Latin American economic recap for May 2005

Latin American economic recap for May 2005

Brazil tops a plethora of headlines this week as South America’s largest economy showed its slowest growth in five quarters. Higher interest rates are to blame for lackluster consumer spending and its strong currency is blamed for slowing exports. Brazil’s gross domestic product (GDP) expanded 2.9% in the first quarter, far below the widely expected 3.6%. Indications are that Brazil’s economy may be headed for a slump. Further pessimism abounds after the government revised its 2004 GDP growth from 5.2% to 4.9%. Much of Brazil’s problems are paradoxically stemming from the surging real. Over the past 12 months, the real has gained 33% on the dollar and has put a significant damper on exporter’s profits. Hopes are that the central bank will halt its rate increases and leave it at 19.75%. The bank has raised rates nine consecutive times since September. Concerns are now creeping into economic conversations that the side-effects of the interest rate increases have only begun to show themselves. The good news is that economists forecast Brazil’s year-end inflation will fall to 6.35%. As of April, inflation stood at 8% and the central bank is optimistically gunning for 5.1% by year’s end. On the currency front, the real made its first inroads of the week on the dollar as it gained nearly 2% on assurances from the central bank that it would not sell reals for dollars. The week prior the real fell nearly 4% against the dollar. Around the rest of the region: Mexico was relatively quiet as speculation continues about what is going to happen to its economy in the face of declining demand for products from US consumers and increasing competition from China. Recently it was revealed that Mexico’s economy grew at it slowest pace in over a year and job growth is stagnant as workers continue to stream north to take jobs in the US. For the week, however, Mexico’s peso continues to show strong performance against the dollar and earlier this week rose to a 15-month high. Argentina saw its trade surplus shrink 15% from a year ago while its credit rating received a much-needed boost. Standard and Poors raised the country’s credit rating 6-levels just three years after it defaulted on $100 billion of debt. It can now begin borrowing again on an international level. Both Argentina and Colombia saw minor drops in their currency against the dollar while Chile’s peso recorded gains.