South American economic overview: October 2011

Argentina:
On the surface, the economic and political picture looks relatively stable. President Cristina Fernandez just won another term by an impressive and overwhelming majority and official economic indicators are looking pretty good as well. GDP will likely grow 8.3 percent this year and the inflation rate is, at least officially, in the single digits. But the good news stops here-the country has a multitude of economic problems, some of them are dating back the financial default of 1999 while others, such as price controls on the energy sector, are more recent. Capital flight is endemic; it estimated that up to US$2.0 billion is leaving the country every month. Strict new exchange controls were announced by the re-elected president as soon as the winning festivities were over. Then there is the outstanding issue of settling old debts from the financial default: US$9.0 billion is still owed to the Paris Club of creditors which includes a number of US banks. This prompted the US government to block loans for Argentina worth US$232 million by the Inter American Development Bank and additional lending by the World Bank. Argentina has had a falling out with the International Monetary Fund (IMF) as well. The government refuses to allow IMF staff to conduct its annual assessment of Argentina's economy-it is the only G-20 nation to do so. One of the discrepancies that might come out is the undervalued inflation rates, which private estimates continue to peg above 20 percent. Additionally, private institutions in Argentina will now be fined when they report their own economic data.

Brazil:
The country's recent remarkable economic success was anchored on three sturdy pillars: low inflation, low budget deficits and a floating exchange rate. Unfortunately, inflation is at a six-year high, spending pledges by the government are jeopardizing budget goals and to almost everyone's surprise, the Central Bank cut the benchmark interest rate by half a percent to 12 percent. The economy saw a slight slowing down in Q2 and growth expectations for this year have been pared back to around 4.5 percent.

Chile:
Early indications of Q3 results show a slight downturn of economic growth. Chile's mining industry has to cope with less global demand for copper and a lower price for it. Still, the central bank expects the GDP to grow in excess of 6.0 percent for the year and has expressed some concern that inflation is running slightly ahead of the targeted 3.0 percent. Still, the benchmark interest rate remains steady at 5.25 percent because central bank officials fear yet another slowdown of the economy. Industrial production was flat in September from the previous month and unemployment still exceeds 7.0 percent.
 
Venezuela:
The economy grew less robustly in Q2 than earlier anticipated.  Despite an ongoing government program to build 153,000 houses for the poor people, the economy suffered from a declining construction market, and the government announced its intentions to nationalize gold mines in Venezuela in order to stop smuggling the precious metal out of the country. Venezuela produces 11 mt of gold a year and illegal mining adds about another 10 metric tons.