Latin America had its best year for two decades in 2004 from the point of view of macro-economic performance and progress on strengthening its financial systems – with the glaring exception of Argentina, according to a leading economist. Fred Jaspersen, director of the Latin America department of the Institute of International Finance, a lobby group for the private sector, said that last year was "as about good as it gets" and that Argentina missed the opportunity to make policy reforms.
Jaspersen, who made a presentation to the IIF meeting on 'Prospects for Latin America,' painted a glowing picture of the region during an interview with Emerging Markets. "Banking systems have strengthened very considerably across the region, which has gone along with the remarkably good performance in 2004 with growth being the highest since the early 1980s."
The "fundamentals in almost every country in Latin America have improved and the banking systems in Brazil and Mexico have got their non-performing assets down very significantly. Lending has been increasing, profitability is good. The banking system had a very positive year in 2004 and we expect that to continue in 2005," Jaspersen said. He singled out Mexico as having become "one of the best managed economies in the world".
But Argentina was a totally "different story", the IIF official stressed. "The most important question for Argentina is: what happens to growth over the medium term, once this recovery has run its course and once the external environment is much less supportive?" The IIF projects that overall growth in Latin America will slow to around 3.3% this year compared with 5.9% last year, as global growth "slows gradually and interest rates rise steadily".
"The downside risk for Argentina is very considerable. That is why we think that in a period when things have been going so well, the government might have dealt with some of the politically more difficult reforms, taking advantage of the positive environment," Jaspersen said. He described Argentina as being "at a cross-roads", which will determine its economic fate, according to how policies are managed.
The country has had a quite positive economic performance over the past two years and the debt exchange programme is moving toward some kind of conclusion, Jaspersen said. "But," he added, "there has been no progress on structural reforms" in Argentina. Relationships between the central governments and the provinces are still problematic and bank lending in Argentina is still "way down below pre-crisis levels", which is hurting the macro economy.
Argentine banks suffered considerable losses because of public policy at the time of the crisis. As a result many of them "do not know what their capital is", said Jaspersen. Court rulings, forcing banks to compensate holders of dollar deposits at a given exchange rate, damaged the banks and made them wary of lending. The government "made no effort to stop the courts or to compensate the banks".
An even bigger worry is the rising rate of consumer price inflation in Argentina, according to the IIF official. Price rises have accelerated from 2.3% in 2002 to 9.1% in March this year and jumped by 1% since February. These are not historically high rates by Latin American standards but "a key element of every financial crisis in Argentina has been runaway inflation", leading to balance of payments problems.
Fortunately, "contagion" has not spread this time from Argentina to other Latin American countries, Jaspersen noted. "Argentina is a case by itself," he said. Others have taken Argentina as a "bad-policy example" rather than following its lead. Most countries in Latin America have realized that any attempt to revert to fixed exchange rates must be avoided. That augurs well for the monetary management of the region, he added.