South American economic overview – November 18, 2008

General: Despite protestations that the current financial upheaval is "Bush's crisis" (Brazilian President Lula), the region cannot escape the fallout from it. International loans are getting scarce and emphasis has shifted from inflation to growth again. The US is still the largest export market for most South American countries and it has just taken the first step into a recession. The World Bank revised its 2009 growth forecast for Latin America to 2.5%-3.5%, down from an earlier 4.5%.

Argentina: The economy is undoubtedly in very bad shape. It seems that it has run out of money - again. Non-governmental sources point to lack of transparency in the government's actions. For almost two years, inflation has been underreported and growth rates exaggerated. The Central Bank spent $2.85 bn of its foreign reserves in October alone to prop up a weakening currency. Then, in an unexpected development, the government pushed through legislation in both chambers to take over $25.0bn in private pension funds. Moreover, Argentina still has not settled all of their old debts they had defaulted on in 2001. The Paris Club expects to be repaid $7.9bn. In the meantime, private polls show 11.5 million people living below the poverty line, a number last seen in 2001. Growth for 2009 will be flat at best and inflation could run as high as 20% (official estimate).

Steel Production: 498,000 mt in September, an increase of 2.6% over last year. In the first nine months of 2008, 4.4 million mt were produced or 12.6% more than last year.

Brazil: Foreign investments and loans are drying up as a consequence of the global financial crisis. Moreover, because of a falling real, foreign exchange derivatives that looked safe only a few weeks ago have now turned sour. Over 200 companies are reckoned to hold these papers. Two large banks, Itau and Unibanco, merged. Their combined assets will make it the largest bank in Latin America. The International Monetary Fund (IMF) predicts  a growth rate for next year of 2.2% only. The Central Bank puts the rate "much higher" and it also predicted that GDP growth for 2008 will still be in excess of 5.0%.

Steel Production: 3.0 million mt in September or 5.0% more than last year. In the first nine months of the year 26.8 million mt were produced or 7.3% more than last year.

Chile: The declining peso is of concern. But Central Bank officials have indicated that they might sell some of their foreign reserves to help stabilize the peso. They also pointed out that Chile has no debt and will therefore be able to ride out these difficult times. But copper prices have fallen to levels last seen in 2005. The benchmark interest rate was left at 8.25%.

Copper Price: $1.7168 per lb as of November 14 for a three month forward deal.

Venezuela: Despite the rapidly falling oil price Venezuela will still show a strong growth in 2008 for the fourth year running. But despite the record oil revenues this year, experts warn that Venezuela's crude oil output has fallen from 3m barrels per day to 2.4m now. Lack of capital investments and skilled management personnel in PDVSA, the state oil company, are to blame for this development. The government's reckless expropriation campaign of foreign companies is a contributing factor to Venezuela's coming problems. Last year the total of foreign investments in Latin America reached $126bn. Only $600 million of this went to Venezuela in sharp contrast to neighboring Colombia ($8.0bn) and Chile ($15.0 bn). Finally, inflation remains out of control.

Steel Production: 410,000 mt in August or 5.4% more than last year. In the first nine months of the year 3.3 million mt were produced or 11.0% less than last year.