The Peruvian study is published below. 

Peru: Effects of Global Recession and Future Prospects

 by

Margarita Benavides, Luis Enrique Povea, and Elliott Morss

EXECUTIVE SUMMARY

 The credit freeze had a significant impact in Peru. The stock market fell almost 72% resulting in an asset loss of US$68 billion. That loss has recently been pared to 35% and a US$ loss of $33 billion. The reduction in export demand resulting from the global recession has had a greater impact. In 2009, investment is expected to fall less than 1%. Consumption growth will be lower – only 2.5% versus 7.9% in both 2007 and 2008. The unemployment rate in 2009 will increase to 8.5% by the end of the year. 1010 looks better, with  GDP growth of 4.3%.

IMPACT OF CREDIT FREEZE

 The credit freeze has had a dramatic impact worldwide. As indicated in Table 1, the world lost $36 trillion in stock market losses directly following the credit freeze. Globally, markets have recovered cutting stock losses to $22 trillion. Latin American stock markets have recovered dramatically. And after being down almost 72% for a loss of $68 billion, the Peruvian market has recovered somewhat and is now down  35%.

Table 1. – Global Stock Market Losses (in mil. US$)

 IMPACT OF DECLINING GLOBAL DEMAND

Peru’s leading exports are copper, gold, zinc, textiles and fish meal. They have been adversely affected by the global recession. As indicated in Table 2, they are down by 24% year to year, with mineral and petroleum exports the hardest hit.

Table 2. – Peru Export Performance (in mil. US$)

http://estadisticas.bcrp.gob.pe/index.asp?sFrecuencia=M 

THE DOMESTIC ECONOMY

Consumption growth slowed from an average of 7.9% in 2008 to 3.5%  for 2009 as estimated in the LatinFocus Consensus Forecast (http://www.latin-focus.com/). Investment fell more sharply: while it grew by 28% in 2008, it is estimated to be flat in 2009. Overall, GDP growth fell from a growth rate averaging 8.3% over the last four years to an estimated growth rate of only 1.5% in 2009. However, LatinFocus estimates GDP will grow 4.3% in 2010.

EXTERNAL SECTOR

 Peru has been running a significant positive trade balance over the last few years. But as Table 3 indicates, the global recession has cut into it as exports have fallen more rapidly than imports.

Table 3. – External Trade (in millions US$)

http://estadisticas.bcrp.gob.pe/index.asp?sFrecuencia=M 

GOVERNMENT POLICIES

 The Peruvian Government has reacted to the global recession by launching a US$3.5 billion stimulus package. In addition, the Central Bank has kept its interest rate at an historically low 1,25%.

 Partially as a result of the global recession and the government stimulus package, the government overall balance as a percent of GDP is expected to go from surplus of 2.1% in 2008 to a deficit of 1.8% in 2009. 

LOOKING AHEAD

The World Bank estimates World GDP will fall 2.9% in 2009 before recovering 2.0% in 2010. That means Global GDP will not get back to 2008 levels until 2011. Latin America overall will fall somewhat less in 2009 before increasing 2% in 2010. 

Table 4. – World Bank Global GDP Growth Estimates

Peru’s GDP is projected to grow by 3.0% in 2009 before growing by 4.3% in 2010. 

Table 5. – World Bank Latin American GDP Growth Estimates

LatinFocus (http://www.latin-focus.com/) collects projections from a wide variety of organizations. Its Consensus GDP Percent Change Forecast for Peru is 1.5% for 2009 and 4.3% for 2010.

 Part of the reason for projected the strong rebound is attributable to the fact commodity prices are recovering rapidly. This is important inasmuch as copper and other commodities constitute a significant portion of Peru’s exports.

 The LatinFocus consensus is that exports will grow 11.4% in 2010 after falling 18.9% in 2009. The LatinFocus Consensus Unemployment Rate Forecast for Peru is 8.5% in 2009, falling to 8.2% in 2010.

 Peru’s external debt is 27% of its GDP which is moderate by Latin American standards. But the Sovereign Spread it has to pay on borrowings is quite low by Latin American standards.

 I have already posted country studies on Argentina, Brazil, Chile, and Colombia. The Venzuelan study is published below 

 Venezuela: Effects of Global Recession and Future Prospects

 by Diana Colmenares, Silvia Sandoval and Elliott Morss

Executive Summary

 The economy depends primarily on oil. Oil exports plummeted in 2009, but in recent months the oil price has recovered somewhat. However, major imbalances continue exist due to bad government policies. Inflation and the government budget deficit are very high. Venezuela is the riskiest Latin American country for foreign investors. But the government can continue in this manner because of tremendous oil reserves.

Impact of Credit Freeze

 The credit freeze has had a dramatic impact worldwide. As indicated in Table 1, $36 trillion was lost worldwide in stock markets directly following the credit freeze. Markets have recovered somewhat, cutting back stock losses to $22 trillion. Latin American stock markets have recovered dramatically.

 Table 1. – Global Stock Market Losses (in mil. US$)

While Venezuela still has a stock market, it is hardly significant. Because of exchange restrictions, companies prefer to list their stock on other markets. This means that Venezuelan stock market fluctuations had very little impact on incomes in Venezuela.

Impact of Declining Global Demand

 According to LatinFocus, oil constitutes 93.5% of Venezuelan exports. Consequently the collapse in oil prices from a high of $140 in early 2008 to $30 in January 2009 had a devastating effect on exports. Oil prices have recovered some of their losses, but Venezuelan exports are still expected to fall 46% in 2009.

OIL PRICES

Evolution 2007 – 2009 

(US$/Barril)

 US/ Venezuelan Trade
For the first half of 2009, Venezuela exported US$ 12.1 billion to the US, a drop of 53% over the same period in 2008. 

Domestic Economy

The fall in oil exports had wide ranging effects on the domestic economy. GDP will be down 2.1% in 2009. Consumption is expected to be off by 2.1% with investment falling by 6.7%. Unemployment is projected to increase in 2009 to 8.3% from 6.1% in 2008.

The government budget has been seriously affected by the loss in oil revenues. The deficit as a percent of GDP is expected to grow from 1.2% in 2008 to 4.8% in 2009.

Exchange Rates

Because of currency controls, there is a large gap between the government’s pegged rate and the black market rate. In September, the black market rate for the Bolivar Fuerte was 5.55 per US$ while the official rate was exchange market the 2.15 Bolivar Fuertes for per US$. That means the official price is less than half the market price, an extremely serious imbalance. Spreads of this sort invite extensive black market profiteering.

In an attempt to sop up some of the excess demand for US dollars in Venezuela, Chavez issued US$3.0 billion in the sovereign debt bonds. The issue was oversubscribed, attesting to the internal demand to sell Fuertes for dollars.

Inflation

Inflation is expected to be 30% in 2009 and slightly higher in future years.

Foreign Investment

 There will be little foreign investment as long as current policies are continued. Foreigners investing in Venezuela have little chance to get their money out. And the government regularly chooses which obligations to pay and which ones to ignore. The riskiness of Venezuela is reflected in its Sovereign Spread (bbs) of 884 in September, higher than any other Latin American country other than Ecuador.

 The Future

Table 2 . – World Bank Latin American GDP Growth Estimates

Venezuela’s economy is expected to continue down in 2010.

But remember this: Venezuela exports about one billion barrels of oil annually. It has more than 50 billion barrels of oil reserves. This means Venezuela can live off its oil almost indefinitely under existing Chavez policies.

I have already posted country studies on Argentina, Chile, and Colombia. The Brazilian study is published below.

Brazil: Effects of Global Recession and Future Prospects

by Roberto Flamini, Paula Gomez, and Elliott Morss

EXECUTIVE SUMMARY

The credit freeze had little impact in Brazil. The economic impact of the global recession in Brazil has been mild compared with previous global downturns. GDP could contract by up to 1% in 2009, far less than what would have been the case in Brazil in a global recession similar situation only a few years ago. Overall, Brazil has become one of the soundest economic powers in the world. With diverse exports, a growing middle class, and a broad natural resource base, Brazil’s prospects are excellent.

IMPACT OF CREDIT FREEZE

The credit freeze has had a dramatic impact worldwide. As indicated in Table 1, stock markets lost $36 trillion directly following the credit freeze. Globally, markets have recovered cutting stock losses to $22 trillion. Latin American stock markets have risen dramatically.

Table 1. – Global Stock Market Losses (in mil. US$)

Brazil is no exception. The BVSP fell 60 % for a loss of US$642 billion. The Brazilian market has recovered somewhat but is still down 8.30 %.

IMPACT OF DECLINING GLOBAL DEMAND

From 2003 through 2008, Brazil’s exports grew at an amazing average annual rate of 22%. As a result of the global recession, exports fell by 26% in the first six months of 2009 as compared to the same period last year. Compared to the January-June 2008 period, the export of basic goods decreased by 7.4%, while semi-manufactured goods and manufactured goods decreased by 26.9% and 30.6%, respectively.

But there are early, tentative signs that recession effects are weakening. Between May and June of this year, basic goods exports have grown by 20.2%, semi-manufactured goods by 11.4%, and manufactured goods by 10%. It is expected that Brazil’s exports will gain 11.5% in 2010.

Brazil is the world’s largest exporter of beef, iron ore, sugarcane ethanol, and the second largest exporter of soy products. Other leading exports include wheat, minerals, oil, and transportation equipment (cars and airplanes). Brazil has just discovered large offshore oil deposits that will add to its large natural resource base in coming years.

THE DOMESTIC ECONOMY

LatinFocus (http://www.latin-focus.com/) estimates that Brazil’s GDP will fall by only 0.1% in 2009, with investment falling 12.3%. Unemployment will increase from 6.8% in 2008 to 8.1% in 2009.

But even with the global recession, consumption grew by 2.3% in 2009. Like China and India, Brazil has a rapidly growing middle class. According to the Fundacion Getulio Vargas, this class has grown from 42% of the population in 2004 to 52% in 2008 (Economist Sept. 11, 2009). This class wants all the luxuries enjoyed now in developed nations, and consumer credit has expanded by 28% in nominal terms in each of the last 3 years.

The spending of this growing middle class will be a major deterrent to extended effects from the global recession.

GOVERNMENT POLICIES

The Brazilian Government has recently announced a small ($3.6 billion – only 0.2% of GDP) stimulus package to boost domestic spending. It has also lowered interest rates and eased capital requirements for the banking system.

Like China and Japan, Brazil is concerned about the growing value of its currency – the Real – against the US dollar. Like most currencies, the Real weakened in the immediate aftermath of the global credit freeze, but it is now strengthening. To hold down further Real appreciation, the government has just imposed a 2% tax on new currency transactions. And because it does not want its competitive export position to erode further, it could resort to buying US dollars.

The relatively mild recession has strengthened the public position of President Luiz Inácio Lula da Silva. He has pursued prudent macroeconomic policies in recent years. The government deficit as a percent of GDP has been kept under control. It will increase to 2.9% in 2009 in response to the global recession but is expected to fall back to 2.2% in 2010.

LOOKING AHEAD

At least the first quarter of the 21st Century will be good to natural resource rich countries. And Brazil, with its rich export base, should do very well.

For the short run, consider first the projections made by World Bank. World GDP is expected to fall 2.9% in 2009 and increase 2.0% in 2010. That means Global GDP will not get back to 2008 levels until 2011. Latin America overall will fall somewhat less in 2009 before increasing 2% in 2010.

Table 2. – World Bank Global GDP Growth Estimates

According to World Bank Estimates, Brazil’s ’s GDP is projected to drop by only 1.1% in 2009 before growing by 2.5% in 2010.

Table 3. – World Bank Latin American GDP Growth Estimates

LatinFocus collects projections from a wide variety of organizations. Its Consensus GDP Percent Change Forecast for Brazil is –0.1% for 2009 and 4.6% for 2010. The LatinFocus Consensus Unemployment Rate Forecast for Argentina is 8.1% in 2009 going to 7.8% in 2010.

Brazil is well on its way to becoming one of the strongest world economies in the 21^st Century. With a low population density (22.5 persons/sq. km) versus China (141.7) and India (380.0), and abundant natural resources, the future is bright.

I am in the process of posting a series of country studies written by my students at the Business School at the University of Palermo in Buenos Aires. The articles assess the impact of the global recession on these countries and their future growth prospects.

The Colombia and Chile studies have already been published. The Argentina study is posted below.

Argentina: Effects of Global Recession and Future Prospects

by Marcela Gonzalez and Elliott Morss

EXECUTIVE SUMMARY

The credit freeze had little impact in Argentina. While the stock market fell 65% resulting in asset loss of US$22 billion, that loss has almost been erased with the market down less than 1% from its earlier highs. But the reduction in export demand resulting from the global recession has had a greater impact. In 2009, investment is expected to fall 12% with consumption lower as well. Unemployment in 2009 will approach 10% by the end of the year. 2010 looks better, with most forecasts predicting GDP growth of 2%.

IMPACT OF CREDIT FREEZE

The credit freeze has had a dramatic impact worldwide. As indicated in Table 1, the world lost $36 trillion in stock market losses directly following the credit freeze. Globally, markets have recovered cutting stock losses to $22 trillion. Latin American stock markets have recovered dramatically. And after being down 40% for a loss of $22 billion, the Argentine market is now only down 0.26%.

Table 1. – Global Stock Market Losses (in mil. US$)

IMPACT OF DECLINING GLOBAL DEMAND

Argentine exports have been adversely hit by the global recession. They are down 26.8% in the first 3 quarters of 2009 as compared with the same period in 2008.

Table 2. – Argentina Export Performance

Sources: http://www.bcra.gov.ar, http://www.indec.gov.ar/

A more complete understanding of export performance can be obtained from Table 3.

Table 3. Export Details

Source : INDEC

As can be seen from this Table, all major exports fell sharply in the first ten months of 2009. Only meat, wine and gold increased over this period.

THE DOMESTIC ECONOMY

Consumption growth slowed by 6.3% in the last quarter of 2008 and first quarter 2009 when compared to the same period in the 2007-2008 year. Consumption is expected to fall by 1.4% for all of 2009. Investment is down by 11.5% in the last quarter of 2008 and first quarter 2009 when compared to the same period in the earlier years. Investment is expected to decline by 11.6% for the entire year. It is estimated that the unemployment rate will increase to 9.9% in 2009 from 7.3% in 2008.

EXTERNAL SECTOR

As Table 4 indicates, Argentina’s trade balance remains strong, even with the fall in exports. International reserves have fallen a bit, but they are still quite adequate.

Table 4. – External Sector (in millions of US$)

Source: LatinFocus

The country’s primary problem here concerns its 2001 default. After defaulting on $95 billion of debt, holders of approximately $75 billion settled in 2005 at 35 cents on the dollar. Argentina has had on and off talks to settle up on the remaining $20 billion, but there is nothing definitive yet. Since then, the country has relied on local markets and loans from Venezuela to meet financing needs. Last year, it seized about $24 billion in pension assets possibly to compensate for falling tax revenues.

Could Argentina afford to pay off its international debts? At 35 cents on the dollar, it would cost $7 billion. The country is estimated to have over $40 billion in international reserves. It is not clear whether the creditors who refused 35 cents on the dollar earlier would accept it now. But settling this debt would allow Argentina to borrow again in international markets where it would probably have to pay less than the 15% charged by Venezuela now. It is reported that the government is at least talking to the IMF.

GOVERNMENT POLICY MORE GENERALLY

It appears that for some time, the country has not had a sound economic strategy. Instead, everything appears to be happening on an ad hoc basis. Argentina has some excellent economists. It is too bad one or more of them is not in a position of power. The country needs “a steady hand on the tiller”.

There is talk of corruption. Corruption exists everywhere. If it is predictable, businessmen will build it in as a cost of doing business. Unpredictability is another matter: if you don’t know whether your company or pension funds will be seized, you try to keep your assets out of the country. Unpredictability is in part the reason the country´s EMBI spread against the US Treasury rate approaches the spreads of Ecuador and Venezuela

LOOKING AHEAD

Does any of that really matter? Probably not. Like Russia, Argentina is a natural resource rich country. And a lot of its exports are food. The global population is growing and it has to have eat. Argentina now exports more wine than Australia – see http://www.morssglobalfinance.com/the-global-economics-of-wine-past-present-and-future/.

The size and role of government will probably continue to grow (it has grown from 20% of GDP in 2002 to more than 30% now). And political power grabs will probably continue.

At least the first quarter of the 21st Century will be good to natural resource rich countries. And it is hard to imagine things will be bad in Argentina in the long run. Its exports will rebound.

For the short run, consider first the projections made by World Bank. World GDP is expected to fall 2.9% in 2009 and increase 2.0% in 2010. That means Global GDP will not get back to 2008 levels until 2011. Latin America overall will fall somewhat less in 2009 before increasing 2% in 2010.

Table 5. – World Bank Global GDP Growth Estimates

Argentina’s GDP is projected to drop only 1.5% in 2009 before growing by 1.9% in 2010.

Table 6. – World Bank Latin American GDP Growth Estimates

LatinFocus (http://www.latin-focus.com/) collects projections from a wide variety of organizations. Its Consensus GDP Percent Change Forecast for Argentina –2.3% for 2009 and 2.2% for 2010. The LatinFocus Consensus Unemployment Rate Forecast for Argentina is 9.9% in 2009 going to 10.3% in 2010. That will mean some pain and increased political pressure on the government.

Last week, I published the Colombian study. The Chilean study is published below.

Chile: Effects of Global Recession and Future Prospects

by Elise Baros, Ceres Corro, and Elliott Morss

EXECUTIVE SUMMARY

The credit freeze had little impact in Chile. While the stock market fell 40% resulting in an asset loss of US$149 billion, that loss has almost been erased with the market down now only 1% from its earlier highs. But the reduction in export demand resulting from the global recession has had a greater impact. In 2009, investment is expected to fall 13% with consumption lower as well. Unemployment in 2009 will approach 10% by the end of the year. 1010 looks better, with most forecasts predicting GDP growth of 4%.

IMPACT OF CREDIT FREEZE

The credit freeze has had a dramatic impact worldwide. As indicated in Table 1, the world lost $36 trillion in stock market losses directly following the credit freeze. Globally, markets have recovered cutting stock losses to $22 trillion. Latin American stock markets have recovered dramatically. And after being down 40% for a loss of $149 billion, the Chilean market is now only down 0.97%.

Table 1. – Global Stock Market Losses (in mil. US$)

IMPACT OF DECLINING GLOBAL DEMAND

Chilean exports have been adversely hit by the global recession. They are down 30.1% for the last quarter of 2008 combined with the first 3 quarters of 2009 as compared with the same period in 2007-2008.

Table 2. – Chile Export Performance (in bil. US$)

Source: http://www.bcentral.cl/estadisticas-economicas/series-indicadores/index_se.htm

THE DOMESTIC ECONOMY

Consumption growth slowed from an average of 5.8% for the last quarter 2007 plus the first two quarters of 2008 to only 0.1% for the same period in 2008-2009. It is expected to be down by only 0.4% for all of 2009. Investment is expected to decline by 13.4% in 2009. It is estimated that the unemployment rate will increase to 9.9% in 2009 from 7.5% in 2008.

EXTERNAL SECTOR

Chile had been receiving a significant amount of foreign direct investment, and this is projected to fall in 2009. Foreign remittances are not significant for Chile.

Table 3. – External Trade (in millions US$)

Source: http://www.bcentral.cl/estadisticas-economicas/series-indicadores/index_se.htm

GOVERNMENT POLICIES

In the spring of 2008, the Chilean peso was getting strengthening relative to the US dollar. In response, the Central Bank started buying US dollars with pesos. Its goal was to purchase $8 billion and thereby end the peso appreciation. This program was stopped in September after the Bank had purchased $6 billion. As the credit freeze took hold and the demand for liquidity increased the Bank launched a program in which it would use pesos and US dollars to buy various financial contracts (swaps and repos).  http://www.bcentral.cl/eng/studies/economic-policy-papers/pdf/dpe30eng.pdf

The Bank also reduced its interest rate from 8.25% to 2.25%.

Partially as a result of the global recession, the government overall balance as a percent of GDP is expected to go from surplus of 5.4% in 2008 to a deficit of 4.2%.

LOOKING AHEAD

The World Bank estimates World GDP will fall 2.9% in 2009 before recovering 2.0% in 2010. That means Global GDP will not get back to 2008 levels until 2011. Latin America overall will fall somewhat less in 2009 before increasing 2% in 2010.

Table 4. – World Bank Global GDP Growth Estimates

Chile’s GDP is projected to drop only 0.4% in 2009 before growing by 2.7% in 2010.

Table 5. – World Bank Latin American GDP Growth Estimates

LatinFocus (http://www.latin-focus.com/) collects projections from a wide variety of organizations. Its Consensus GDP Percent Change Forecast for Chile is 1.5% for 2009 and 4.0% for 2010.

Part of the reason for projected the strong rebound is attributable to the fact Copper prices have recovered 57% of their losses from previous highs. This is important inasmuch as copper constitutes approximately 50% of Chile’s exports.

Table 6. – Copper Price Index

As a result, the LatinFocus consensus is that exports will grow 12.8% in 2010 after falling 25.3% in 2009. The LatinFocus Consensus Unemployment Rate Forecast for Chile is 9.9% in 2009 and 9.3% in 2010.

Chile’s external debt is 38.6% of its GDP which is high by Latin American standards. But the Sovereign Spread it has to pay on borrowings is extremely low by Latin American standards which reflect international trust in its government policies.