27
TOTAL	13494	11693	25187

Visit of Costa Rican Foreign Trade Minister to India 19-23 March 2012.

The Minister of Foreign Trade of Costa Rica, Mrs. Anabel Gonzalez, will be visiting India on March 19-23 to participate as Guest of Honor at INDIASOFT 2012. Minister Gonzalez will also be leading a trade and investment mission of approximately 25 Costa Rican entrepreneurs with the objective of strengthening trade and investment relations between both countries.

• The visit will include the cities of New Delhi (March 19-20), Hyderabad (March 21-22) and Bangalore (March 23). Minister Gonzalez will be accompanied by the Costa Rican agencies specialized on trade and investment promotion (PROCOMER and CINDE).

• In New Delhi, Minister Gonzalez will meet with the Minister of Commerce and Industry of India, Mr. Anand Sharma; the Minister of Finance, Mr. Shri pranab Mikherjee and the Commerce Secretary, Mr. Rahul Khullar. Hopefully both governments will be able to agree and sign a Framework Agreement to Promote Economic Cooperation and an Agreement for the Reciprocal Promotion and Protection of Investments.

• The visit will also include meetings with different Indian chambers of commerce and trade, such as the Federation of Indian Chambers of Commerce and Industry (FICCI) and the Confederation of Indian Industry (CII).

• On Monday 19th, The Ambassador of Costa Rica in India, Mr. Juan Manuel Cordero will offer a welcome cocktail to the Minister, with the participation of government counterparts and Costa Rican and Indian businessmen and chambers of commerce and trade.

• In Hyderabad, Minister Gonzalez will be the Guest of Honor and Keynote Speaker at the inaugural session of INDIASOFT 2012. She will meet with authorities from the Electronics and Computer Software Export Promotion Council (ESC) sponsor of INDIASOFT and will visit the CII Green Business Center.

• In Bangalore, Minister Gonzalez will meet with The Associated Chambers of Commerce and Industry of India (NASSCOM) and she will visit different Indian enterprises, with the objective of exploring Investment opportunities.

Godrej makes yet another aquisition in Latin America

Godrej Consumer Products Ltd (GCPL) announced on 21 January that it has entered into an agreement to acquire 60% stake in Cosmetica Nacional, a market leading hair colorant and cosmetics company in Chile. The company has a strong portfolio of brands in the hair care and color cosmetics segments. With its brands well positioned across income and age levels, Cosmetica Nacional enjoys greater than 30% market share (by volume) in the hair colorant space. With this move, GCPL continues to expand its focused presence in emerging markets in line with its global 3 x 3 strategy.

Cosmética Nacional (CN) was founded in 1979 by Fernando García, a chemist by training. He continues to lead the company as its Chief Executive Officer. CN had sales of about 36 million US dollars in the year 2011 and enjoys EBITDA margins of about 20%. The company exports its products to seven countries in the region.

In 2010 Godrej acquired two Argintine cosmetics companies.

Latin America will continue its growth in 2012- ECLAC Report

• The Latin America and the Caribbean (LAC) region had a GDP growth of 4.3% (estimate) in 2011 and is projected to grow by 3.7% in 2012 despite the continuing crisis in Europe, uncertain outlook in USA and the slow down of the Asian markets.

Both Imports and exports of LAC crossed the trillion dollar mark in 2011. Imports increased by 23% to 1.038 trillion dollars.

Foreign Direct Investment leaped to a record level of 130 billion dollars from 75 billion in 2010.

Foreign exchange reserves increased to 761 billion dollars as of October 2011 from 655 billion dollars in 2010.

The total external debt as a percentage of GDP declined to 19.2% in 2011 from 20% in 2010. The fiscal accounts of Latin America closed in 2011 with a small primary surplus.

These are the highlights of the 21 December 2011 report of the Economic Commission for Latin America and Caribbean ( ECLAC) based in Santiago. More from the report as follows.

GDP growth projection in 2012

Latin America and the Caribbean GDP is projected to grow by 3.7% in 2012 . South America is expected to grow by 3.9% and Central America by 3.5%.

The highest growth is projected for Panama (6.5%) followed by Peru and Ecuador at 5% each. Brazil is expected to grow by 3.5%, Mexico by 3.3%, Argentina by 4.8%, Colombia by 4.5%, Chile by 4.2% and Venezuela by 3%. El Salvador has the lowest growth projection of 2%.

GDP growth in 2011

The provisional GDP growth of LAC is estimated to be 4.3%. South America had grown by 4.6% and Central America by 4.1%. Panama had the highest growth of 10.5%. Argentina grew at a Chinese rate of 9%, in 2011 slightly down from its impressive 9.2% growth in 2010. Brazil, the largest Latin American market grew by 2.9% while the second largest market, Mexico grew by 4%. Colombia had increased its growth to 5.5% in 2011 from 4.3% in 2010. Peru had grown by 7% in 2011, down from 8.8% in 2010. Chile had increased its growth to 6.3% in 2011 from 5.2% in 2010. Venezuela recovered from its recession in 2009 and 2010 and showed positive growth of 4.2% in 2011.

The main driver for the growth is domestic demand and underpinned by high commodity prices and demand.

Trade

Both imports and exports of goods of LAC crossed the trillion dollar mark in 2011. The imports in 2011 reached 1.038 trillion dollars increasing by 23.5% from 846billion in 2010. Exports increased by 23.1% to 1.097 trillion dollars from 891 billion dollars in 2010. Among the major countries, Brazil´s imports increased to 228 billion dollars in 2011 from 182 billion dollars in 2010. Mexican imports in 2011 reached 352 billion dollars from 302 billion dollars in 2010. Argentine imports increased to 71 billion dollars in 2011 from 54 billion dollars in 2010.


Foreign Exchange Reserves

Foreign exchange reserves swelled by 106 billion dollars reaching a record 761 billion dollars as of October 2011 from 655 billion dollars in 2010. Argentina was the only major country which lost (5 billion dollars) reserves in 2011. Brazil's forex reserves were the highest with 353 billion dollars followed by Mexico-141 bn, Peru- 49 bn, Argentina-48 bn, Chile- 39 bn and Colombia-33 bn.

Foreign Direct Investment (FDI)

The FDI reached a record level of 130 billion dollars in 2011 jumping from 75 billion in 2010. Brazil attracted 81 billion dollars in 2011 from 37 billion dollars in 2010. FDI in Mexico reached 9.8 9.8 billion dollars in 2011 from 6.2 billion dollars in 2010. FDI in Argentina fell to 3.9 billion in 2011 from 6 billion dollars in 2010. Peru was the third largest destination of FDI with 7.3 7.3 billion dollars in 2011. Chile received 5.9 billion dollars, Venezuela 3.6 billion dollars and Colombia 2.6 bn. It is noteworthy that Costa Rica had attracted 1.76 billion dollars of FDI in 2011 and had consistently been receiving over one billion dollars of annual FDI since 2006. Dominican Republic, Uruguay and Panama are the other small countries which have also been receiving over one billion dollars of annual FDI since 2005.

External Debt

The total external debt as a percentage of GDP declined to 19.2% in 2011 from 20% in 2010. Since 2010, the bulk of the debt of the government across most of the region has been domestic, in clear contrast to the situation in the past when external debt was more. In the case of Brazil, the ratio of external debt to GDP is 12.8% while for Mexico it is 18.3%, Colombia-21.3%, Peru-23.8%, Venezuela- 28.6%, Argentina- 31.5%, and Chile- 40.9%. The highest is in the case of Nicaragua, which is 56.7% but even this is very low in comparison to that of USA and many European countries. The total external debt of LAC stood at 1.03 trillion dollars in July 2011. Brazil's debt was 291 bn $, Mexico-206 bn, Argentina-133 bn and Chile- 98 bn.

Inflation

The average rate of inflation of the region increased marginally to 6.9% in 2011 from 6.5% in 2010. But it is expected to decline in 2012. It may be noted that the rate of inflation has remained in single digit since 2003. In 2011, Only Venezuela and Argentina had inflation in double digits.

Fiscal Policy

The fiscal accounts of Latin America will close 2011 with a primary surplus of 0.3% after last year´s deficit of 0.3%. The overall deficit declined on average from 1.9% of GDP in 2010 to 1.5% in 2011. This slight improvement was the result of an increase in revenues of 0.4% of GDP, while spending remained nearly constant as a proportion of GDP. Most countries reduced their deficits, transformed them into surpluses, or expanded existing surpluses.

Exchange rates

In the first ten months of 2011, currencies of 11 countries in the region had appreciated but the trend has reversed since then.

Risks and Challenges

What will be the impact of deterioration of the European crisis?

Impact on Latin American exports will not be significant since Europe accounts only for an average of 13% of Latin American exports. Brazil is dependent upon Europe for 23% of its exports, Chile 21% and Argentina 17.8%. Mexico will be least affected since only 5.3% of its exports go to Europe. However, Latin American growth will slow down if the situation in Europe deteriorates further dragging the world into another crisis.

Slowdown in the US market will affect Mexico which is dependent upon USA for 80% of its exports. It will also impact Central America from whom US is the destination of about 40% of exports.

But the good news is that the Latin American policy makers are well prepared to deal with external shocks, having gone through such situations in the past and having learnt lessons from them. It may be recalled that the region rebounded more rapidly than expected from the impact of the 2008/2009 crisis. Most of the countries of Latin America find themselves in a reasonably well placed in macroeconomic terms to cope with the expected deterioration in the global economy and are in a strong position to weather external shocks of the kind a deepening of the debt crisis in the euro zone is expected to bring. Compared with many of the more developed countries, levels of external and public debt in the region are low and international reserves are high.

Latin America is in a happy position to say.. cheers 2012 ! This is also reconfirmation of the Decade of Growth for the New Latin America.