Latin American economic analysis – week of August 15, 2005

Latin American economic analysis – week of August 15, 2005

South America’s largest economy continues to reel from political turmoil as new allegations of corruption have arisen against Finance Minister Antonio Palocci. Sao Paulo state prosecutors are alleging that Mr. Palocci may have took bribes when he was mayor in the 1990s. Reportedly, Palocci accepted over $20’000 per month from a company in charge of the city’s trash collection. Because of Palocci’s high influence on Brazil’s economic policy, the markets are reeling from the new wave of political scandal that has been rocking the country since June when Luiz Inacio Lula da Silva started facing his own set of political trials. As a result, the Brazilian stock market has fallen 1.4 percent and the currency lost over two percent last week. In Mexico, President Vivente Fox is driving new efforts to balance the country’s budget. So far his economic policies have breathed new life in to Latin America’s largest economy. It has grown 3.1 percent since last year and 2.4 percent in the first quarter alone. When Fox took office, inflation was nine percent. It now stands at 4.5 percent. Fox’s most recent initiative has been to ask Mexico’s congress to phase in tax cuts for state owned oil company Petroleos Mexicanos because it expects to lower revenues $5 billion next year. Fox wants to implement the tax cuts over ten years rather than the proposed five. He has also vowed to balance the Mexican budget by 2006. The peso fell 1.2 percent last week. In Colombia, the central bank held steady on its overnight lending rate on August 19 at 6.5 percent. No immediate change is forecast and Colombia’s peso fell slightly 0.1 percent last week. Turning to steel, recent figures show that South American steel production dropped over seven percent in July from the same period in 2004. Raw steel production plunged to 3.7 million metric tons last month. However, year-to-date production has increased 0.2 percent. Around the region, Brazil saw their steel production fall 12.5 percent to 2.5 mmt. Mexico saw a decline of nearly four percent to 1.4 mmt but year-to-date production increased about 0.4 percent. Argentina meanwhile reported a 4.8 percent increase last month to 455’000 mt and Venezuela saw a 5.5 percent rise. Among the more notable steel producers, Chile, Colombia, Peru, Paraguay, Ecuador, and Uruguay also accounted for a portion of the raw production figures.