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GDP Growth: Venezuela Best

By Chronicle staff | Latin Business Chronicle

03.10.05 | Venezuela and Argentina will post the strongest GDP growth in Latin America this year, while Haiti will post the weakest results. Overall Latin America will see lower growth this year compared with 2004.

The rise in oil prices have benefitted some countries (most notably Venezuela), while hurting others, leading to a slowdown in Latin American economic growth compared with last year.

The region is expected to see a GDP increase of 4.1 percent this year, a rate lower than last year's rate of 5.6 percent, the IMF forecasts in its latest World Economic Outlook, released in September. That 2005 estimate is slighly lower than the forecast from the United Nations Economic Commission on Latin America and the Caribbean (ECLAC), which in August predicted a Latin American economic growth rate of 4.3 percent this year.

"In Latin America, growth has moderated to a more sustainable pace after a sharp rebound in 2004," the fund says in its outlook. "Strong commodity and raw material exports and—in most large economies— broad terms-of-trade gains continue to support the growth momentum, although manufacturing exports have weakened somewhat in tandem with the slowdown in global manufacturing."

Venezuela will likely end the year with an economic expansion of 7.8 percent, the IMF forecasts. ECLAC's forecast is 7.0 percent.

However, both figures mark a slowdown compared with last year's growth rate of 17.9 percent, which was Latin America's best performance last year as well. Venezuela is Latin America's largest oil exporter. Despite declining production, the country has seen its oil revenues swell as a result of a strong increase in international prices.

"Favorable oil market conditions provide an opportunity for lasting improvements on the recent erratic growth performance through decisive measures to strengthen the fiscal position, liberalize the economy, and improve the investment climate," the IMF points out.

Argentina is set for a growth rate of 7.5 percent, helped by growing public expenditure that has helped offset declining private investments, the IMF forecasts. ECLAC expects a slightly less expansion of 7.3 percent. Like Venezuela, this year's growth marks a slower pace than last year.

"To sustain solid growth over the medium term, prudent fiscal policies, structural reforms—including the phased elimination of distortionary taxes, the strengthening of the institutional framework of intergovernmental fiscal relations, and improved incentives for private sector participation in the provision of public services—and a resolution of the remaining arrears to private creditors will be required," the IMF recommends.

Uruguay, Chile, the Dominican Republic and Peru round out the top six growth economies this year. But except for the Dominican Republic, the other countries are actually seeing slower growth this year compared with last year. All in all, 14 economies in Latin America - including Mexico and Brazil - will see slower economic expansion this year, while only five will see better results, according to the IMF.

Brazil, which this year has replaced Mexico as the largest economy in Latin America, is expected to grow by 3.3 percent, which is weaker than last year's rate of 4.9 percent, the IMF says. ECLAC is even more pessimistic, forecasting a growth of 3.0 percent. The South American country has been marred by growing political uncertainty as a result of a corruption scandal that has hit the government of President Luiz Inacio "Lula" da Silva.

"Recent activity indicators point to some upside potential to the growth outlook, but higher oil prices and the possible fallout from the political uncertainties add to the downside risks," the IMF says. "In view of the need to accommodate essential social and infrastructure spending while maintaining large budget surpluses, reforms are needed to reduce budgetary rigidities and increase the quality and efficiency of spending."

Mexico is set to post a GDP growth of 3.0 percent this year, which is lower than last year's economic expansion of 4.4 percent, according to the IMF. Here ECLAC forecasts a slightly better result: 3.6 percent. However, whatever figure is used, fact is that Mexico is seeing a slowdown due to a combination of weaker demand from the United States and growing uncertainty before next year's presidential elections, where a leftist candidate is the frontrunner.

"Growth slowed more than expected in the first half of 2005, reflecting the soft patch in U.S. industrial production and a corresponding slump in automobile-related exports and weak agricultural production," the IMF says. "It is expected, however, to rebound in the second half of the year—supported by the recovery in the U.S. manufacturing sector, and steady domestic demand."

Oil revenues are likely to again exceed budget projections, but the Mexican government should use these additional revenues to reduce the public debt, although there is also some scope for increasing capital expenditure, according to the fund.

"Further structural reforms are needed to boost medium-term growth, including in the energy and telecommunications sectors, labor market reforms to increase productivity and employment in the formal sector, and the strengthening of the judicial and regulatory systems to improve the business climate," the IMF says.

Colombia, the fifth-largest economy is set to grow by 4.0 percent this year, only slighly less than last year's rate.

The Dominican Republic is expected to post GDP growth of 4.5 percent this year - an improevement over last year's 2.0 percent expansion. Also Bolivia, El Salvador, Guatemala and Haiti are expected to see stronger GDP growth this year compared with 2004, the IMF forecasts.

Next year, Latin America should see total GDP growth of 3.8 percent, according to both the IMF and ECLAC. While lower than this year, it's still higher than the average of the past few years.

"Looking forward, the expansion is projected to continue at a solid pace, with growth remaining above the 1990s average through 2005–06, underpinned by both external and domestic demand growth," the IMF says.

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