IMF Expects Latin
American Economies to Grow

Since the austerity program to stabilize Mexico's economic and financial system was unveiled last year, Mexican stocks have more than doubled their value in US dollar terms.

This rally took place against a backdrop of economic gloom, as Mexico's economy contracted by 6.9 percent last year, its worst performance in six decades. Investors were betting, however, that deep cuts in spending and tax increases would restore business and investor confidence and set the stage for economic growth in 1996.

Although signs of a strong recovery remain fleeting, the case for a return to growth in Mexico and Argentina, the other country hit hardest by fallout from the peso meltdown, is becoming more persuasive. To add to this, the latest bulletin on the prospect for Latin American economies by the International Monetary Fund (IMF), forecasts that modest economic recovery in the region is underway.

IMF analysts estimate that Latin America will grow 3.1 percent this year, compared with 0.9 percent last year. "What's in store is a healthy increase in growth," said Larry Goodman, an economist at Salomon Brothers Inc. His estimate for growth in the region is 2.9 percent, slightly more conservative. Investors are becoming believers, as the rallies in the financial markets of Mexico, Argentina and Brazil clearly show.

Latin American stocks are up 8.9 percent this year, according to indices compiled by Morgan Stanley Capital International. For the second consecutive year, Chile will likely boast the second strongest growth in the region, the IMF said, with the Gross Domestic Product (GDP) growing 6.5 percent, the same figure forecast by the government. Last year, GDP increased 8.5 percent. According to the Fund, Colombia's economy will likely grow 4.5 percent, a bit below the official government estimate of 4.9 percent, while Mexico will expand 3 percent, the same as Mexican Finance Minister, Guillermo Ortiz has forecast.

Among the other major economies, Brazil will likely grow 3 percent, well below the government's 4 percent estimate, and Argentina 2.5 percent, also below the 3 percent growth that Economy Minister, Domingo Cavallo has predicted. The only major economy in the region expected to contract is Venezuela, which could fall 0.6 percent. The country remains in the aftermath of a financial crisis that was sparked by the failure of several large banks in 1994.

Though the IMF doesn't have a reputation for issuing overly rosy economic forecasts, some analysts tracking the performance of emerging markets around the world remain sceptical that the region will enjoy even the modest recovery the Fund's economists expect. In Brazil, for example, economists at Salomon and Oppenheimer are forecasting 2.5 percent, this is below the 3 percent estimate of the IMF. Oppenheimer & Co. expects high domestic interest rates to limit growth to 1.5 percent.

"Real rates will need to be high for Government to maintain the current economic program," says Carlos Asilis, head economist at Oppenheimer & Co. "That will contribute to a moderation in economic growth." The challenge for Mexico will be to generate growth while domestic interest rates remain relatively high and consumer debt limits borrowing. In addition, the economic austerity program forces Government to maintain a tight monetary policy.
"In the past, Mexico has grown because of expansion in fiscal expenditures. This policy has been ruled out as one of the conditions for the economic restructuring loan with the US," said Asilis. He expects the economy to grow 2.5 percent, spurred mainly by the robust export sector. Argentina may have an even tougher time, said Walter Molano, chief Latin American economist at Swiss Bank Corp.

If GDP contracts 6 percent in the first quarter as expected, the economy would have to grow 11 percent during the second half to reach an annual 3 percent growth rate. That's unlikely, given the government's inability to stimulate the economy. The amount of money in circulation cannot increase without additional reserves. Molano said the economy could contract 1.2 percent this year before rebounding to grow 6.5 percent next year. Molano is optimistic that Argentina will be able to post higher, more sustainable growth next year, but he is also concerned that another year of disappointments could prompt investors to sell shares, dragging the entire market lower.

"The tendency to compare economic growth in Latin America with the same period a year earlier causes distortions," continues Molano. Economic growth in the U.S. and other countries is usually compared with the previous three month period, he says. As a result, "when there is a shock in the market, it is normally understated on the way down and when the recovery is starting it is delayed. Up to June, the Bovespa stock market index in Brazil rose to 50,756.48. For the year, the index is up at least 16 percent in dollar terms. Mexican stocks have also risen with the expectation that the peso would remain strong. A lower inflation rate is also expected to cause interest rates to decline. This year, the index is up 23 percent in US dollar terms.

Argentine shares soared with signs that the economy was picking up. This was reflected in rising cement, steel and car sales since the start of the year. The Merval index increased to 553.72. So far, the index has risen 6.93 percent in dollar terms. Chilean stocks increased on optimism that firstquarter corporate profits would be better than expected. The index is down 1.32 percent in dollar terms since January 1996. The Colombian index is also down 1.19 percent in dollars. Venezuelan stocks are up more than 80 percent, spurred by Government's decision to lift restrictions on buying and selling foreign exchange. The general index rose to 3783.22 in June. This year the index is up 87 percent in nominal terms.

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