Business Coffee Break

Exclusive blog by Dr. Christiane Hanna Henkel, Correspondent, Neue Zürcher Zeitung (NZZ)

Doubts over dinner…

“Latin America looks so good – better than ever before”, I was told on Sunday by an emerging market researcher; a bright guy from one of the top US-American investment-banks. I met him at the Annual Meeting of Inter American Development in Belo Horizonte (nice horizons), Brazil, which ended this Wednesday. Indeed, macroeconomic indicators look impressive: inflation is down, current accounts are running surpluses, foreign currency reserves are piling up and sovereign debt is declining. The region, once the home of nasty macroeconomic management is finally following school-book macroeconomic policies.

When the last World Economic Forum on Latin America took place in 2002 in Rio de Janeiro, Latin America had just witnessed the crisis of Argentina defaulting on it’s sovereign debt (the biggest default ever in the word) and Brazil had just stepped back from the verge of default.

Now in 2006 things look much brighter. A big chunk of the money which investors have pumped in the emerging markets has gone to Latin America, with lots of that to Brazil. The region is growing for the third year in the row at an average rate well above 4 percent. Brazil is experiencing its longest growth cycle in 15 years. If it lasts just a little longer - until mid 2007 - it would be its longest growth cycle in 25 years.

To cut a long story short: Trust in the region is back.

But is it really? Doubts can come over dinner….

At the beginning of this week, I attended a dinner organized by the Institute of International Finance, a global association of financial institutions. During entrée (rosy shining shrimps) I talked to my neighbor on the left and during the main course to the one on my right. Both are highly respected analysts in Brazil.

Well, the guy to my left expressed the strong belief that the Brazilian leftwing President Lula da Silva will, after having been re-elected during the upcoming presidential-elections in October, do a really good job. Amid a lacking majority in congress he will team up with the PMDB, one of the bigger parties in Brazil. The government will then push through a couple of the much needed reforms and general management will be highly effective and efficient, benefiting from the operational experience gained during the first term. Brazil will finally witness the long awaited growth miracle (a sustainable growth of course).

Then having advanced to the main course – the mere look of which (meat, brown sauce, pale potatoes) should have alerted me to the upcoming shift in sentiment - I turned to my neighbor on the right...

That was the moment when I was shaken in my cautiously optimistic belief that Latin American is a more or less stable region and that there is no immediate danger of a slippage.

Lula will be re-elected, that was as far the expert to my right agreed to the expert to my left. But then he drew a heavily disturbing picture of Brazil’s immediate future: The formed political coalition will not be able to attract able politicians, the ministries will be filled up with mediocre staff. Some market jitters (falling commodity prices, rising interest rate in the US, more cautions investors) and pressure arising from the people in the streets will drive the weak government to take wrong decisions in economic policies. The whole story will end up with Lula being driven out of office – either through him stepping down or being impeached.

Two prestigious analysts – two totally different opinions. I kind of lost my direction that evening and surely lost my appetite (the mango-bedded, rich chocolate cake stayed untouched!).

Let’s take Brazil just as an example for Latin America as a whole. Much progress has been made, but are the institutions really so stable that a way back is not thinkable anymore? Has it reached the degree of stability that might weather the next storm?

Well, the debate is on at meetings like that of the mighty IDB or at the exclusive World Economic Forum Latin America. But, more than 20 million people seem to have found the answer already. This is the number of Latin American emigrants – now living mostly in the USA. They have decided to leave the their homes in Mexico, Brazil, Ecuador or elsewhere in the region.
They did not see any chances that their governments would provide them with the chances to lead a decent life.

Only when they start coming back to their home countries, might it be time to say that the trust is back in the region…

SOURSE: http://www.forumblog.org/blog/americas/