Latin America & The Caribbean Economic Monitor:

Argentina: Looking to Settle Bilateral Debt
In the wake of securing a deal to repay US$960mn in debt that Spain extended during the 2001 crisis, Argentina appears ready to discuss its other bilateral obligations. The country hopes to settle US$6.3bn in outstanding debt with the Paris Club by 2015 according to reports in Argentina’s Ambito Financiero. Economy minister Felisa Miceli is said to be preparing a proposal to the Club for the beginning of December, in which Argentina would be allowed to repay Spain ahead of the rest (by 2012) in light of the ‘bail-out’ nature of that loan.

Brazil: Where do we go from here?
Over the last three years, Brazil has taken great strides toward reducing its traditional vulnerabilities. Its lumbering public and external debt burdens are being tamed, perceptions of financial stability have helped secure more stable sources of capital flows, and it has succeeded in opening and broadening its trade profile. All these developments will make the country much more resilient in the face of the coming downturn. The next step toward investment grade, however, will require the Lula administration to address some of the economy’s fundamental structural challenges, and may well expose an internal struggle for the soul of this PT government. But the choice is between the government’s social democratic agenda and its target growth rate of 5% in 2007.
Brazil’s investment ratio currently stands at 17.5%, down significantly from 32% in 1975. For gross capital formation to rise, however, it is not enough for the real interest rate to fall. Improvements are needed with respect to the overall business environment. Excessive growth of public spending places upward pressure on taxation. Primary spending has increased at an average of 9.4% in real terms through the first Lula administration. Given the government’s commitment to maintain a 4.25% primary surplus and reduce public debt, this is only possible with higher taxes. Another factor inhibiting investment is the dire state of the country’s transportation infrastructure, which some say costs businesses $5 billion per year in efficiency losses. But due to fiscal constraints, addressing this requires private capital. To achieve this, as I’ve said, the government will have to strengthen the country’s regulatory framework, and begin to look more seriously at the public-private partnership scheme.

Ecuador: Dollarization safe…for now.
Since his election victory on September 26, President-elect Raphael Correa has ruled out any sudden changes to the dollarization of Ecuador’s economy, but added that he "would be opposed to keeping the policy going indefinitely, because one of the symbols of a country’s sovereignty is its currency." EDC Economics does not believe that there is sufficient displeasure in Ecuador at this point with the dollarization regime to motivate such a move in the near- to medium-term. Mr. Correa has, however, indicated on several occasions that he would be in favor of ‘renegotiating’the country's external debt. We have enough reason to believe that he would carry
out such a threat, and caution that he should be taken at his word in that respect. That said, a collapse of the dollarization regime would not necessarily go to follow. Mr. Correa does have a reputation of being extremely erratic and, despite being a US-trained economist, a move toward more Chavez-inspired economic heterodoxy should not be ruled out.

Mexico – Impacts of US slowdown and Domestic Politics should be watched closely
A US slowdown is already underway. Mexican companies whose main sources of income are dependent on the US housing market and the US consumer will feel the greatest impact. And now US manufacturing is also facing its problems with November’s ISM release coming in below the threshold 50 mark, meaning the sector is in contraction. Meanwhile, President Calderon was sworn in last week. The peso showed little reaction and the stock market hit another record, but political developments deserve close attention. Monetary policy and good debt management are important but can’t do it all. Longer term structural issues such as declining oil reserves will weigh on the fiscal accounts. Production from Cantarell is projected to fall 14% annually between 07-15.
In 2004, its output accounted for 63% of Mexico’s total crude production.

Peru: The Herd Mentality in Full Effect
In July, EDC Economics upgraded Peru to ‘BB+’, citing "healthy growth and stable inflation combined with sound macroeconomic management." Then in August, Fitch Ratings upgraded the country to ‘BB+’ due to Peru’s "rapidly growing exports…as well as strong output growth." Now, on November 20th, S&P also bumped the sovereign’s MLT FC credit rating to ‘BB+’, based on strong growth in the context of "a strengthening macroeconomic framework characterized by low inflation…current account surpluses, and a fiscal consolidation strategy."