ASUTIL analyst’s economic review

By Doug Newhouse |

The second day of the ASUTIL conference in Mexico City last Friday began with ‘An Engaged Vision’, by analyst Carlos Melconian, Director, M&S Consultores (pictured).

 

He talked about the major influences and impacts on economies and GDP in the region over recent years, even taking the audience back to the crisis around the time of 9/11. He also addressed major events and impacts in the region – both good and bad – on a time line stretching between 1994 to 2014.

 

In more recent years he said the world economy has seen Europe and the US trying to break out of their becalmed economies with only moderate success, while in Latin America it has been difficult to predict the advance of commodities. He also likened some countries to individuals who might say that everything is just fine, but really don’t want to move things forward.

 

Argentina is an example of a major country in the region that did not take advantage of the last decade, said Melconian, although he said later that he fears more for Venezuela than Argentina in terms of recovery prospects.

 

NO LONGER ISOLATIONIST?

Melconian added that South America can no longer be isolationist in its outlook, since it is now a major player. He made the point that the European Central Bank has not acted only in an orthodox fashion in Europe and it has now declared that it will try to avoid any inflationary moves.

 

Latin American governments now have to make similarly big decisions, according to the general consensus to determine the ‘world spirit’. Having said this, he readily admits that it is easy to read the signs incorrectly: “Can this be wrong? Yes. For the short-term perspective I always try to be in the other sides’ shoes to understand what is happening and without waiting for a crisis to appear.

 

“The next four or five years will determine what is going to happen over the next 15 years”.

Carlos Melconian

 

 

“The whole world has this apparent contradiction that the cruise speed will determine what happens over the next five years. But 10-15 years ago who would have imagined this weakening of the dollar? The next four or five years will determine what is going to happen over the next 15 years.”

 

Melconian said that the European Central Bank is now leaving behind this idea of easy money and these periods where governments just cruise along only point to the vulnerabilities in countries. He reasons that this is why Mexico, Asia, Russia and Brazil have had their difficulties at times.

 

He believes there will be more competition in future and the value of the dollar will become stronger, while interest rates will gradually go up. While he says this may not exactly signal ‘party time’, it is equally not a bad outlook for the world.

 

The current slowdown is not that bad and people should not be disillusioned says Melconian, arguing that Brazil and Mexico tend to have longer down time periods than other countries in the region.

 

Some countries do have anti-inflationary buffers built into their economies, but he thinks that it is going to be a lot harder for Venezuela to find its way back to a stable and manageable economy than it will be for Argentina. By contrast with other countries, he says the Mexican peso has been stable because it is linked to the US dollar.

 

ECONOMIES NEED BETTER MANAGEMENT

Certain emerging market economies will need to be managed more carefully and with much better discipline in future and these countries will also need to retain strong controls over public spending.

 

It was no coincidence that Melconian then added that Argentina is unsustainable at present, although he says he nevertheless remains optimistic for its future welfare with certain changes that are expected in future.

 

Melconian says this Argentine government has a knack for not fixing things… yet still not letting them get totally out of hand.

 

 

Argentina does not want to go down the Venezuela road, he said, especially as it is struggling to retain the support of 10% to 15% of the people that still support it to stop the government from crashing. But Melconian says he doesn’t believe there will actually be a crash, since this Argentinean government has a knack for not fixing things… yet still not letting them get totally out of hand.

 

The fiscal deficit is the priority to be addressed in Argentina, he says, because when countries lose their reserves it is dangerous. He added: “The Argentine government continues to make mistakes. They are trying to defend the reserves to avoid utter collapse, but they are not going to fix the economy.”

 

FALLING RESERVES – A BAD IDEA

He said the decision to allow reserves to fall has been responsible for currency devaluations and the infamous 20% crash dive in January. Worse still, Argentina will probably have to devalue the currency again and while the government might think it is fixing the problem, the rest of the world doesn’t agree.

 

Melconian pulls no punches when he says that the present Argentinean government ‘has destroyed the value of the Argentine currency’. He added: “Argentina doesn’t have much capital left… $54bn is what is left and this is why Argentina has a restriction on importing… because the central bank are keeping track of what is happening on a daily basis. It is going to take a while for exports to go up again…”

 

Right now, he says the Argentinean government doesn’t have any credit as it tries to manage $10bn worth of debt. It now seems to be holding out hopes for a fresh loan from the Club of Paris to ‘hopefully place an Argentinean bond at 10%…’ he said. However, he describes the interest rates charged by the group of countries who belong to this club as ‘a type of punishment’. He says a picture of ‘recession and inflation’ awaits the new Argentinean government, whoever that may turn out to be.

 

By contrast, he says there is also an uncertain scenario in Brazil, with President Dilma Rousseff (right) not 100% certain to win another term later this year [she assumed office in January 2011, succeeding Luiz Inácio Lula da Silva-Ed]

 

 

Melconian says Brazil currently has $500bn-worth of exports and is at an extraordinary crossroads…

 

 

Melconian said Dilma must move forward, as there has been a big drop in the popularity of her Workers Party in the polls due to economic challenges. There is also low growth in Brazil and ‘an annoying 6% inflation rate’, so the analyst says that it remains to be seen what will happen next in Brazil.

 

BRAZIL STILL IMPORTING MORE…

He says that after 10 years and despite inflation, Brazil is exporting less and importing more. He says Brazil currently has $500bn-worth of exports and is at an extraordinary crossroads, along with strong and direct foreign investment supporting the economy.

 

Having said that, Brazil’s fiscal situation has deteriorated with some very expensive foreign debt. Melconian believes Brazil needs to urgently identify what the critical elements are that the country needs in the next two years to make the transition from an economy ‘in adolescence to adulthood’.

 

By contrast, he says that Mexico has a new government which he hopes will deliver both stability and commercial integration: “We need to deregulate our monopolies and this is very difficult. The new president [Enrique Peña Nieto – since December 2012, right] knows that there must be a very important transition in business relationships.”

 

Melconian said fiscal reform with more privatisation could be one positive road for Mexico, along with transparency which helps to keep corruption down.

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