Summary:The Latin America panel discussed that region′s future outlook. In 1993, as Christof Weber recalled, the region was considered the land of opportunity by foreign investors offering incredible investments at bargain prices. It was a region with depressed asset prices making steady progress towards a market economy, determined to eliminate one of its biggest problems, corruption. By 1998, most countries seemed to have embraced capitalism, and the international capital markets were rewarding the region with record breaking capital flows.
However, today, the picture is quite the opposite. Under mounting pressure of a widening income gap and deteriorating economic conditions, much of the steps towards capitalism have been reversed by emerging populist regimes, with Venezuela being the basket case.
Sergio Munoz, who moderated the panel, opened the session by stating that the region has deteriorated enormously and giving a brief overview of the current state of the main countries. On an optimistic note, he mentioned that Peru, a country that endured more than a decade under an oppressive regime, has now shown GDP growth of more than 4 percent. On the other hand he mentioned Colombia as being the most embattled country in the region, mainly due to the resurgence of fighting between the army and the guerillas. He concluded his opening remarks by stating that unfortunately for the region, the increased importance of homeland security since 9/11 and now the conflicts in the Middle East, have taken much of Washington′s attention off Latin America.
Following Munoz′s comments, David Kastholm gave an overview of the current economic situation in Latin America, pointing out that Latin America is facing a very tough business environment. Only two countries, Chile and Mexico, have investment grade sovereign debt ratings, and half of the countries in the region have a negative outlook (indicating a greater than 50 percent chance that their sovereign debt rating will be further downgraded in the next two years). In this environment, companies continue to be downgraded, as default risk rises and their already high risk-premium continues to increase.
Furthermore, the acute lack of investor confidence, both national and international, makes funding the large investments needed, all but impossible. International capital markets have shuttered for Latin America, and the region continues to suffer from a very low savings rate.
Following Kastholm′s review of the region, Nelson Ortiz focused on the Venezuelan situation, stating that the country is an example of how you can perform poorly despite having money available. The country enjoyed positive current account balances in all but three years from 1990 to 2002, and the cumulative balance through exceeds $46 billion.
However, he stated, this country has experienced one of the biggest "peace-time" wealth destructions in history. The market capitalization of the Caracas Stock Exchange dropped by more than two thirds between 1991 and 2002, from over $12 billion to less than $4 billion, much of this accounted for by foreign investors who took control of two large utility companies. All the while, daily trading volume dropped from more than $15 million in 1997, to its current level of around $100,000.
After Ortiz, Manuel Suárez-Mier introduced his scorecard, where he measured the degree of implementation, or lack of, economic reforms in selected countries in the region. On top of the list was Chile, which got 42 points out of a possible 45, followed by Mexico a distant 2nd with only 21 points. On the bottom of his scorecard, he placed Venezuela with 0 points in reforms, not because they were not introduced, but because they have been, for the most part, reversed.
The first category of his scorecard was public finances, where both Argentina and Venezuela scored 0. The former country received this score because of its inability to close its fiscal deficit, which was once covered by privatizations. But, when there was nothing else to privatize, they chose to finance the budget deficit with increasingly expensive debt financing. That proved to be the Achilles Heel of the once admirable Argentinean Economy. In regard to pension reforms, most countries performed poorly. He stated that most countries are no longer in the business of using pension funds as now they must manage the rapidly increasing pension liabilities.
Next, Christof Weber talked about underlying socio-economic problems, adding that the reform process did not yield the fruit promised and, thus, support for further advancement of reforms had weakened. Official estimates place average unemployment in the region at more than 14 percent with gaps in income and wealth growing wider and wider. For instance, in Brazil and Mexico, around 60 percent of national income reaches only 20 percent of the population.
Referring to Mexico, Suarez-Mier mentioned that a commission in charge of eliminating red tape in the government was proceeding very rapidly, but was challenged by the introduction of new "red tape" faster than it could remove the old red tape.
Talking about closed economies versus open economies, the panelists agreed that interestingly, the economies that were performing best, Brazil and Chile, were at opposite ends of the spectrum, with Brazil being the most closed, and Chile the most open.
Panelists agreed that one of the problems for Latin America in attracting foreign investor interest right now is that it seems to have fallen off the radar screen. Another problem is a cultural one, in which the population finds it easier to blame Washington, rather than accept that most of their problems lie within their own countries.
To finalize the session, Munoz posed with the question of whether the outlook for Latin America was positive or negative. One of the panelists quoted Mexican comedian Cantinflas, "Maybe yes, maybe no, but most likely, who knows."
