We will post a monthly commentary on the U.S. and Latin America around the 15th of each month. We will also post comments on latest economic developments, as they arise.

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                                   StratInfo - Strategic Information Analysis Inc.   
                                                    Miami, Florida, U.S.A.
                                        Ph: (305)858-2825 or (800)801-0065

                                                       January 15, 2003

                                                            U.S. Economy

 As we had predicted in our last StratAlert, the Fed did not change the Fed Funds target rate last December, and we do not expect them to do so at the January 29 FOMC meeting. Fed Funds futures also reflect our view of no change; although the April futures contract is trading at 1.20 percent, implying some sentiment for another cut in rates. We base our expectation of no change this month on the continued "zig-zag" pattern of economic growth and on a still tame inflationary index. Nevertheless, we think as economic activity gathers some steam the Fed will begin to moderately raise the Fed Funds rate during the second quarter of this year.

Another reason why the Fed is likely to hold tight in the near future is that a rate change could put them right in the middle of a highly political fiscal policy debate. President Bush’s proposed Plan is expected to generate lively debate in Congress. For that reason, the Fed may want to wait and see what changes do materialize in fiscal policy before making their monetary policy call.

We think the President’s economic stimulus package will be a positive influence on the economic recovery. However, some of the components of the plan need to be re-designed for a more effective stimulus strategy. As stated in the President’s proposal, the principal goal of the Plan is to support growth and job creation in order to strengthen the economy. In view of the weak economic recovery, this Plan should be designed to have a short-term or immediate impact, in order to bolster the recovery. Our overall evaluation of the Plan is favorable, but the Plan needs more up-front stimulus, and unfortunately, the elimination of the tax on dividends distracts attention from the Plan’s main goal. With respect to the specific initiatives, we focus on the following issues from an economics perspective:

1. Acceleration of tax rate cuts planned for 2004-2006 to January 2003: this will have a modest impact on household disposable income this year, followed by a more noticeable impact in 2004.

2. Extension of unemployment benefits and a monetary incentive for those seeking a job: this is an excellent initiative with an immediate positive impact on spending. The so-called Re-Employment accounts is an intriguing concept.

3. Elimination of the tax on dividends: this does not really belong in an economic stimulus Plan. The topic of double taxation goes back many years, and we agree that it should be eliminated; but this really belongs in a legislative package to support medium- to long-term growth in the American economy. By including it in a purely short-term program it can compromise the effectiveness of the overall program and attract greater criticism of the other well-designed features of the President’s Plan.

4. More generous depreciation for small businesses: good measure, but it probably fits better as part of a Plan to stimulate medium- to long-term growth, or what is referred to as supply-side economics.

5. Miscellaneous tax incentives: a) reducing the marriage penalty; b) raising the child tax credit; and c) allowing more workers to take advantage of the lowest tax bracket of 10 percent now rather than the original target date of 2008: good measures with impact starting mostly in 2004.

On another matter, the Wall Street Journal’s survey of mainstream economists’ forecast for 2003, which was released earlier this month, paints a rosy picture:

Our StratInfo forecast differs in terms of lower growth, higher inflation, and higher long-term interest rates, and as we have been saying since the middle of last year, a much weaker US$:

The principal risks to the outlook are:

1. War in Iraq and the military consequences as well as its impact on oil prices, U.S. budget deficits, and risk of terrorist attacks against the US.

2. Bulging fiscal deficits and their impact on long-term interest rates.

3. Huge trade deficits and the risk of a much weaker US$. As we have explained in previous StratAlert’s (See our Archive), we are now at the threshold of the third downward cycle of the dollar. The first was in 1973, after the breakdown of the Bretton Woods global monetary system; and the second was in 1985, when the Group of 7 industrial nations collaborated on a strategy to push down the value of the dollar. This cycle will be triggered by the runaway trade deficits in the US.

 

 The tables below show several key economic indicators for the main Latin American and Caribbean countries and for the region as a whole, based on the preliminary 2002 estimates by the U.N. Economic Commission for Latin America (CEPAL). For comparison purposes we have also computed the averages for the periods 1993-1997 and 1998-2002. The figures show a deterioration for the region in terms of GDP growth and the fiscal budget deficit. The greatest accomplishment of the region has been the dramatic fall in the inflation rate. Another significant improvement has been the reduction in the ratio of external debt to total exports of goods and services.

In terms of economic growth, Peru was the best performer during the 1993-1997 period with a spectacular average growth of 7.1 percent per annum. The Dominican Republic topped the list during 1998-2002 period, with average annual growth of 5.8 percent. The worst performers have been Jamaica in 1993-97 with a meager 0.8 percent growth per annum and Argentina in the 1998-2002 period with a fall of 3.2 percent. The worst deterioration from one period to the other has been recorded by Argentina, while the most notable improvement has been registered by Trinidad & Tobago. The region experienced a sharp slowdown in growth from 3.7 percent during 1993-1997 to 1.3 percent during 1998-2002.

In terms of inflation the lowest rate during the 1993-2002 period has been posted by Panama, which is explained by its long-standing peg to the US$. Other than Panama, Argentina has that distinction during 1993-1997, and El Salvador during 1998-2002. The worst inflation rate in the region was that of Brazil during 1993-1997 with an astronomical 818.7percent! On the other hand, Brazil also got kudos for greatest improvement, when former president Cardoso succeeded in taming inflation to a low of 6.0 percent in just five years. The only country in the region that recorded a deterioration from 1993-1997 to 1998-2002 was Ecuador, whose inflation rate went from 30.1 percent to 47.1 percent. And as a dollarized economy, the high inflation rate poses a serious structural problem. For the region as a whole, the inflation rate went down dramatically from 304.1 percent to 8.2 percent between the two periods.

The fiscal accounts have deteriorated for the region as a whole, from an average deficit of 1.5 percent of GDP during 1993-1997 to 2.8 during 1998-2002. Chile was the only economy that managed to show a fiscal surplus of 2.1 percent during the 1993-1997 period, while Honduras had the worst record during that period with a deficit of 5.6 percent. In the 1998-2002 period the best performance award goes to Dominican Republic with a virtual balance, while Nicaragua went deeply in the red with a deficit of 7.0 percent, which resulted in the worst deterioration for any economy in the region.

Total external debt as percent of exports of goods and services experienced a moderate improvement for Latin America with a decline from 235.7 percent during 1993-1997, to 200.8 percent in 1998-2002. Nicaragua has had the worst record for the region during all those years, despite a dramatic improvement from 1,782.9 percent during 1993-1997, to 723.4 percent during 1998-2002. It must be noted that Nicaragua has been the beneficiary of large foreign debt reductions from donor countries and multilateral organizations. On the other hand, the Dominican Republic has had the lowest ratio in the region between 1993-2002. Argentina and Brazil have posted the worst deterioration. The greatest improvements have been made Peru and Mexico.

                                               Latin American Economies
                                                        GDP

Source: CEPAL

                                     Latin American Economies
                                                  Inflation

Source: IMF and StratInfo

                                      Latin American Economies

          Trade Balance                                                     Current Account
                      US$ Millions                                                                                                              US$Millions

Source: CEPAL

                                        Latin American Economies
                                            Public Sector Accounts
                                                          (As a Percent of GDP)

Source: CEPAL

                                    Latin American Economies
                                         Total External Debt
                             (As Percent of Total Exports of Goods and Services) 

Source: CEPAL