Latin America economic analysis – week of July 18, 2005

Latin America economic analysis – week of July 18, 2005

It was a relatively quiet week for the Latin American region, with most noise coming out of Brazil as a political corruption scandal has drawn attention away from much-needed tax and pension reforms. As a result, the usually strong Brazilian real, which has recorded month after month of gains against the dollar, fell for a second week in a row. As of July 22, the real recorded declines of over 1.6 percent to fall to 2.3963 per dollar. The Brazilian congress is investigating allegations that funds from an advertising company were diverted to bribe legislators. The investigation may severely hinder growth and progress in South America’s largest economy as the scandal diverts attention from more pressing issues, such as tax and pension reforms. The country also exchanged nearly $4.5 billion in decade-old bonds as part of a large debt restructuring effort. It is an attempt to free itself from a legacy of defaults as well as save around $400 million in annual interest payments. There were flickers of good news for Brazilian steel shares as several prominent steelmakers, including Siderurgica Nacional and Usinas Siderurgicas de Minas Gerais, iron ore producer Vale, and other related companies gained over 164 points on the Brazil’s main stock index. The gains were largely spurred by China’s decision to end its peg on the yuan. Meanwhile, Mexico, the world’s fifth largest oil producer, has benefited nicely from record prices and has managed to boost international reserves to over $60 billion. Mexico’s foreign currency debt level has been raised to investment grade by Standard and Poor’s, whereas just five years ago it was rated as junk. The country has also halted its practice of raising interest rates after 12 consecutive increases. The Mexican central bank held the rate steady at 9.75 percent on reports that inflation, even though it has not hit Banco de Mexico’s desired levels, has indeed slowed. The current inflation level remains at 4.3 percent, which is just slightly above the desired level between two and four percent. At the close of business, July 22, the peso had fallen 0.22 percent to 10.6476 per dollar. Elsewhere, Argentina has reportedly raised exports taxes on dairy products to 15 percent from 5 percent in an effort to curb inflation. The country intends to keep the measures in place for six months, at which time it will re-examine to see what, if any, effect they have had. Argentina’s inflation rate is expected to rise above 10 percent for the first time in two years. The Argentinean peso fell 0.10 percent to 2.8637 per dollar. Finally, in Colombia, the central bank fixed the overnight lending rate at 6.5 percent in response to declining inflation. The Colombian peso fell 0.02 percent to 2,314.50 per dollar.