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Country Forecast

Latin America Regional overview

June 2014

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Latin America: Regional overview 1

Country Forecast June 2014 www.eiu.com © The Economist Intelligence Unit Limited 2014

Contents

2 Fact sheet

3 Summary

5 Boost logistics to support competitiveness in Latin America 5 Summary 5 Logistics & competitiveness 6 Key bottlenecks in logistics 7 Short-, medium- & long-term solutions 8 References

9 Political outlook 12 Election watch 15 International relations

19 Economic forecast 19 Global outlook 22 Latin America

33 Business environment rankings

37 Data summary 37 Latin America and the Caribbean 38 Expanded Mercosur 39 Andean Community 40 Central America

41 Guide to the business rankings model

42 List of indicators in the business rankings model

2 Latin America: Regional overview


Fact sheet Latin America 2013 Historical averages (%) 2009-13Population (m) 593 Population growth 1.2Population growth (%) 1.1 Real GDP growth 2.8

GDP (US$ bn; at market exchange rates) 5,942 Real domestic demand growth 3.3GDP growth (%) 2.5 Inflation 7.4

GDP per head (US$; at market exchange rates) 10,015 Current-account balance/GDP -1.5GDP per head (US$; at purchasing power parity) 13,435 FDI inflows/GDP 1.9Inflation (av; %) 7.8 Debt/exports of goods & services 103.9

Background: Military rule and populist economic policies created instability in Latin America for much of the second half of the 20th century. A debt crisis that started in 1982 threw the region into recession and triggered political changes as military governments fell and economic policies became more market-oriented. The region is now much more stable, but sub-par government efficiency remains a cause for concern, as do episodes of social unrest linked to natural resources, particularly in the Andes and Central America, and to demands for better services by a more assertive expanding middle class. High crime rates and drug-related violence plague many countries, most notably Mexico, Central America and the Caribbean. Political structure: Except for Cuba, all countries have democratically elected governments, most with strong presidencies. There is little risk of a return to military rule, but confidence in institutions remains weak, reflecting poor governance standards, as well as persistently large income disparities and entrenched poverty. Meanwhile, political fragmentation has created obstacles to governability and legislative effectiveness in many countries in the region. Policy issues: Trade and investment regimes were liberalised across the region in the 1980s and 1990s. Many countries have also adopted floating exchange-rate regimes, in some cases backed by an inflation-targeting framework. Reforms in the past two decades have reduced fiscal and external vulnerabilities (although tax collection remains low and the external financing requirement relatively high), lowered inflation and engendered much greater macroeconomic stability. The continued predominance of primary commodities in the region�s export basket has supported GDP growth rates in recent years, on the back of high world prices in the past decade, and also helped the region to build up an abundant cushion of foreign-exchange reserves (estimated at US$830.2bn in 2013). The commodities boom and unprecedented international liquidity have exacerbated currency appreciation in recent years, undermining the competitiveness of the manufacturing sector and prompting the adoption of protectionist measures to shield domestic industry. The tapering of the latest quantitative easing programme of the Federal Reserve (the US central bank) will weaken currencies in the region but The Economist Intelligence Unit expects its impact to be cyclical. Many countries in the region, particularly the smallest, are dependent on remittances from emigrant workers, mainly in the US and Europe. Low skill levels are a persistent constraint. Taxation: Most regional tax systems rely heavily on indirect taxes and royalties from minerals extraction. Efforts to raise generally low levels of tax revenue (around 21% of GDP, compared with about 35% of GDP in the OECD) are often thwarted by a culture of tax evasion and weak institutional capacity, coupled with widespread informality. Foreign trade: The region has become more open. Although trade diversification has increased in recent years, the EU and the US remain the main export markets for the region as a whole. China is a growing market for raw materials producers, accounting for 16% of the region�s exports and for 30.1% of its imports in 2013. Mexico�s maquila (offshore assembly for re-export) industry accounts for about 40% of regional trade.

Leading markets 2013 % of total Leading suppliers 2013 % of totalUS 64.7 US 39.7

China 16.0 China 30.1EU 15.6 EU 23.4

Japan 3.6 Japan 6.8



Summary

In his article, Sebastián Nieto-Parra from the OECD Development Centre discusses the importance of improving logistics to foster competitiveness and productivity in Latin America, and the challenges involved in doing so.

Despite progress in consolidating political stability and strengthening the rule of law, challenges to the political outlook remain, and include the functioning of government, the strength of democratic institutions, governance standards and corruption. Moreover, continued high poverty rates and widespread income disparities continue to fuel frustration among the most vulnerable segments of the population. Drug- and gang-related crime and violence are high and remain a major hindrance to businesses and citizens across the region. Dissatisfaction over the quality of governance and public services continues to trigger social unrest across the region, with negative implications for political stability. Significant progress on structural reforms needed to enhance productivity is unlikely in 2014-18, given fragmented legislatures and weak appetite for reform.

Latin America continues to struggle to emerge from a period of below-average growth. Subdued growth in Mexico and Brazil, and outright contractions in Argentina and Venezuela, will keep regional growth depressed at 2.3% this year, down from 2.5% in 2013 (and far below post-crisis highs of over 5% in 2010-11). Constraints to growth have been varied; in some countries, a less supportive commodity price environment has exacerbated cyclical slowdowns; in a few outliers, including Argentina and Venezuela, policy mismanagement over several years is weighing heavily on the outlook for 2014. Elsewhere, domestic supply constraints have become problematic, with tight labour markets and infrastructure shortcomings reducing potential growth rates, while adding to inflationary pressures and producing growing current-account deficits. The Economist Intelligence Unit expects only a gradual pick-up in growth to an average of 3.6% in 2015-18 (well below pre-2009 rates of expansion).

Only four countries in the region will boost their business environment rankings in 2014-18; with one remaining stable and seven losing ground. Although most countries in the region will make progress, this will not be fast enough to catch up with other emerging markets. Latin America will register a particularly striking gap compared with Eastern Europe and Asia.

Key indicators 2013 2014 2015 2016 2017 2018GDP growth (% real change) 2.5 2.3 3.2 3.7 3.7 3.7Consumer prices (av) 7.8 10.3 8.4 7.3 6.9 6.3

Current-account balance (US$bn) -146.1 -143.0 -154.1 -161.2 -166.2 -174.1Current-account balance (% of GDP) -2.5 -2.4 -2.4 -2.4 -2.3 -2.3

External financing requirement (US$ bn) -306.2 -290.0 -311.2 -323.3 -337.2 -352.1

FDI inflows (US$ bn) 182.2 163.1 178.0 189.3 198.6 207.1FDI inflows (% of GDP) 3.1 2.7 2.7 2.8 2.8 2.7

Editors: Irene Mia (editor); Fiona Mackie (consulting editor) Editorial closing date: June 16th 2014 All queries: Tel: (44.20) 7576 8000 E-mail: [email protected] Next report: To request the latest schedule, e-mail [email protected]

Economic outlook

Business environmentrankings

Logistics and competitivenessin Latin America

Political outlook



Basic data, 2013

Population (m) GDP (US$ bn) Per head

(US$)GDP at PPP

(US$ bn)Per head

(PPP; US$)GDP growth (% change)

Inflation (av; %)

Current-account balance

(% of GDP)Argentina 42 614 14,729 879 21,106 3.0 20.7 -0.7

Bolivia 11 30 2,837 65 6,114 6.8 5.7 3.4Brazil 201 2,242 11,154 2,424 12,057 2.3 6.2 -3.6

Colombia 49 378 7,728 526 10,759 4.3 2.0 -3.4Chile 18 277 15,779 334 19,027 4.1 1.9 -3.4Costa Rica 5 50 10,148 59 12,155 3.5 5.2 -5.1

Cuba 11 66 5,865 130 11,597 2.7 6.0 -1.6Dominican Republic 10 60 6,087 122 12,386 4.1 4.8 -4.3

Ecuador 15 94 6,207 171 11,308 4.5 2.7 -1.3El Salvador 6 24 3,863 44 6,980 1.7 0.8 -6.5Guatemala 13 54 4,039 115 8,636 3.7 4.3 -2.8

Honduras 8 19 2,314 35 4,266 2.6 5.2 -9.7Jamaica 3 14 5,290 13 4,944 0.2 9.3 -9.9

Mexico 116 1,259 10,827 2,091 17,986 1.3 3.8 -1.8Nicaragua 7 11 1,584 23 3,284 4.6 7.1 -13.9

Peru 31 207 6,626 344 11,043 5.0 2.8 -4.9Paraguay 7 29 4,240 47 6,888 14.4 2.7 3.8Panama 2 41 23,834 80 47,104 8.4 4.0 -11.8

Trinidad & Tobago 1 27 20,408 18 13,385 1.5 5.2 7.5Uruguay 3 56 16,585 57 16,772 4.8 8.6 -5.5

Venezuela 30 358 11,942 409 13,668 1.3 40.6 3.5Regional totals 593 5,942 10,015 7,971 13,435 2.5 7.8 -2.5

Latin America and the Caribbean: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Cuba, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, Trinidad and Tobago, Uruguay and Venezuela

Latin America 12: Argentina, Brazil, Chile, Colombia, Costa Rica, Cuba, Dominican Republic, Ecuador, El Salvador, Mexico, Peru and Venezuela

Mercado Común del Sur (Mercosur, the Southern Cone customs union): Argentina, Brazil, Paraguay, Uruguay and Venezuela

Comunidad Andina (CAN, the Andean Community): Bolivia, Colombia, Ecuador and Peru

Central America: Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama

Caribbean: Cuba, Dominican Republic, Jamaica, and Trinidad and Tobago



Boost logistics to support competitiveness in Latin America Sebastián Nieto-Parra, Economist, Development Centre, OECD

This article presents the main factors behind the logistics gap in Latin America in comparison with other emerging and OECD economies, and presents a series of policies to improve logistics performance in order to foster growth and competitiveness in Latin America.

Better logistics strengthen domestic and foreign trade, and play an important role in attracting investment and creating employment in logistics-intensive sectors. Fundamentally, efficient logistics ensure good transport links and reduce transaction costs at large within the economy. In addition, they promote integration into international trade, helping to boost exports, reduce import costs, and facilitate entry into global value chains.

Furthermore, logistics performance is also linked to enhanced levels of productivity as well as export sophistication, both of which are critical for facilitating structural change. After controlling for other variables affecting economic development, there is a significant association between improved logistics performance on the one hand and productivity gains and sophistication of exports on the other. More specifically, improvements in the logistics performance in Latin America, bringing the region into line with other emerging economies, would increase its labour productivity by about 35%. For instance, this would be the productivity gain for Uruguay if it were to achieve the same level of logistics performance as Taiwan. Colombia would achieve the same gain if it were to raise its logistics performance to the same level as Malaysia.

Logistics performance is particularly important for sectors of the economy that are highly dependent on intermediate inputs, time-sensitive in nature, or in which transport and logistics costs account for a considerable share of product value. When measuring logistics intensity in each economic sector based on logistics costs or time-sensitivity, Latin America�s production structure is on average more than three times more sensitive to logistics performance than that of the OECD countries. This result is driven by the region�s specialisation pattern, with a high proportion of logistics-intensive natural resources as well as fresh agricultural products and garments, which are time-sensitive. A better logistics performance would therefore not only help to further diversify Latin America�s economies, but would also contribute to boosting competitiveness of Latin America�s traditional exports.

Summary

Logistics and competitiveness



Time-sensitive, logistics-intensive exports(% of total exports)

Source: OECD/ECLAC/CAF (2013) based on UN COMTRADE.

0

10

20

30

40

50

60

70

80

90

100Time-sensitiveLogistics-intensive

OECDLAC

Mexic

o

Uruguay

Colom

bia

Jamaic

a

Ecuador

Dom R

ep.

Bolivia

El Salv

adorPeru

Chile

Costa R

ica

Brazi

l

Argentin

a

Belize

Paraguay

Panama

Guatem

ala

Nicara

gua

Note: Logistics-intensive sectors include mining, forestry and logging, wood manufacturing, paper publishing and printing.Time-sensitive sectors include agriculture, fisheries, food and drink manufacturing, clothing and horticulture.Latin America and the Caribbean (LAC) consists of 18 countries.

Latin America still lags behind OECD economies in terms of its logistics performance. This difference is particularly clear for the region as a whole, as well as for the seven largest Latin American economies. Moreover, although all countries in the World Bank�s Logistics Performance Index lag well behind the OECD country with the best score, some countries (Haiti, Cuba, Paraguay, Venezuela, Honduras, El Salvador, Bolivia and the Dominican Republic) have a differential 50-100% greater than that of Chile, the region�s leading performer.

The region�s logistics gap stems mainly from factors in which public policy plays a vital role. The largest gap is for infrastructure, followed by customs and then logistics services. The largest infrastructure gap is in the transport sector, notably in roads, where supply and quality remain below those typical of middle-income countries. In addition, the limited availability of co-modal transport options in Latin America contributes to elevated logistics and environmental costs. The strong preference for road transport over other modes of transport affects complementarities among modes of transport in the region. The concentration of road transport in Latin America is 15 times greater than in the US. If Brazil were to double its number of multimodal transport hubs from 250 to 500, storage costs and total stock would be reduced by up to US$1bn a year*.

In addition, the regulatory and institutional weakness of concessions in Latin America has caused continuous renegotiations, without necessarily lowering logistics costs. Fifty of the 61 highway concessions signed up until 2010 in Colombia, Chile and Peru have been renegotiated at least once, resulting in more than 540 renegotiations. The first of these took place less than three years after the concession was granted. The situation in Colombia is particularly striking; 21 concessions have been renegotiated a total of more than 400 times, costing almost three times the initial cost of the concessions.

* Guasch, 2011.

Key bottlenecks in logistics



Additional cost versus initial value of the contract(value of initial contract and additional costs)

Source: Bitran et al. (2013).Note: The x-axis indicates the year in which the concession contract was initially signed.

0

10

20

30

40

50

60

70

80

90

100Additional costValue of initial contract

20

10

20

09

20

07

20

05

20

03

20

10

20

07

20

06

20

04

20

02

20

01

19

99

19

97

19

96

19

95

19

94

20

04

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19

99

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93

Chile Colombia Peru

Most countries in the region are also seen to have serious deficiencies in their customs and goods-export procedures. According to interviews with companies, customs and trade regulations are a major obstacle to conducting business. This is particularly evident in certain countries, such as Argentina, Brazil and Venezuela. In general, while in OECD countries it takes around four days to complete customs procedures for direct exports, in some Latin American countries it takes more than ten days.

Transport and logistics costs are substantially higher than tariff costs in Latin America. Average freight costs for trade between the US and all its partners are less than double the tariff costs, but if only its Latin American partners are considered, the ratio rises to almost 9:1. Thus, while some countries in the region have made considerable efforts in opening up to trade, similar or greater efforts need to be invested reducing logistics costs.

Several policies are needed to improve both �soft� and �hard� aspects of logistics. Because eliminating the gap for hard components such as transport infrastructure cannot be achieved in the short run, it is important to implement policies that reduce transport costs of goods and services using existing infrastructures.

To close the transport-infrastructure gap, greater investment in the sector should be accompanied by improvements to the institutional framework. Subnational and national coherence and co-ordination among stakeholders are also necessary to improve the efficiency of the transport sector. Prioritisation and planning need to be improved during the transport policymaking phase. During this phase technical capacities for designing suitable projects and a framework for policy implementation tend to be low*. Exploiting the benefits of public�private partnerships (PPPs) requires developing a strong capacity to assess, tender and manage concession contracts. A value-for-money assessment helps to determine which mode of financing is most appropriate for infrastructure works. Recently, some Latin American countries, including Colombia, El Salvador, Honduras, Mexico and Uruguay, have improved legislation for PPPs, but the current system can still be improved to reduce the possibility of future renegotiations and promote effective investment in infrastructure.

* See Nieto-Parra, Olivera and Tibocha, 2013 for the case of Colombia.

Short-, medium- and long-term solutions



Maximising the benefits from the current stock of infrastructure depends on the provision of �soft� aspects such as modern storage facilities, efficient customs and certification procedures, and the use of information and communication technologies for logistics, as well as the promotion of competition in the transport sector. In particular, policies are needed to streamline technical and administrative procedures by reducing red tape for imports and exports. For example, some countries in the region, including Chile, Colombia, Costa Rica, the Dominican Republic, Mexico, Panama and Peru, are operating single-window facilities for foreign trade. Also, it is essential to implement technology that enables better tracking and performance in the movement of goods. These elements can be used to encourage efficient use of available infrastructure and thus minimise logistics costs.

Bitran, E., Nieto-Parra, S. and Robledo, J. S., Opening the black box of contract renegotiations: An analysis of road concessions in Chile, Colombia and Peru, OECD Development Centre Working Papers, No. 317, OECD Publishing, Paris. 2013

Guasch, J. L., Logistics as a driver for competitiveness in Latin America and the Caribbean, IDB Discussion Paper, No. IDB-DP-193, Capital Markets and Financial Institutions Division, Inter-American Development Bank, Washington DC, 2011

Nieto-Parra, S., Olivera, M. and Tibocha, A., The politics of transport infrastructure policies in Colombia, OECD Development Centre Working Papers, No. 316, OECD Publishing, Paris, 2013

OECD/ECLAC/CAF, Latin American Economic Outlook 2014, Logistics and Competitiveness for Development, OECD Publishing, Paris, 2013

OECD/WTO, Aid for Trade and Value Chains in Transport and Logistics, Aid for Trade and Value Chains Sector Studies OECD/WTO, 2013

Rodrigue, J.-P., The benefits of logistics investments: Opportunities for Latin America and the Caribbean, Technical Notes, IDB-TN-395, Department of Infrastructure and Environment, Inter-American Development Bank, Washington DC, 2012

World Economic Forum, Bain and World Bank, Enabling Trade Valuing Growth Opportunities, World Economic Forum, Geneva, 2013

References



Political outlook In the past two decades, Latin America has made significant strides towards political and macroeconomic stability after the recurring crises of the 1980s and 1990s. Fairly solid GDP growth rates in the past few years (with the exception of 2009, when the region as a whole contracted by 1.5%), together with increases in minimum wages, targeted social policies for the most vulnerable segments of the population (notably conditional cash transfer programmes geared toward human capital development, which are currently benefiting 21% of the regional population) and low unemployment rates (the regional average was 6.2% in 2013) have helped to reduce income disparity and lift more and more people out of poverty. This has gone hand-in-hand with an important expansion of the middle class in the region. The latter, according to the World Bank, grew in size by 50% in 2003-09, from around 100m people to 150m�which is more than 25% of Latin America�s total population. Moreover, there has been a noticeable improvement in income mobility within generations, with more than 40% of the region�s population moving up in social class over the past 15 years. Despite this progress, income inequality remains high, with the poorest and wealthiest income quintiles accounting for 5% and 47% respectively of total income in the region in 2012. Moreover, according to the OECD, one-third of Latin Americans still live below the poverty line, and two-thirds of Latin American countries rank among the most unequal in the world.

Greater economic stability has been accompanied by progress in strengthening the institutional environment in most countries, with the establishment of democratic regimes almost everywhere in the region (Cuba being the notable exception) and reduced interference by the armed forces in policymaking. However, government inefficiency and lax public governance remain major problems in many countries. These, together with continued high poverty rates, and regional and income disparities, are fuelling frustration and social unrest in the region. Protests related to perceived corruption and failures to provide basic public services have periodically erupted in countries such as Brazil, Chile, Peru, Venezuela and Colombia over the course of the last year or so.

Meanwhile, the investment boom in natural resources in most Andean countries has been accompanied by rising social conflicts over their control and use, as well as a backlash against mining activities and foreign investors� involvement. Controversies stem from the concerns of the rural poor and indigenous communities over how extractive projects will affect their livelihoods and the environment (in particular access to water for agriculture), and how the proceeds from the development of natural resources will be shared. Governments have made some efforts to meet protesters� demands, and there has been a tendency to take a more conciliatory approach with local communities unhappy about mining projects. Nevertheless, The Economist Intelligence Unit expects the risk of social unrest to remain high in the region.

Risks are particularly elevated in Venezuela, with anti-government protests having entered their fourth month in May, often turning violent (with 2,800 people arrested, more than 40 killed and almost 900 injured as of mid-May). Talks between the government of the president, Nicolás Maduro, and moderate

Four months of protest in Venezuela and no solution in sight



leaders of the opposition Mesa de la Unidad Democrática (MUD) alliance, which began on April 10th, were suspended in May by the opposition, in view of its increasing frustration at the lack of progress. So far, a date for fresh talks has not been set, despite mediation efforts by the foreign ministers of Brazil, Colombia and Ecuador, who left the country at the end of May. As the protests have lost much of their initial intensity, Mr Maduro has little to gain from conceding ground to the opposition in negotiations. For its part, the opposition has become increasingly divided over the best strategy to deal with the government, what it should demand from the authorities and how long it should engage in discussions in the absence of any progress. Given that the underlying tensions between the government and opposition remain entirely unresolved, the risk of further social unrest remains high. This is particularly true in the light of the recent sharp deterioration of the economy, with worsening consumer shortages and rampant inflation likely to fuel public frustration with the government. We continue to expect the Maduro administration to remain in power in the short term. Medium-term risks are higher and will depend in large part on the extent to which the economy deteriorates, but�assuming that the government avoids a deep economic crisis and default�we believe that Mr Maduro will remain in power until the next presidential election in 2018.

There have been renewed protests in Brazil by small groups of activists over the high costs of staging the FIFA World Cup (estimated at around US$11bn, the most expensive World Cup to date) as well as other, unrelated strikes by diverse categories of workers, including teachers and bus drivers, in the weeks leading up to the football tournament, which kicked off on June 12th. These are likely to continue, given the local (and global) media attention that the event will attract and the leverage that this provides demonstrators. Some protests have turned violent, which has caused alarm among FIFA officials about the ability of Brazilian authorities to ensure a trouble-free event. Although it is not our baseline scenario�we expect demonstrations to remain on a smaller scale than those that swept the country a year ago, when millions of Brazilians took to the streets to protest over poor public services, corruption and the cost of staging the World Cup�major unrest, with widespread violence, would undermine not only the event, but Brazil�s image abroad and its attractiveness for investors and tourists in the medium to long term. It would also be a blow, ahead of the general election in October, to the government�s standing, which has already been blemished by its poor record in reactivating the economy, controlling stubborn inflation and address demonstrators� demands.

According to the UN Office on Drugs and Crime (UNODC), Latin America is the most violent region in the world, with an average of 25 murders per 100,000 population in 2012, compared with a global average of 6.2 per 100,000. Honduras remains the most violent country in the world, with 90.4 homicides per 100,000 population, followed by Venezuela (53.7), Belize (44.7) and El Salvador (41.2). Colombia, Brazil and Mexico registered murder rates of 30.8, 25.2 and 21.5 per 100,000 population, respectively. Although murder rates in Brazil and Mexico seem to be contained (and, in the case of Mexico, have declined slightly from 2011), the two countries registered the highest number of homicides in the world (at more than 50,000 and 26,000, respectively) in 2012.

Brazil sees more unrest as the World Cup begins

Violence to remain a key shortcoming in the region's business environment



Central America and the Caribbean countries remain among the most violent in the world, with the partial exception of Nicaragua (which has a murder rate of 11.3 per 100,000 population) and a few small Caribbean countries. The Inter-American Development Bank estimates that the equivalent of 2% of the subregion�s GDP is spent each year on fighting and preventing crime. Drug-trafficking appears to have driven the upsurge in violence, with the flow of drugs through Central America having risen dramatically since 2006, when a stepped-up military offensive against drug cartels in Mexico displaced trafficking to neighbouring countries, notably Guatemala, El Salvador and Honduras. Some Mexican drug-trafficking organisations have moved many of their operations smuggling illegal narcotics into the US to Central America, using local gangs (maras), which were already responsible for much of the violent crime in these countries: gang-related violence was responsible for 30% of total homicides in Latin America in 2012, compared with 1% in Asia, Europe and Oceania.

After trying (unsuccessfully) to address violence by adopting hardline security policies based on military or joint military and police deployments, Central American governments have increasingly sought to boost crime-prevention measures, in addition to considering other approaches, including drug decriminalisation. Belize, El Salvador and Honduras have brokered truces between criminal gangs. This seems to have resulted in a decline in homicide rates. In El Salvador, for example, the murder rate fell from 69.9 to 41.2 in 2011-12. However, pervasive corruption within the public sector, including in law enforcement and the judicial system, and weak institutions remain obstacles to more notable improvements in the short term. Ineffective criminal-justice systems and poor enforcement practices result in lax upholding of the rule of law and in high levels of impunity, perpetuating violent behaviour. The identification and arrest of one or more suspects occurs in only 50% of cases in Latin America, compared with a global average of more than 60%, while only 24% of perpetrators are convicted in the region, compared with 48% globally. These institutional flaws, coupled with the lack of an effective global strategy to fight drug-trafficking and widespread availability of weapons on both sides of the US-Mexico border, will continue to prevent substantial progress in curbing violence in the region during the forecast period and beyond.

The adoption of structural reforms to reinforce the region�s competitiveneness (including fiscal, education, labour market and competition-enhancing reforms) will remain politically difficult, as many of its countries� governments lack congressional majorities or have only fragile majorities based on unstable coalitions. A particularly emblematic case is the regional giant, Brazil, whose GDP growth rate has been disappointing for the last three years, averaging just 2% in 2011-13 and forecast at 1.8% this year. Although the president, Dilma Rousseff, has a large congressional majority on paper, owing to the size of her ruling coalition, the extent of her unwieldy alliance has severely compromised her room for manoeuvre and has entrenched patronage in the political system during her term (which comes to an end this year). This has made enactment of the ambitious structural reforms needed to improve the country�s growth outlook unlikely before the end of her current term amid more pressing political challenges (including addressing social discontent over the quality of

Structural reforms delayed by political fragmentation



public services). Assuming that Ms Rousseff wins a second mandate in the October presidential elections (our baseline scenario), her diminished political capital and the continued unwieldy nature of Brazil�s coalition politics will continue to constrain her ability to achieve progress on structural reforms.

In Mexico, by contrast, numerous landmark structural reforms were signed into law by the government of the president, Enrique Peña Nieto of the Partido Revolucionario Institucional during its first year in office (2013), including education, energy and telecommunications reform. Although most of these are awaiting the adoption of the necessary secondary legislation (currently under discussion in an extraordinary session of Congress), full implementation would eliminate some of Mexico�s long-standing bottlenecks to growth and add 1-2 percentage points to annual GDP growth, pushing Mexico�s structural growth rate from current levels of under 3.5% to at least 4-5%. Although the legislative environment is likely to become increasingly confrontational as the 2015 mid-term elections approach�compared with last year, when cross-party co-operation, through the Pacto por México (Pact for Mexico, signed by the three main parties) enabled swift passage of the government�s reform agenda�we expect the pending secondary legislation to be approved by the end of the current congressional extraordinary session in late June.

Next elections Presidential Legislative2014 Uruguay Oct 2014 Oct 2014

Brazil Oct 2014 Oct 2014Haiti - Oct 2014

Bolivia Dec 2014 Dec 20142015-18 El Salvador - Mar 2015

Suriname - May 2015Mexico - Jul 2015

Trinidad & Tobago 2015 Aug 2015Guatemala Sep 2015 Sep 2015Venezuela - Sep 2015

Argentina Oct 2015 Oct 2015Haiti 2015 -

Peru Apr 2016 Apr 2016Dominican Republic May 2016 May 2016

Puerto Rico - Jun 2016Nicaragua Nov 2016 Dec 2016Jamaica Dec 2016 Dec 2016

Guyana 2016 2016Ecuador Feb 2017 Feb 2017

Belize - Mar 2017Chile Nov 2017 Nov 2017Honduras Nov 2017 Nov 2017

Costa Rica Feb 2018 Feb 2018Paraguay Apr 2018 Apr 2018

Mexico Jul 2018 -Venezuela Dec 2018 -

Election watch



The electoral calendar has been busy. The past quarter has seen a presidential run-off election in Costa Rica in April, a presidential election in Panama in May, and a first-round presidential vote and a second-round run-off in Colombia in May and June, respectively. The rest of the year will be equally full, with general elections scheduled in Uruguay and Brazil (both in October) and Bolivia (December), and with legislative elections due to take place in Haiti (in October), two years behind schedule.

In Costa Rica, Luis Guillermo Solís of the centre-left Partido Acción Ciudadana (PAC) won a landslide victory in the April 6th presidential run-off, following the unexpected withdrawal from the race of his rival, Johnny Araya of the ruling Partido Liberación Nacional (PLN). Mr Solís is the first head of state since 1949 not to hail from either of the country�s two traditional parties, the PLN or the Partido Unidad Social Cristiana. Although the president personally secured a solid mandate, the new ruling party will be hampered by the fact that it managed to win just 12 out of 57 seats in the Legislative Assembly, the lowest total of any party in power in Costa Rican history (and fewer than the PLN, which has 18 seats). This will require the PAC to build and maintain alliances with the opposition in order to pass its agenda unhindered and avoid the legislative gridlock that has characterised the past few administrations. The PAC victory will help to breathe fresh life into the system, given dissatisfaction with the PLN, but discontent could rise again if the PAC fails to break the legislative deadlock. So far, Mr Solís has maintained that his government will take a gradualist approach. He faces a range of challenges, including a troubled fiscal outlook (following repeated failures by the two previous administrations to pass a comprehensive tax reform), the imminent closure of the US firm Intel�s microprocessor assembly plant (an important driver of economic growth), little public-private co-operation on infrastructure projects and rising crime levels.

In Panama, Juan Carlos Varela, leader of the centre-right opposition Partido Panameñista (PP), secured a surprise victory in the presidential election on May 4th, winning by a margin of more than 7 percentage opints. Opinion polls had long pointed to a three-horse race, with Mr Varela mostly trailing in third place. However, Mr Varela�s aggressive campaign against José Domingo Arias of the ruling Cambio Democrático party, in which he equated voting for the latter with re-electing the administration, proved effective. Mr Varela had also been subject to concerted personal attacks and smears by the ruling party, and this may well have helped him to win last-minute support from the country�s many undecided voters (more than 15% of the electorate). Mr Varela lacks a majority in Congress and will need to construct some sort of voting alliance, most probably with members of the opposition centre-left Partido Revolucionario Democrático, to implement his campaign pledges. These include reversing controversial reforms approved by the outgoing administration of Ricardo Martinelli, such as the appointment of several allied officials to key governance oversight posts for several years beyond the end of his own term of office. Much will depend on the shape that Mr Varela�s cabinet takes, and on whether his administration will be one of unity. Given Mr Varela�s weak position in Congress, his honeymoon period may not last very long. Nevertheless, we believe that current policies, including efforts to strengthen Panama�s role as a regional transportation and business hub, are unlikely to change much.

A challenging outlook for the PAC in Costa Rica

The centre-right PP achieves a surprise victory in Panama



Following a highly polarised electoral contest in Colombia, the president, Juan Manuel Santos, won a new four-year term in the June 15th presidential run-off election, obtaining 7.8m votes (51% of the total) against 6.9m (45%) for Óscar Iván Zuluaga, the nominee of the right-wing Centro Democrático (CD) party. The president owes his victory to several factors, principally the success of the ruling Unidad Nacional (UN) coalition in increasing voter participation compared with the May 25th first-round election in Bogotá (the capital) and key regions such as the Atlantic coast, where Mr Santos swept the board. The alliances built by the president with left-wing leaders, who had generally opposed the government but who supported his efforts to reach a peace agreement with the Fuerzas Armadas Revolucionarias de Colombia guerrillas, also helped. Peace negotiations played a key role in Mr Santos�s first term in office, but will become the centrepiece of his second administration, with an increased push to reach a final deal with leftist guerrillas within the next year, so that Congress can start to address the reforms needed to implement it.

Mr Santos�s coalition will control only around 60% of both chambers in the 2014-18 legislative period, compared with 80% of the Senate (the upper house) and almost the entire House of Representatives (the lower house) in the past four years. This still constitutes a working majority, but could prove insufficient for the approval of contentious initiatives such as those stemming from a potential peace agreement. Mr Santos will therefore need to make alliances with smaller parties that tend to oppose the government, such as the centre-left Partido Verde. The task will be complicated by the presence of the CD and of its leader, former president Álvaro Uribe (2002-10). Overall, however, Mr Santos�s still comfortable position in Congress and the country�s relatively sturdy institutions will guarantee some degree of stability and policy continuity in 2014-18. Political tensions and social protests will not undo the significant progress made over the past decade, while a potential peace agreement could bring further institutional strengthening and social developments to some of Colombia�s poorest and more remote areas.

In Brazil, the president, Dilma Rousseff, has seen her early lead over her two main rivals in the polls narrow recently, in line with our long-standing view that she is unlikely to win outright in the first round of the presidential election on October 5th. According to a June opinion poll conducted by Datafolha, voting intentions for Ms Rousseff, of the Partido dos Trabalhadores (PT), stand at 34%. Voting intentions for the two main opposition candidates, Aécio Neves of the centrist Partido da Social Democracia Brasileira and Eduardo Campos of the centre-left Partido Socialista Brasileiro, stood at only 19% and 7% respectively, but the record high percentage of undecided voters and those who plan to cast a blank ballot (30%) points to continued uncertainty about the election outcome. Nevertheless, we still expect Ms Rousseff to win (in a second-round run-off, which would be held on October 26th), owing to support from voters from more than 14m households that benefit from the flagship conditional cash transfer Bolsa Familia programme (whose benefits were raised by an additional 10% in May). However, opinion polls indicate that there is a desire for a change of direction, giving Ms Rousseff�s rivals an opportunity to defeat her if they can convince enough voters that they would be able to improve the country. Even so, we consider that she would have to suffer further setbacks to lose the

Ms Rousseff expected to be re-elected in a run-off in Brazil

A victory for peace in Colombia



election. Ms Rousseff alone will have at least 50% of the official television campaign time, giving her a distinct advantage. Initially, Mr Neves and Mr Campos had been co-ordinating their attacks on the government�s economic record, but more recently they have drifted apart as they seek to differentiate themselves. That said, in the event of a run-off with Ms Rousseff, the runner-up (we currently believe that Mr Neves will come second in the first round) would seek the support of the third-placed candidate as part of an anti-PT front. If such a pact were to materialise, it could make for a closer result than opinion polls currently suggest.

In Uruguay, where attention is now focused on the October 26th general election, primary elections held on June 1st have confirmed the position of Tabaré Vázquez, a former president (2005-10) as favourite to secure the presidency. Mr Vázquez, of the ruling Frente Amplio (FA) coalition, won its nomination by a huge margin. There was little surprise in the nomination of Pedro Bordaberry as candidate for the right-wing Partido Colorado (known as the Colorados). More surprising, however, was the victory of Luis Lacalle Pou as candidate for the Partido Nacional (known as the Blancos). Mr Lacalle Pou, a young congressman (40) and son of a former president, has presented himself as the candidate of change and has rapidly gained substantial momentum.

The presidential race therefore seems all but certain to go to a second-round run-off, required if no candidate secures more than 50% of the vote. The FA is likely to change its campaign tactics somewhat to respond to Mr Lacalle Pou�s challenge. Mr Vázquez is 74 and the current president, José Mujica, 79. Mr Mujica�s wife, Lucía Topolansky (69), had, until the primary election, been seen as a strong contender for the vice-presidential nomination, but is also part of the FA old guard. As the FA attempts to respond to Mr Lacalle Pou�s youthful image, another coalition figure, Raúl Sendic (51, the former president of the government-run oil company, Ancap, and son of a well-known Tupamaro guerrilla leader), appears better placed to join Mr Vázquez on the FA ticket. Despite this change of tactic, a second-run run-off could still be close, especially if Mr Lacalle Pou were to garner the formal support of the Colorados. Nonetheless, opinion polls currently show the FA as having a solid lead over the Blancos, and we continue to base our forecasts on the assumption of a victory for Mr Vázquez, providing continuity for a policy framework that combines orthodox macroeconomic policy with an emphasis on social development. A Lacalle Pou government would probably be more socially conservative, while maintaining orthodox macroeconomic policies (and possibly tightening fiscal policy beyond our current forecasts) and continuing the FA�s popular social development programmes.

Periodic international and intra-regional disputes will continue in parts of the region. In a context of lukewarm global demand, market volatility and concern over export competitiveness, increasing trade protectionism in some countries will remain a source of diplomatic tensions, while sporadic episodes of nationalisation will continue to cause uncertainty over the environment for foreign direct investment (FDI) in some parts of Latin America. Diplomatic disputes will also continue to be triggered by efforts by beleaguered governments to deflect attention from criticism at home. On a more positive

International relations

The ruling FA's Tabaré Vázquez is the favourite to win Uruguay's presidency



note, Latin American countries will continue to strengthen intra-regional trade ties, with important trade liberalisation initiatives coming on stream, including the Alianza del Pacífico (Pacific Alliance), an ambitious trade and economic area including Chile, Colombia, Peru and Mexico, which is likely to expand to include Costa Rica, Panama and Guatemala in the short term, and which other countries in the region have expressed an interest in joining.

Assuming that the chavistas retain power in the forecast period, Venezuela will remain the greatest cause for concern. Its government will continue to use foreign policy to deflect attention from difficulties at home, but its political influence and appeal abroad are likely to wane without the charismatic personality of the late former president, Hugo Chávez (1999-2013), and amid spiralling domestic woes.

In focus: The Pacific Alliance�s overtures to Mercosur

The members of the Pacific Alliance (PA) agreed on May 30th (following a closed meeting of the foreign affairs ministers of Mexico, Chile, Colombia and Peru) to hold a round of ministerial talks with the Mercado Común del Sur (Mercosur, the Southern Cone customs union), its associates and other countries in Latin America. The initiative originated from Chile�s foreign minister, Heraldo Muñoz, in line with the greater focus on the Asia-Pacific region of that country�s new administration, led by Michelle Bachelet, and the need to involve Latin American countries besides the PA in the drive to develop relations with that region. It comes against a backdrop of increased interest in the PA on the part of Mercosur members in recent months, with Uruguay and Paraguay expressing a desire to join the bloc, and with Brazil declaring Mercosur�s aim of advancing trade integration with the PA through tariff reductions.

Divergent fortunes

Mercosur�originally established in 1991 between Argentina, Brazil, Paraguay and Uruguay, with Venezuela joining in 2012, and Bolivia in the process of ratifying its membership�has seemed to lose momentum amid protectionist tendencies and the sluggish economic growth of most of its members in recent years. The PA, by contrast, has gone from strength to strength since its creation in 2012, boosted by a common open trade and pro-market stance. At its last meeting in February, a comprehensive landmark agreement was signed, providing for the elimination of trade and non-trade barriers on 92% of the goods traded within the PA bloc and the adoption of measures to improve the mobility of capital and individuals. The PA�s considerable economic weight�with a combined population of more than 200m and GDP amounting to US$2trn, the bloc accounts for just under 40% of Latin American GDP and of foreign trade and inward foreign investment flows to the region�has attracted much attention, with 30 observer states and with Costa Rica in the process of joining the original members (Chile, Mexico, Peru and Colombia). The PA is forecast to post economic growth of more than 4% on average this year, compared with a dismal 1.3% on average for the Mercosur members.

Progress may take time

Although no additional details have been provided on the form that the initiative will take, or on its timing, the opening up of the PA to Mercosur would, in theory, be an important development, as trade liberalisation across the two blocs could provide a substantial boost to regional trade and to export diversification towards more



value-added production. It is also indicative of Mercosur�s new-found desire to open up to other regions, as illustrated by its renewed efforts to conclude a free-trade agreement (FTA) with the EU, after years of impasse�with Brazil pushing to sign an agreement by the end of the year and with Argentina adopting an increasingly co-operative stance. However, given the very different trade stance of the two blocs, we do not expect any significant progress towards a bilateral FTA in the short term.

In Brazil, domestic policy will take precedence over foreign policy ahead of and beyond the October presidential election, given continued widespread social discontent and difficulties in reactivating the economy. Ms Rousseff�s attempts to lift Brazil�s standing on the global stage by gaining a permanent seat on an expanded UN Security Council and strengthening emerging markets� influence in global policymaking institutions, will therefore take a back seat. Ms Rousseff will meet the US vice-president, Joe Biden, when he visits Brazil during the World Cup, providing an opportunity for an improvement in bilateral ties, after a spat last year over US espionage in Brazil soured relations. The loss of trade preferences to the EU and poor prospects for multilateral trade liberalisation�despite the World Trade Organisation (WTO) deal in Indonesia last year�increases the importance of negotiating a free-trade agreement (FTA) between the EU and the Mercado Común del Sur (Mercosur, the Southern Cone customs union), but we consider a deal to be unlikely before the end of Ms Rousseff's current term.

Relations with the EU, one of the region�s main markets and sources of FDI, will remain important, with a continued focus on co-operation and trade liberalisation�an inter-regional association agreement was signed last June between the EU and the Sistema de Integración Centroamericana (the Central America Integration System). However, the EU�s weak growth prospects in the medium term (especially so in the case of Spain, which has traditionally been Latin America�s key trading and investment partner in the region), alongside the well-established nature of bilateral relations, mean that Europe is not likely to be among Latin America�s areas of focus, unlike the more dynamic non-traditional markets such as Asia and, to a lesser extent, Africa and the Middle East. The visit to the region in June 2013 by the Chinese president, Xi Jinping, his second official trip abroad following his inauguration in March of that year, illustrated China�s growing interest in Latin America, as well as its leadership�s assertiveness in searching for market opportunities and natural resources in what has traditionally been seen as the US�s backyard. We expect the recent deepening of relations with China (with which Latin American trade rose from US$3.9bn in 2000 to US$86bn in 2011) to continue, sustained by its interest in Latin America�s expanding domestic markets, investment opportunities and natural resources, and by the region�s interest in diversifying its trade and investment ties to less traditional partners.

Visits to the region in 2013-14 by the US president, Barack Obama, and vice-president have served to raise expectations that Latin America could become more prominent on the US foreign policy agenda during the second Obama administration. However, no firm plan to deepen economic links has emerged so far�with the exception of a �Look South� initiative, unveiled in January to encourage domestic companies to do business with Mexico and the US�s ten

Domestic politics overshadows Brazil's attempts to raise its global profiles

Immigration reform, trade and security to dominate US-Latin America relations

Traditional and newer trade and investment partners



other FTA partners in Latin America. Bilateral relations will continue to focus on trade promotion, security and anti-drug strategies, with few new initiatives. The main exception could be a comprehensive immigration reform, which, although essentially a domestic issue, will have implications for Latin American countries�an estimated 12m undocumented immigrants in the US are from Latin America (mostly from Mexico). A comprehensive immigration reform setting a path to citizenship for illegal immigrants gained US Senate approval in June 2013. In January Republican leaders in the US House of Representatives, who for years had stalled all reform efforts, signalled a new willingness to tackle the issue, by tentatively discussing a set of �principles� that could form the basis for legislation. Securing consensus among House Republican members on an actual legislative bill will not be easy and, rather than engage in an intra-party skirmish before the mid-term elections in November, House leaders may find it easier to delay the reforms until a less politically sensitive time. However, we believe that the reform is likely eventually to be approved in some form, not least because of the growing numbers and influence of Hispanic voters in the US. Nevertheless, the approved version is likely to be less ambitious than the Senate bill and to have even stricter security provisions.

On the trade front, we expect the US to concentrate on the Trans-Pacific Partnership (TPP, a proposed free-trade zone including the US, Australia, Brunei, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam), and on the negotiation of a free-trade area with the EU, despite its assurances that it will not relegate trade with Latin America to a subordinate role.

Mr Obama will probably wait until there is substantive political change in Cuba before supporting a meaningful thaw in bilateral relations (or a lifting of the trade embargo and travel ban for US citizens). However, we do not expect this to occur during his term, as a forthcoming leadership change is unlikely to bring with it a major overhaul of the centralised political system.



Economic forecast

2013 2014 2015 2016 2017 2018Real GDP growth (%) US 1.9 2.5 3.0 2.5 2.4 2.7

Japan 1.6 1.8 1.5 1.2 1.2 1.3Euro area -0.4 1.1 1.4 1.5 1.5 1.6World (market exchange rates) 2.1 2.9 2.9 2.8 2.8 2.9

World (PPP exchange rate) 2.9 3.4 3.8 3.9 3.9 4.0World trade growth (%)

Goods 2.7 4.6 5.0 5.3 5.4 5.5Consumer price inflation (%) US 1.5 1.9 2.2 2.3 2.3 2.5

Japan 0.4 2.3 1.8 1.7 1.5 1.6Euro area 1.4 0.8 1.3 1.5 1.6 1.7

Export price inflation Manufactures (US$) -3.1 0.0 0.9 1.8 1.9 1.6

Commodities World oil price (Brent; US$/b) 108.9 105.8 106.8 103.8 97.5 93.0Non-oil commodities -6.8 -1.9 0.6 0.8 0.6 2.3

Food, feedstuffs, beverages -7.4 -1.4 -4.1 -1.5 -0.7 2.1Industrial raw materials -5.9 -2.7 7.9 4.0 2.3 2.7

• This year will mark an important step in the recovery of advanced economies from the recession and the other shocks that have stunted global growth in recent years. The Economist Intelligence Unit is currently forecasting that the global economy will grow by 2.9% at market exchange rates, the best showing since 2010, supported by a synchronised upturn in the developed world. Many countries are also beginning to address structural problems, from Japan�where prices are steadily rising after years of deflation�to big emerging markets such as China and India, which are renewing structural reform programmes after years of complacency. Not all of these initiatives will pay full dividends in 2014, but they set the stage for a better performance during the remainder of the forecast period, with global growth expected to reach 4% at PPP exchange rates by 2018. Despite their recent woes, emerging markets should also benefit from the positive spillover effects of better growth in the advanced economies�the euro zone, the US and Japan are the three largest importing economies in the world, purchasing US$7.4trn in goods from their trading partners in 2011. On balance, faster growth in the advanced economies will support the expansion in the rest of the world, helping, in particular, to reverse some of the recent cyclical slowdown in emerging markets, and cushioning the decline in potential output growth in a number of these countries.

• The economic outlook for the US, Latin America's primary trading partner (accounting for 64.7% and 39.7% of total regional exports and imports respectively in 2013) continues to look fairly bright, despite the weather-induced weakness of the first quarter (which led us to reduce our full-year GDP growth forecast for 2014 to 2.5% from 3%). There remains a lingering fear that the US economic recovery may not last�improvements in 2010 and 2012 faded. The difference this time is that most of the fundamentals that support growth�job creation, reduced debt, consumer spending, business investment, housing and general

Global outlook



government outlays�should all, collectively, contribute to growth in 2014, a situation that did not exist during past, aborted recoveries. In particular, private consumption (which account for almost 70% of GDP) will power the economy in the remaining months of 2014, supported by stronger household spending (after these are nearing the end of the deleveraging cycle), solid job creation (the unemployment rate fell to 6.3% in April, the lowest level since early 2008) and interest rates near historical lows, despite the winding down of its very loose monetary policy by the Federal Reserve (the Fed, the US central bank).

• A tentative economic recovery is under way in the euro zone (which remains one of Latin America's top trade and investment partners, accounting for 15.6% and 23.4% of its exports and imports respectively in 2013), but the scale of this recovery should not be overstated. Although the bloc has expanded for four consecutive quarters�boosted by higher exports and investment�after six quarters in a row of contraction, it lost some momentum in the first quarter of 2014. Perhaps of greater concern is the bloc�s continued reliance on Germany and the lack of evidence that the recovery is broadening. Although Germany continued to power ahead in the first quarter, the rest of the euro zone lost momentum. Spain also recorded solid growth (0.4% quarter on quarter), but France stagnated and Italy contracted by 0.1%. The sluggishness of two of the three largest euro zone economies is a key obstacle to the recovery of aggregate growth across the bloc. Nevertheless, while the euro zone expansion, excluding Germany, will be vulnerable to setbacks, the recession is over and the recovery looks sustainable. We therefore reaffirm our forecast for 2014 euro zone growth of 1.1%.

• In China (a market which has become increasingly important for Latin America, absorbing 16% of the region's exports and providing 23.4% of its imports in 2013), economic growth continues to slow. The government has made no secret of its desire to clamp down on credit-fuelled growth, which has created overcapacity in China�s economy, leading to rising levels of debt and signs of stress among its banks. However, we do not expect a serious reduction in China�s rate of economic expansion: the economy grew by 7.4% in the first quarter of this year, and we expect growth of around 7.3% for full-year 2014, supported by improving conditions in the US and the euro zone. Although we believe that the government is right to squeeze some of the froth out of China's economy, there are limits as to how far it will let growth slip. In early March the authorities set a 2014 growth target of 7.5% and, although they will almost certainly tolerate a slightly lower figure, they are equally certain to provide enough stimulus to keep the growth rate from falling too far. Indeed, the government has announced a number of measures designed to stimulate economic activity, focused mainly on the construction of railways and social housing.

• Emerging markets remain vulnerable on a number of fronts, especially from the prospect of sudden capital outflows. Most of the major developing economies struggled in 2013, after the Fed signalled its intention to reverse its massive bond-buying programme, which had depressed interest rates on safe-haven US investments and pushed investment capital into riskier assets, many of which are in emerging markets. The prospect of less-liquid US monetary



policy has lifted US and European interest rates from their 2013 lows, altering the risk-reward ratio for investors and redirecting capital from emerging markets back to the advanced economies. This outflow of capital pushed many emerging-market stocks, bonds and currencies sharply lower at various points in 2013, and the volatility continued in early 2014. However, in recent months the pressure has largely abated. Lower rates in advanced economies mean less competition for investment capital that might otherwise flow to emerging markets�this is one reason why currency and capital markets in emerging economies have been relatively stable of late. Nonetheless, US monetary policy will gradually be tightened over the next 12-18 months, and this will inevitably push US interest rates higher, drawing some capital away from emerging markets. That is likely to cause renewed volatility in capital markets.

• Although the recent turmoil in emerging markets should not erupt into a full-blown crisis, the risk of this happening cannot be wholly discounted. The biggest danger is that investors, hurt by losses in some emerging markets, sour on the entire asset class. We have noted with concern that currencies in several otherwise stable emerging markets, such as South Korea and Poland, started to decline during the worst of the emerging-market sell-off in January. Past crises have shown how contagion can, through a chain reaction, spread to countries that should not be particularly vulnerable. Once asset prices begin to fall in weak economies, lenders and borrowers may need to replenish collateral on loans and other financial obligations, which forces them to sell good-quality assets to raise cash. This subsequent selling pushes down prices in other countries, including those that are not especially vulnerable, deepening the cycle of falling prices, margin calls and more asset sales. It is this process that could lead to a fully fledged emerging-markets crisis.

• Global commodity markets will weaken in 2014 as concerns about softening demand in China�the largest buyer of industrial raw materials�and substantial supply positions in many stable agricultural markets weigh on prices. In some cases the weak fundamental picture will lead investors and speculators to sell commodities, which will add to downward pressures on prices. A strong recovery in global oil supply in 2014-15 will act as a cap to higher prices, notwithstanding the potential for political risk to have an adverse effect on output in many politically unstable members of OPEC. In 2015 supply tightness emerging in some industrial markets and stronger global economic growth will be reflected in a slight rise in our World Commodity Forecast index, although prices in agricultural markets will remain on a downward trajectory.

• Our industrial raw materials (IRM) index will fall by close to 3% in 2014 as weakness in the aluminium, copper and rubber markets drags down the index. Base metal prices have diverged so far in 2014, with nickel and tin trending upwards, following the implementation of more stringent export regulations from an important supplier, Indonesia, while copper, a bellwether for industrial demand in China, has fallen substantially, owing partly to its use as collateral for loans in China. The Chinese government has introduced some stimulus measures that should help to put a floor under the price of some industrial metals, but oversupply, particularly in aluminium and copper, will offset the impact of still-growing demand. The pace of urbanisation in China and other



emerging economies, along with recoveries in the US housing and automotive markets, will sustain demand for metals in 2014-18 and, along with restrained capital expenditure by resources companies, will help to support prices above historic levels.

• Our food, feedstuffs and beverages (FFB) index will decline again in 2014, as the supply positions of major staples�wheat, rice and maize�remain above historic levels. However, some poor weather conditions in the US, a major producer of wheat, maize and soybeans, have helped prices to trend upwards from low levels at the end of 2013 and early 2014 (although they remain lower in year-on-year terms). Arabica coffee prices were up by 67% since the start of the year by mid-May, as dry conditions in Brazil, the world's largest coffee producer, have threatened the performance of the crop in what was already expected to be a seasonally "off", or lower-output, year. Notwithstanding the current price weakness, there is structural support for agricultural commodity prices in the form of ongoing population growth, urbanisation in the developing world (and less arable land), and the use of crops in biofuel production.

Key indicators 2013 2014 2015 2016 2017 2018GDP growth (% real change) 2.5 2.3 3.2 3.7 3.7 3.7

Consumer prices (av) 7.8 10.3 8.4 7.3 6.9 6.3Current-account balance (US$bn) -146.1 -143.0 -154.1 -161.2 -166.2 -174.1

Current-account balance (% of GDP) -2.5 -2.4 -2.4 -2.4 -2.3 -2.3External financing requirement

(US$ bn) -306.2 -290.0 -311.2 -323.3 -337.2 -352.1FDI inflows (US$ bn) 182.2 163.1 178.0 189.3 198.6 207.1

FDI inflows (% of GDP) 3.1 2.7 2.7 2.8 2.8 2.7

Latin America continues to struggle to emerge from a period of below-average growth. Subdued growth in Mexico and Brazil, coupled with outright contractions in Argentina and Venezuela, will keep regional growth depressed at 2.3% this year, down from 2.5% in 2013. This is well below post-crisis highs of over 5% in 2010-11. The constraints to growth in the region have been varied: in some countries there has been a lack of progress in efforts to reinforce competitiveness fundamentals, while in others a less-supportive commodity price environment has exacerbated cyclical slowdowns. In a few outliers, including Argentina and Venezuela, policy mismanagement over several years is weighing heavily on the economic outlook for 2014. Domestic supply constraints have also become extremely problematic, with tight labour markets and infrastructure shortcomings serving to reduce potential growth rates, while adding to inflationary pressures and producing growing current-account deficits. In this context, growth rates will only gradually pick up, even in the medium term, to an average of 3.6% in 2015-18 (well below pre-2009 rates of expansion).

Even this relatively modest forecast for growth is subject to downside risks. Challenging external conditions in the form of a steady weakening of growth in China, and a gradual shift to tighter monetary policy in the US and other developed economies, will test the resilience of Latin America's economies. Owing to a reduction of external and fiscal vulnerabilities in the past decade, Latin America will be on a relatively strong footing to weather the impact of

The medium-term growth outlook

Latin America



any global market volatility related to tighter developed country monetary policy. However, tighter global financing conditions that will result from an eventual end to quantitative easing (QE) and a rise in the Fed funds rate could hit financing of investment in the region in the medium term more dramatically than currently factored into our GDP forecasts. Another risk to our growth forecast stems from weaker than expected growth in China, which would further reduce commodities prices, with a negative impact on South American commodity exporters. Although we do not envisage a collapse in commodity prices as the Chinese economy slows, these economies will no longer be able to enjoy the cumulative annual gains in terms of trade experienced since 2003 (notwithstanding sporadic interruptions, such as during the 2008-09 global financial crisis), and economic growth will have to be driven more from productivity gains. In some countries, such as Mexico, where the administration of the president, Enrique Peña Nieto, has embarked on an ambitious programme of structural reform, the outlook for such productivity gains has improved. In other countries, including Brazil, a lack of political will has prevented progress in recent years and is expected to continue to be an obstacle to reform in the forecast period. This will continue to cloud the growth and investment outlook. Our forecasts for the region as a whole still assume a substantial pick-up in gross fixed investment from current lows (from 2.7% in 2013 to 6.2% in 2016-18). However, the outlook will vary dramatically by country, and businesses will look increasingly carefully at policies and the reform agenda across countries when selecting where to allocate their investments in future, given tighter international liquidity and the increased attractiveness of developed economies as investment destinations.

On a positive note, higher annual US growth rates and a moderate recovery in the euro zone in 2014-18 should prove supportive for the region as a whole. A stronger US performance would be of particular benefit to the likes of Mexico, given the close linkages across the US-Mexico industrial chain, and Central America. At the same time, a tapering of QE and eventual tightening of monetary policy in the US will help to reverse recent currency appreciation pressures in Latin America. This will provide some support to the region's manufacturing exports, which have been consistently losing competitiveness in recent years against a backdrop of strong currencies and competitiveness shortcomings.

We assume that, in response to tighter monetary policy in the US and (eventually) in other developed economies, most of the region's central banks will also tighten policy in the medium term. However, in the short term this shift will not be straightforward, as many countries grapple with weak domestic demand. Brazil was the first of the major economies in the region to shift to a tighter stance in April 2013, prompted by stubbornly high inflation and concerns over monetary policy credibility, in spite of still-sluggish growth. Successive increases since then have brought the benchmark Selic rate to 11%, and more tightening after the October general elections is possible, given that a convergence of inflation with the Banco Central do Brasil (BCB, the Central Bank) central target of 4.5% (with a 2-point tolerance range either way) is unlikely by that time. In Chile, in contrast, where inflationary expectations are well anchored in the target range, the focus remains on supporting growth with a more dovish stance and the possibility of further cuts in the short term. In



Mexico, the Banco de México (Banxico, the central bank) also surprised us and most analysts by cutting its monetary policy rate by 50 basis points in June to a historic low of 3%, amid continued concerns over the economy's weakness.

Peru and Panama will post the region's highest growth rates in 2014-18 (5.9%, and 5.7% respectively). Ecuador, Nicaragua and Paraguay will also post good performances, with growth rates at or above 4.5% in the forecast period. Venezuela, Jamaica and El Salvador will lag behind, with annual average growth rates of 1%, 1.9% and 2.1% respectively.

Selected Latin American countries average GDP growth rates, 2014-18(%)

Source: The Economist Intelligence Unit.

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Venezuela

El Salv

ador

Jamaica

Brazil

Trin

idad &

Tobago

Argentin

a

Honduras

Guatem

alaCuba

Mexico

Uruguay

Costa R

ica

Bolivia

Dom R

ep.Chile

Colom

bia

Paraguay

Nicara

gua

Ecuador

Panama

Peru

Although less favourable external conditions will weigh on domestic economic activity, leading to a period of slower growth in 2014-18 compared with the past decade (when annual GDP growth exceeded 6%), Peru will still post some of the strongest growth rates in Latin America. This will be supported by huge new infrastructure projects that are currently being tendered�such as new metro rail lines in the capital, Lima�which will gradually be implemented during the forecast period. Moreover, helped by the coming on stream of two mining mega-projects in the next two years�the Toromocho and Las Bambas copper mines�we expect GDP growth to accelerate gradually to a high of 5.8% in 2016, before losing some momentum in 2017-18. Under our baseline scenario, private consumption and investment will remain the key drivers of GDP growth. Investment in roads, utilities and airports will help to offset weaker foreign private investment in large mining projects, reflecting the easing of the commodity supercycle that led to huge investment in copper and other mines in the past two decades.

After expanding by 8.4% in 2013, Panama's economy will grow by 7% in 2014, still supported by large-scale investment projects. We expect GDP growth to soften to just over 5% from 2015, owing partly to post-election fiscal adjustments. Our medium- and longer-term forecasts assume that the stimulus effect of public construction will also fade, but that this will be partly offset by inward investment in services and manufacturing. Private consumption growth will remain firm into the medium term as the expansion of services and manufacturing supports employment and wages.

Chile and Colombia remain among the main investment hotspots in the region, and are forecast to post solid average GDP growth rates of 4.4% in the forecast period (2014-18). A high dependence on a small base of commodity exports leaves both countries exposed to external conditions. This introduces some

Peru, Panama and Ecuador to outperform regional average



downside risks to our medium-term forecasts. However, the two countries� strong macroeconomic fundamentals and continued focus on further improving the business environment, and promoting more inclusive growth to reduce inequality and encourage job creation will continue to enhance their attractiveness to investors. In Colombia the recent re-election of the president, Juan Manuel Santos, in a second-round run-off on June 15th should ensure economic policy continuity. In Chile the president, Michelle Bachelet, who took office in March, will face demands from leftist elements in her Nueva Mayoría coalition to steer a more radical policy course, but we expect that she will pursue broadly pragmatic and moderate policies, while increasing social and education spending.

In focus: Legislative hurdles to Michelle Bachelet's reform agenda

The president, Michelle Bachelet, appears to have made a convincing start on her comprehensive reform agenda. She promised when elected that she would introduce 50 reform bills in her first 100 days and, by the end of March (a couple of weeks after she had taken office), had submitted a major fiscal reform passage, which is now being debated in Congress. Owing to the fact that by law fiscal reforms require only a simple majority for passage, she is likely to see them approved soon. Indeed, on April 15th the finance committee of the Chamber of Deputies (the lower house) voted by a majority to move the project forward. In late April she also presented to Congress a bill to reform the country's electoral law, with the aim, among others, of eliminating the so-called binomial system, a legacy of the military dictatorship. There have been attempts to reform the law for more than two decades, but it appears that chances are better now than ever, because of Ms Bachelet's strong mandate and popularity. However, given the large majority of legislative votes needed for passage, this is not assured.

Tax reform easiest to achieve

As a result of Chile's peculiar binomial electoral system, which gives the second-place coalition an over-representation in Congress, together with the varied legislative majorities required for each reform, passage of all of Ms Bachelet's proposals is not assured. The president's programme centres on three major reforms: a tax reform, an educational reform and a new constitution. The reform to the electoral law is also important. All of these reforms, with the exception of the tax package, require more than just the ruling coalition's votes. The tax reform needs just a simple majority to pass and, on paper, is the easiest of the four reforms to secure. However, the next set of reforms will require more than that. The proposed changes to the country's educational system will require a four-sevenths majority, or 69 lower-house deputies and 22 senators, while constitutional changes will require a two-thirds majority of 80 deputies and 25 senators. An electoral reform will need a three-fifths majority, or 72 deputies and 23 senators.

Opposition within ruling coalition also emerges

As discussion of the tax reform has progressed, the leading party from the opposition Alianza coalition, Unión Demócrata Independiente (UDI), has expressed its opposition, while the more moderate Renovación Nacional (RN) party, together with the Alianza's independents, has expressed willingness to discuss the issues at hand. More recently, some opposition within the ruling coalition's own ranks has started to emerge, particularly from members of the agricultural regions, as the reform includes



an increase in taxes on wines and spirits, of which Chile is a major producer and exporter. The criticism has been led by the Partido Demócrata Cristiano (PDC), which includes the agricultural sector as one of its electoral bastions. The PDC, together with Alianza members, has also criticised the proposed strengthening of the oversight capacity of the Servicio de Impuestos Internos (SII, Chile's tax authority) to tackle tax avoidance and evasion, over fears that it may lead to access to individuals' private information related to electronic payments, and credit- and debit-card reports, among other data. Despite these concerns, on April 15th the lower house's finance committee voted to move the project forward. However, so far, around 40 amendments, from both the ruling and opposition coalitions, have been filed and are expected to be discussed by the committee, therefore making the approval of the reform in its current form not straightforward.

Some obstacles in the way

Ms Bachelet's legislative efforts appear to have started on the right track. Her majorities in both houses increase the chances that she will achieve passage of the reforms that she says the country needs. However, the president and her cabinet will have to navigate carefully through the process. She is certain to face opposition not just from centre-right parties, but also from some independent legislators and members of the more conservative PDC party within her own coalition, who have expressed some reluctance to giving Ms Bachelet carte blanche. Her powers of persuasion�which served to deliver her a landslide victory in last December's presidential run-off election�will have to be on full display.

Mexico and Brazil will continue to attract investor interest but, at an annual average of 3.6% and 2.5% respectively in 2014-18, both of Latin America's largest economies will post disappointing growth rates. A sub-par performance of late has refocused attention on persistent structural weaknesses in both countries. We believe that prospects for long-term growth in Mexico remain fairly positive, given the Peña Nieto government's progress on the structural reform front. However, still-weak consumer confidence suggests that it will take time before domestic demand picks up to a level more compatible with the economy's potential growth.

Brazil�s prospects appear less promising. Weaker macroeconomic policy management and government intervention have soured investor confidence, contributing to a soft medium-term growth outlook. Sentiment has also been hit by Fed tapering and a weaker economic outlook for China. Brazil�s long monetary tightening cycle is continuing to dampen investment, despite a pause in May. Higher credit costs are also affecting households and, although unemployment is at record low (4.9% in April), real wage growth is weaker than in the past, impairing private consumption this year. The government is hoping that oil and infrastructure concessions will buoy activity, but confidence in policymaking remains low, hurting overall business investment. Overall GDP growth for 2014 will remain subdued, at 1.8% (with risks now tilted more to the downside). This would be the third consecutive year of below-potential growth. Under the benign assumption that the president, Dilma Rousseff, will strengthen macroeconomic policy management in her second term, economic expansion will remain contained in 2015 as adjustment measures are felt, but GDP growth will then pick up in 2016 to 3%, around potential. Our baseline

Brazil to continue to underperform



GDP growth forecasts for 2015-18 (averaging just under 3%) are well below the rates achieved during 2004-10 boom (averaging 4.5%), reflecting weaker labour market dynamics, softer Chinese demand and slower credit growth. Economic expansion will have to be driven more by productivity gains, with limited progress amid low investment rates (under 18% of GDP currently).

The macroeconomic and financial reforms undertaken in the past two decades (largely in response to the �lost decade� of the 1980s) have put the region in a strong position to weather external shocks. The region�s sounder macro-economic fundamentals and, in particular, its lower public-debt ratios, make it better equipped to mitigate the impact of weak global conditions, by adopting countercyclical policies and stimulus measures. In addition, growing domestic demand, supported by the greater purchasing power of an expanding middle class, is increasingly becoming an additional engine of growth in many economies, partly compensating for weaker external demand. Moreover, abundant international reserves (US$830.2bn in 2013) provide substantial firepower to deal with currency volatility and overshooting.

The financial system also appears to be on a solid footing�as demonstrated by the sector�s solid performance during the 2008-09 economic crisis�owing partly to the wave of foreign investment and consolidation in the region�s banking systems in the 1990s. This has gradually brought more expertise in areas such as credit analysis, and the adoption of stricter regulation and supervision in response to the experience of past crises. Meanwhile, the region�s banking system is deepening on the back of demographic shifts that have seen more people moving into the middle class ranks and gaining access to banking services.

The region�s main external vulnerability is a current-account deficit, which is expected to rise from an annual average 1.5% of GDP in 2009-13 to 2.4% of GDP in 2014-18. After the surpluses registered during the 2004-07 commodities boom, the new trend is more in line with 1993-2003 levels, reflecting the real currency appreciation of recent years, declining export competitiveness of the non-commodities sectors, and sustained domestic demand (boosted by rising incomes and access to credit) that has not been matched by increased supply. As a result, the region�s narrow financing requirement (the current-account deficit plus medium- and long-term external debt falling due) will remain large. As a share of GDP (an average 5%), this represents a manageable burden, and we expect foreign direct investment (FDI) to cover more than half of it. Nonetheless, the region's substantial external financing needs will continue to leave it exposed to changing market sentiment at times of global volatility�as occurred during the emerging-market sell-off in mid-2013 and again (although to a lesser extent) during renewed global market volatility at the beginning of this year.

Argentina and Venezuela are notable exceptions to our generally positive view of the region's vulnerability to shocks. In both countries, policy mismanagement over a period of several years has heightened the risk of a balance-of-payments crisis. In Argentina unsustainable pressure on the peso amid a precarious reserves position is forcing the government to change policy course. There has been a clear effort at rapprochement with foreign investors

Fundamentals are stronger, but current-account deficits remain weakness

Argentina and Venezuela remain outliers



and creditors as the government attempts to secure much-needed dollars to bolster the foreign reserves position. However, inflows from these sources will take time to materialise and, in the meantime, we have serious concerns about the government�s commitment to macroeconomic adjustment and its capacity to steer the economy away from a currency crisis, even after a moderate peso adjustment in January. A combination of recession, renewed intervention by the Banco Central de la República Argentina (BCRA, the Central Bank), sharp interest rate rises and stricter foreign currency bank reserve requirements has halted a slide in the foreign reserves for the time being. However, with inflation now approaching 40%, further peso weakening is required to produce a sustained improvement in the current account and a recovery of reserves amid continued external financing constraints. We continue to assume that the Central Bank will allow the peso to depreciate gradually once wage negotiations are out of the way, which should provide a boost to manufacturing export competitiveness and the current account. However, without a commitment to macroeconomic policy tightening, rampant inflation will rapidly erode any competitiveness benefits brought about by the adjustment of the peso. Our benign baseline forecast assumes that peso weakening will be accompanied by fiscal and monetary tightening (the latter has already occurred). However, it will be politically difficult for the government to negotiate through a period of still-high inflation and negative GDP growth, and there is a strong chance that the government will backtrack on adjustment. A strong risk remains therefore that, amid a severe crisis of confidence, the authorities will be unable to control the peso�s fall and that there will be an uncontrolled currency devaluation, spiralling inflation, and payments problems during the forecast period.

In Venezuela severe macroeconomic distortions, in combination with a volatile external environment, pose serious short- and medium-term challenges. The main problem is a chronic lack of foreign exchange, as extremely expansionary macroeconomic policies, together with capital outflows, have decimated the proceeds of the oil windfall of recent years. Tight capital and foreign-exchange controls mean that access to US dollars for businesses and individuals is extremely restricted. This has delayed import shipments and resulted in shortages of consumer goods, food and medicine. The government is attempting to boost inflows of foreign exchange, by allowing oil companies to sell US dollars to the government at a much better rate than they previously received, but this will have only a marginal impact on the country's currency problems, given the scale of the problems and the limited room for manoeuvre. On the assumption that the ruling party remains in power in 2014-18, the operating climate for private sector businesses will deteriorate even further. The government will take an increasingly hard line against companies that it believes are raising prices too aggressively or hoarding supplies. Nationalisation will remain a potent threat, particularly in politically sensitive sectors that have been affected by consumer shortages (retail, food and drink). This will further weaken the business environment, which has already been damaged by some of the world�s highest labour costs, entrenched corruption, difficulty in accessing foreign exchange, and a highly politicised and ineffective judicial system.



Latin America�s longer-term outlook remains mixed. The region has consistently underperformed other emerging economies in the recent past in terms of its growth rate and potential, and our forecasts suggest that it will continue to do so. Although this partly reflects Latin America�s higher incomes per head compared with other emerging markets (notably in Asia), which give the region less scope for catch-up with developed country incomes, it is also the result of structural shortcomings in most countries� business environments, which act as a drag on productivity and growth rates. Reforms to simplify costly and complex tax systems while broadening the tax base, notably by tackling widespread informality, are greatly needed in most of the region. According to the OECD, tax revenue in Latin America totalled 20.7% of GDP in 2012, up from 8.9% in 2009, but still low compared with the OECD average of 34.6%. It also remains over-reliant on indirect taxes�which are especially regressive and inimical to the strengthening of domestic markets in a region with high poverty rates�and on commodity exports, which leave the public finances acutely exposed to external shocks. Also required is a reduction of red tape and further liberalisation of the factors markets, in particular by improving competition in the goods and services markets and increasing the flexibility of labour markets. Although we expect most of the region to continue to reduce red tape in the forecast period, the outlook for structural reforms is not as good, especially in the areas of labour, competition, fiscal policy and education.

Underdeveloped infrastructure also remains a key constraint on the region�s ability to achieve sustained growth. Public investment in infrastructure never recovered from the substantial cuts made under the stabilisation programmes of the 1990s. It remains at just over 2% of GDP on average in Latin America, down from around 4% of GDP in 1980-85. The UN Economic Commission for Latin America and the Caribbean (ECLAC) estimates that, for the region to address the mounting demands on infrastructure and for this not to become a constraint on long-term growth, around 5% of GDP should be invested in infrastructure in 2006-20. Private investment is sorely needed to bridge the gap, given governments� continuing financial constraints. The good news is that there is increasing consensus in the region on the need for a role for private investment in financing infrastructure. However, for this to happen, upgrading of the regulatory frameworks for public-private partnerships (PPPs)�including a review of weak incentive structures and uncertain returns on investment�and a scrapping of restrictions on private investment in some areas (notably energy) are crucial. We expect PPP frameworks to continue to improve in most of the countries in the region in the forecast period, supported by the increasingly pressing need to upgrade infrastructure.

In focus: Infrastructure shortcomings in Brazil

The staging of the FIFA World Cup has drawn attention to the government's shortcomings in delivering the improvements in urban mobility that Brazilians were promised when the country won the right to hold the event in 2007. In addition, the recent slowdown in the economy (GDP grew by just 0.2% in the first quarter) partly reflects slow progress in upgrading infrastructure more generally. According to Inter.B Consultoria Internacional de Negócios, a Rio de Janeiro-based consultancy, total investment (public and private) in infrastructure amounted to R118.6bn (US$55bn) in

Structural shortcomings continue to hinder regional growth



2013�equivalent to just 2.45% of GDP, and just 0.06% of GDP more than the previous year, despite the government's launch of an ambitious flagship infrastructure concessions programme in August 2012. This is an inadequate level, as it does not even cover the minimum investment needed to keep infrastructure in its current state, given asset depreciation. A generally accepted parameter is that Brazil should be investing 3% of GDP to account for this. However, successive governments have failed to reach this level, allowing an infrastructure gap to build up. The catalogue of unfinished projects and delays is long. On the day before the World Cup opening ceremony, the president, Dilma Rousseff, decided to visit the north-eastern city of Salvador, which will host games during the tournament, in order to inaugurate the first line of the urban metro railway connecting the stadium with the city. With five stations and a length of 7.5 km (Ms Rousseff could only travel along 6 km of track as the full line will not be ready until the end of June), this short metro line took 14 years to build.

Slow progress reflects government failures

The problems reflect shortcomings at all levels of government: federal, state and local. However, above all it is the federal government that must have clear investment programmes and should be responsible for planning and regulating expenditure, yet successive administrations have struggled to achieve this. On the positive side, through the concessions programme, the government has turned to the private sector, but progress has been hindered, as it has been slow to offer secure conditions and a regulatory framework that generate confidence. Early road concessions envisaged as part of the government's logistics programme announced in 2012 carried too low a rate of return. Gradually the government adjusted the financial returns upwards, helping to make more recent concessions successful. However, much of the planned infrastructure has yet to materialise. Last year private companies were large investors in infrastructure, with a 38% participation in total. The transportation sector was the highlight, with investment in airports jumping by 79% to R4.58bn (US$2bn) in 2013 because of licences sold to operate the airports of Guarulhos and Viracopos in the states of São Paulo and in Brasília respectively, and owing to increased investment by the state-run airport authority, Infraero. Another bright spot was expenditure in urban transportation, which rose by 47% in 2013, to R8.12bn, with the expansion of the subway systems in São Paulo and Rio de Janeiro absorbing most of the funds. However, the outlook for 2014 is not much better. According to Inter.B, there is likely to be more progress in road transportation, but infrastructure investment is likely to increase by only 0.07% of GDP, to 2.52%. The transportation sector will likely see the most gains because of planned investments starting to come on line, related to the round of concessions licensing in 2012 for roads and airports. However, expenditure on ports and railroads, which are part of the government's Programa de Investimento em Logística (PIL, programme for investment in logistics), faces delays.

Infrastructure will remain an important driver of FDI inflows into Latin America in the forecast period. FDI remained firm in 2013, confirming international investors' continued interest in the region's expanding domestic markets and copious natural resources, even amid persistent global uncertainty and repeated episodes of market volatility. Inward FDI totalled US$184.9bn in 2013, according to data recently released by ECLAC, up from US$174bn in 2012, continuing a steady upward trend that started in 2003 (with the exception of

Weaker FDI outlook for 2014



2006 and 2009). However, FDI to the region grew by 5% year on year in 2013, less than the global average increase (11%) and not enough to increase Latin America's share of global FDI, which remained stable at 13%. Moreover, FDI as a percentage of regional GDP has remained stable in recent years, at around 3%, a much lower level than the 4.5% registered at the turn of the century, when privatisation programmes and liberalisation efforts were in full swing in most countries of the region; had it not been for a single huge transaction (the US$13.5bn purchase of Mexico's Grupo Modelo beer maker by Belgium's Anheuser-Busch InBev), FDI to the region would have decreased from 2012. The backdrop for FDI to Latin America has become increasingly complicated in the past two years, given weak external conditions (with the EU mired in an uncertain recovery and China decelerating), and lower commodities prices, coupled with competitiveness shortcomings at home. At the same time, private consumption in the region remained steady, supporting the growing attractiveness of domestic consumer markets for investment in mass consumption services (including telecommunications, retail commerce and financial services among others). This mixed outlook supports our forecast that FDI will drop marginally in 2014 (to US$163.1bn) to then pick up again, amid more sustained global and domestic growth, and improving business environments in the region, to reach an all-time high of US$207.1bn by the end of the forecast period.

FDI inflows in 2013 were concentrated once again in the region's six largest economies, which absorbed over 80% of the total. Brazil, with US$64bn, accounted for 35% of the total FDI to the region, while Mexico regained its status as the second-largest recipient, with US$38.3bn (owing to the Modelo transaction), after having lost it to Chile in 2012. Chile came in third, with US$20.3bn, followed by Colombia (US$16.8bn), Peru (US$10.2bn) and Argentina (US$9.1bn). Considering that almost half of total FDI to the region consisted of reinvested earnings in the same sectors in 2013, sectoral composition was similar to that of previous years, with services (38%) accounting for the majority of FDI inflows, followed by manufacturing (36%) and natural resources (26%). Although FDI in natural resources remained concentrated in South America (with a record 70% of total FDI going to the sector in Bolivia), manufacturing was more prevalent in Mexico (where 70% of total FDI went to the sector) and Central America. Brazil showed a more diversified profile, with 40%, 32% and 28% of total FDI going to services, manufacturing and natural resources respectively.

The US remained the largest country of origin overall, with a particularly strong presence in Central America (30% of total inflows) and Mexico (32%, down from 49% in 2012), although it accounted for just 14% of FDI to Brazil, down from 21% in 2012. Europe was the largest investor in Brazil (46%), Mexico (54%) and Colombia (36%). Trans-Latin firms also accounted for a large share of total FDI in the region, with the exception of Mexico, representing a maximum of 46% of total investment in Ecuador, 39% in Central America and 30% in Colombia. Japan and South Korea remained the most important Asian investors, given their large manufacturing investment in Brazil and Mexico in the automotive and electronics sectors. Although Chinese FDI is difficult to track, ECLAC estimates that US$10bn has been invested annually in the region since 2010 by China, with a particular focus on the mining sector in Peru, and oil extraction and manufacturing in Brazil.



Although the medium-term FDI outlook for the region is fairly positive, challenges remain. In particular, some progress in attracting FDI in high-tech and other high value-added sectors (sectors with the most significant positive externalities) has been made in the region, but there is still a long way to go for the region to diversify away from services and natural resources. The still-weak growth outlook for Europe, which has traditionally been the main source of FDI in higher value-added and R&D sectors in the region, will remain a significant challenge in this regard. To become an increasingly attractive destination for high value-added FDI, comprehensive reforms to the domestic education and innovation systems across the region remain a necessity.



Business environment rankings The Economist Intelligence Unit�s business environment rankings model seeks to measure the attractiveness of the business environment in 82 of the world�s major economies. It provides cross-country comparisons of the main aspects of a country�s business climate, supporting companies in designing their global business strategies and making their investment location decisions. The assessment of the business environment�based on the opportunities and challenges for doing business�allows countries to be ranked on the basis of the overall quality of their business environment, as well as in each of the ten categories comprising the index, on both a global and a regional basis. The model ranks countries over the historical period (2008-13), as well as according to our projections of how business conditions will evolve over the forecast period (2014-18). This allows us to use the regularity, depth and detail of our forecasting work to generate a unique set of forward-looking business environment rankings on a regional and global basis. The table below gives our index scores and rankings for the 12 Latin American countries included in the rankings for the historical period and the forecast period.

Latin American business environment rankings 2009-13 2014-18

Total score Global rank Total score Global rank Change in Change in (out of 10) (out of 82) (out of 10) (out of 82) total score a rank a

Argentina 5.40 63 5.35 70 -0.04 -7Brazil 6.33 41 6.57 43 0.24 -2

Chile 7.81 14 7.89 13 0.08 1Colombia 5.93 50 6.35 51 0.42 -1

Costa Rica 6.26 43 6.59 40 0.33 3Cuba 4.19 79 4.59 78 0.40 1Dominican Republic 5.33 64 5.68 63 0.36 1

Ecuador 5.09 68 5.34 71 0.25 -3El Salvador 5.73 56 5.90 58 0.17 -2

Mexico 6.83 32 6.91 32 0.08 0Peru 6.09 46 6.40 49 0.32 -3

Venezuela 4.58 74 3.93 82 -0.65 -8

a From historical period to forecast period.

Only four countries of the 12 covered will raise their business environment ranking in 2014-18 relative to the historical period, namely Costa Rica (up by three places), as well as Chile, Cuba and the Dominican Republic (all up by one place). Mexico remains stable, while seven countries lose ground, including Venezuela (down by eight places), Argentina (down by seven places), as well as Peru and Ecuador (both down by three places). Nonetheless, all countries in the region, barring Venezuela and Argentina, will post improvements in their overall score (with the greatest progress made by Colombia, the Dominican Republic and Cuba). However, this will not be enough to catch up with more dynamic areas of the world and will constrain Latin America's progress in the global rankings.



Latin America's score improves by 0.16 points in 2014-18, less than the world average (0.25) and North America (0.19), and a much weaker performance than that of the other emerging markets. The gap is particularly striking with respect to Eastern Europe and Asia (which will rise by 0.41 and 0.35 respectively). This will largely reflect slower progress in competitiveness-enhancing reforms, the pace of which will continue to be restricted by a lack of political appetite in most countries in Latin America. However, continuing global uncertainty and weak economic conditions in most of Latin America�s main markets, coupled with a gradual reduction of international liquidity, are exposing the region�s structural flaws and are likely to increase the pressure on legislatures and societies at large to address constraints in the business environments, and reinforce competitiveness fundamentals.

Latin America�s main economies will continue to demonstrate significant diversity in the quality of the business environment, with a very large differential (69 places) between the region�s best and worst performers, namely Chile (13th) and Venezuela (82nd). In addition, while Chile and, to a lesser extent Mexico (32nd), Costa Rica (40th) and Brazil (43rd), are characterised by fairly business-friendly environments, Venezuela, Cuba (78th), Ecuador (71st) and Argentina (70th) continue to share a tendency for unpredictable state interventionism that has undermined economic performance and discouraged foreign investment.

Venezuela and Argentina will post the worst declines in ranking in the forecast period. Venezuela�s dismal performance reflects erratic state interventionism, a highly heterodox macroeconomic environment, below-par legal security and difficulties in accessing foreign exchange. The medium-term political outlook is highly uncertain, with a wave of recent protests seeking to oust the government. Regardless of whether the protesters succeed, both the incumbent government and any potential opposition-led administration will have severe difficulties in stabilising the economy and addressing high levels of violent crime. Eventual improvements in the business environment would be likely if the opposition came to power, but this is not part of our central forecast scenario and would take time to occur. Dealing with the country�s structural constraints and curbing corruption and bureaucratic inefficiency could take even longer. In Argentina the progressive deterioration in its legal and regulatory framework (with political polarisation, weak institutions, fickle political loyalties, powerful unions and a strong tradition of public protest sustaining risks to political stability throughout the forecast period) is taking a toll on investor interest in its market. In the short term the main risks to stability will come from growing economic uncertainty, with activity stalling and the peso weakening rapidly. This is producing serious difficulties for the president, Cristina Fernández de Kirchner, as her political support wanes and social unrest rises. Even assuming that the government avoids a major political and economic crisis, the quality of policymaking will remain poor under the current government and, although we assume some improvement after the general election in 2015, provided that a more business-friendly government takes office, this will take time to materialise.

Business environment varies across the region



Cuba will also continue to lag behind the rest of the region. Although the government is gradually enacting liberalising measures, the state�s dominance of the economy will restrict scope for private business. Those who do invest will benefit from a clear tax framework, low crime rates and an educated labour force.

Costa Rica will post the highest improvement in the rankings, supported by its entrenched political stability, skilled human capital, favourable tax regime and increasing economic openness�the landmark victory of Luis Guillermo Solís of the Partido Acción Ciudadana (PAC) in the 2014 elections will not change the outlook significantly. On the negative side, the macroeconomic environment will continue to be constrained by the failure to adopt a long-overdue fiscal reform, with no prospect of the new government beginning to negotiate this until at least 2016. An inefficient tax code, as well as difficulties in obtaining financing for all but the largest firms, will also weigh on the country�s attractiveness.

At the top end of the regional rankings, Chile will remain the most attractive business destination in Latin America and among the best-ranked economies globally. Its success rests on a longstanding commitment to free markets, as well as on strong institutional underpinnings, a sophisticated financial market and a very open economy, with an extensive network of free-trade agreements (FTAs). Labour rules and educational outcomes are a relative weakness, and the fragile energy matrix impairs otherwise good infrastructure. The country will step up social and infrastructure investment in the forecast period, which should further reinforce its growth fundamentals.

Among the region�s largest economies, Brazil will remain among the most attractive business destinations in Latin America, owing to a large and growing domestic market, diversified economy and political stability. On a more negative note, the failure to conduct a complete overhaul of the tax system and reduce the tax burden significantly (and improve the quality of its public services) will remain a serious handicap. Labour markets will continue to lack flexibility and suffer from skills shortages. Efforts to upgrade infrastructure have been stepped up ahead of the international sporting events that Brazil is hosting in 2014 and 2016 and will start to pay off, but shortcomings will persist. The government's room for manoeuvre to implement growth enhancing reforms will be restricted by a fragmented legislature, a worsening fiscal outlook, below-par implementation capacity and social tensions.

Mexico also remains a very attractive market for investors, given its privileged access to the US market, integration into US manufacturing supply chains, an extensive network of FTAs and a large internal market. The administration of the president, Enrique Peña Nieto, has moved swiftly on its agenda of competitiveness enhancing structural reforms, managing to have most of these approved in its first year in office. Although risks exist linked to the adoption of the pending by-laws and the reforms' implementation, we expect the country to continue to make substantial progress�after years of paralysis�in addressing some of its main structural constraints to growth in the forecast period (including poor educational levels and sub-par competition conditions), and in liberalising attractive sectors for investors, including energy and telecoms.



Overall regional scores(Total score, out of 10)

2009-13 2014-18North America 8.09 8.27Western Europe 7.36 7.46

Asia & Australasia 6.01 6.42Eastern Europe 6.56 6.91Latin America 5.80 5.96

Middle East & Africa 5.44 5.74World average 6.54 6.79



Data summary

Latin America and the Caribbean

Latin Americaa 2009b 2010b 2011b 2012c 2013c 2014 c 2015 c 2016 c 2017c 2018c

Economic growth (%)

GDP -1.5 5.9 4.4 2.9 2.5 2.3 3.2 3.7 3.7 3.7Private consumption -0.5 6.1 5.4 4.1 3.2 2.3 3.2 3.4 3.6 3.7

Government consumption 4.0 3.8 2.9 4.0 2.8 3.0 3.1 3.3 3.2 3.5Gross investment -15.1 16.4 8.1 1.6 1.5 2.7 5.5 6.1 6.2 6.2Exports of goods & servicesd -8.9 10.8 6.9 3.1 1.5 3.7 4.9 5.3 5.4 5.2

Imports of goods & servicesd -14.3 22.2 11.3 3.9 2.7 5.6 6.7 6.6 6.7 7.0Domestic demand -3.2 7.9 5.7 3.5 2.8 2.5 3.7 4.0 4.2 4.3

GDP growth per head -2.7 4.6 3.2 1.7 1.4 1.2 2.1 2.6 2.7 2.7GDP (PPP weights) -1.2 6.0 4.6 2.9 2.7 2.3 3.2 3.7 3.8 3.8Population, income and market size

Population (m) 566.4 573.4 580.1 586.7 593.3 599.8 606.4 612.8 619.1 625.4GDP (US$ bn at market exchange rates) 4,160 5,152 5,773 5,809 5,942 5,997 6,477 6,822 7,203 7,628

GDP per head (US$ at market exchange rates) 7,344 8,985 9,953 9,901 10,015 9,998 10,680 11,133 11,634 12,197Private consumption (US$ bn) 2,650 3,217 3,617 3,719 3,832 3,899 4,224 4,452 4,706 4,989

Private consumption per head (US$) 4,678 5,610 6,235 6,339 6,460 6,500 6,966 7,266 7,601 7,977GDP (US$ bn at PPP) 6,320 6,789 7,313 7,652 7,971 8,292 8,709 9,209 9,759 10,376GDP per head (US$ at PPP) 11,158 11,839 12,608 13,043 13,435 13,824 14,361 15,028 15,763 16,591

Economic structure (% of GDP)

Private consumption 63.7 62.4 62.6 64.0 64.5 65.0 65.2 65.3 65.3 65.4

Government consumption 16.5 16.3 16.3 16.3 16.6 16.9 17.2 17.4 17.5 17.7Gross fixed investment 19.9 19.8 20.1 20.0 19.7 19.2 19.1 19.5 19.8 20.3Exports of goods & services 19.6 20.7 21.7 22.0 21.6 22.1 22.0 22.6 23.0 23.4

Imports of goods & services 19.6 20.3 21.7 22.8 22.9 24.0 24.3 25.3 26.4 27.4Price inflation (%)

Consumer prices (av) 6.9 7.1 7.9 7.3 7.8 10.3 8.4 7.3 6.9 6.3Current account (US$ bn)

Current-account balance -27.3 -60.0 -75.8 -103.0 -146.1 -143.0 -154.1 -161.2 -166.2 -174.1Current-account balance (% of GDP) -0.7 -1.2 -1.3 -1.8 -2.5 -2.4 -2.4 -2.4 -2.3 -2.3Trade balance 49.9 47.6 69.5 40.6 10.7 16.5 16.2 19.2 22.4 25.0

Services balance -28.9 -41.6 -56.3 -62.0 -67.6 -68.5 -71.2 -76.4 -79.2 -82.5Income balance -104.0 -123.4 -149.0 -141.1 -150.1 -155.1 -166.5 -175.6 -185.4 -197.1

Current transfers balance 55.8 57.5 60.0 59.6 60.9 64.2 67.5 71.6 76.0 80.5Memorandum items

Share of world population (%) 8.4 8.3 8.3 8.3 8.3 8.3 8.4 8.4 8.4 8.4

Share of world GDP (% at market exchange rates) 7.4 7.6 8.3 8.2 8.0 7.7 7.8 7.7 7.6 7.7Share of world GDP (% at PPP) 8.8 8.4 8.6 8.6 8.6 8.4 8.4 8.4 8.3 8.6

External debt

Total external debt (US$ bn) 968.6 1117.0 1266.7 1412.6 1522.6 1630.0 1725.7 1843.6 1967.7 2093.7

Total external debt (% of GDP) 23.3 21.7 21.9 24.3 25.6 27.2 26.6 27.0 27.3 27.4Debt-service ratio, paid (%) 16.2 13.1 12.6 14.5 16.2 14.8 14.7 14.7 15.0 15.0

a Comprises Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, Trinidad and Tobago, Uruguay and Venezuela. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts. d Includes intra-regional trade.



Expanded Mercosur Mercosura 2009b 2010b 2011b 2012b 2013b 2014 c 2015 c 2016 c 2017c 2018c

Economic growth (%) GDP -0.6 6.8 4.0 1.5 2.4 0.9 2.0 3.1 3.2 3.2

Private consumption 3.3 6.3 5.5 3.8 3.0 0.8 2.2 2.8 3.1 3.2Government consumption 3.6 4.4 3.1 4.1 2.8 3.1 3.2 3.3 3.3 3.8

Gross investment -16.1 24.1 7.4 -3.6 2.5 -0.7 3.3 4.7 4.7 4.7Exports of goods & servicesd -9.6 7.7 4.7 -0.9 -0.1 2.2 3.8 4.2 4.3 4.5Imports of goods & servicesd -12.2 28.4 12.5 2.8 4.1 4.4 6.6 5.7 5.5 6.3

Domestic demand -1.0 9.3 5.5 2.2 2.9 0.9 2.6 3.3 3.5 3.6GDP growth per head -1.7 5.7 3.0 0.5 1.4 -0.1 1.1 2.2 2.3 2.4

GDP (PPP weights) -0.6 6.9 4.3 1.5 2.5 0.8 2.1 3.1 3.3 3.3Population, income and market size Population (m) 272 274 277 280 283 286 288 291 293 296

GDP (US$ bn at market exchange rates) 2,378 3,059 3,422 3,307 3,298 3,266 3,544 3,679 3,842 4,019GDP per head (US$ at market exchange rates) 8,756 11,146 12,343 11,808 11,662 11,437 12,299 12,655 13,100 13,591

Private consumption (US$ bn) 1,481 1,841 2,077 2,084 2,089 2,088 2,282 2,372 2,480 2,597Private consumption per head (US$) 5,456 6,707 7,492 7,440 7,385 7,312 7,918 8,157 8,455 8,782

GDP (US$ bn at PPP) 3,087 3,341 3,552 3,668 3,816 3,914 4,066 4,278 4,512 4,776GDP per head (US$ at PPP) 11,367 12,173 12,811 13,095 13,492 13,708 14,111 14,712 15,386 16,151Economic structure (% of GDP) Private consumption 62.3 60.2 60.7 63.0 63.3 63.9 64.4 64.5 64.5 64.6Government consumption 18.7 18.5 18.5 18.9 19.7 20.3 20.7 21.2 21.5 21.8

Gross fixed investment 18.7 19.1 19.0 18.2 18.0 16.9 16.3 16.2 16.3 16.4Exports of goods & services 13.5 14.6 15.0 15.2 14.8 14.9 14.7 15.1 15.5 15.8Imports of goods & services 13.2 13.6 14.3 15.7 16.4 17.0 17.1 17.9 18.6 19.5

Price inflation (%) Consumer prices (av) 9.7 11.0 12.2 11.0 12.5 17.3 13.9 11.4 10.5 9.2

Current account (US$ bn) Current-account balance -13.6 -37.9 -31.4 -45.8 -75.1 -76.2 -82.7 -90.3 -94.1 -100.6

Current-account balance (% of GDP) -0.6 -1.2 -0.9 -1.4 -2.3 -2.3 -2.3 -2.5 -2.4 -2.5Trade balance 61.0 62.0 88.1 71.2 52.3 59.0 61.1 61.5 64.9 68.8Services balance -29.5 -42.1 -52.4 -59.4 -67.8 -70.3 -74.7 -78.9 -80.5 -83.0

Income balance -48.4 -60.0 -69.6 -59.9 -62.2 -67.7 -71.6 -75.7 -81.5 -89.7Current transfers balance 3.4 2.3 2.5 2.3 2.7 2.8 2.5 2.8 3.1 3.4

Memorandum items Share of world population (%) 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0Share of world GDP (% at market exchange rates) 4.2 5.0 5.0 4.8 4.6 4.4 4.5 4.4 4.3 4.3

Share of world GDP (% at PPP) 4.3 4.4 4.4 4.3 4.3 4.2 4.1 4.1 4.1 4.1External debt Total external debt (US$ bn) 487.8 554.0 617.6 654.8 696.3 739.5 781.5 838.4 899.6 963.1Total external debt (% of GDP) 20.5 18.1 18.0 19.8 21.1 22.6 22.0 22.8 23.4 24.0

Debt-service ratio, paid (%) 18.8 15.8 15.4 12.7 16.2 16.1 15.8 16.1 16.5 16.8

a Comprises Argentina, Brazil, Paraguay, Uruguay and Venezuela. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts. d Includes intra-regional trade.



Andean Community Andean communitya

2009b 2010b 2011b 2012c 2013c 2014 c 2015 c 2016 c 2017c 2018c

Economic growth (%) GDP 1.3 5.4 6.8 4.9 4.6 4.8 4.8 5.0 4.9 4.8

Private consumption 1.0 5.8 6.0 4.8 4.5 4.6 4.5 4.5 4.7 4.7Government consumption 8.7 5.9 4.5 6.8 5.8 5.4 4.9 4.5 4.7 4.7

Gross investment -9.7 16.3 14.7 6.0 6.0 5.7 7.3 7.4 6.5 5.9Exports of goods & servicesd -3.8 1.5 9.2 5.8 3.8 4.1 4.5 5.8 5.7 5.3Imports of goods & servicesd -12.1 15.1 14.6 7.9 3.5 6.0 6.6 6.8 6.6 6.1

Domestic demand -0.7 8.1 7.9 5.4 5.1 5.0 5.3 5.3 5.2 5.0GDP growth per head -0.1 3.6 5.3 3.5 3.2 3.5 3.5 3.7 3.6 3.6

Population, income and market size Population (m) 100.0 101.7 103.1 104.5 105.9 107.3 108.7 110.0 111.3 112.6GDP (US$ bn at market exchange rates) 440.6 529.8 615.5 684.0 710.7 731.7 774.9 824.4 869.5 917.2

GDP per head (US$ at market exchange rates) 4,406 5,211 5,972 6,547 6,712 6,820 7,130 7,496 7,815 8,149Private consumption (US$ bn) 280.7 331.8 376.3 418.8 437.0 450.6 480.6 513.5 546.2 579.9

Private consumption per head (US$) 2,807 3,264 3,651 4,008 4,127 4,200 4,422 4,669 4,909 5,152GDP (US$ bn at PPP) 826.9 881.7 959.9 1,025.2 1,089.1 1,161.6 1,238.8 1,326.1 1,420.6 1,525.1

GDP per head (US$ at PPP) 8,269 8,672 9,313 9,812 10,286 10,827 11,398 12,059 12,767 13,549Economic structure (% of GDP) Private consumption 63.7 62.6 61.1 61.2 61.5 61.6 62.0 62.3 62.8 63.2

Government consumption 14.4 14.3 13.7 14.2 14.3 14.4 14.6 14.7 15.0 15.2Gross fixed investment 22.5 23.0 23.9 24.8 25.1 25.0 25.2 25.5 25.8 25.9

Exports of goods & services 20.4 21.2 24.1 23.0 22.1 22.8 22.8 22.9 23.0 23.0Imports of goods & services 20.7 21.8 23.7 23.5 23.2 24.0 24.8 25.6 26.7 27.5Price inflation (%) Consumer prices (av) 3.9 2.3 3.9 3.7 2.6 3.3 3.4 3.4 3.4 3.4Current account (US$ bn) Current-account balance -5.2 -13.6 -12.8 -16.1 -22.4 -22.6 -23.2 -22.1 -20.9 -20.2Current-account balance (% of GDP) -1.2 -2.6 -2.1 -2.4 -3.2 -3.1 -3.0 -2.7 -2.4 -2.2

Trade balance 8.7 8.5 16.3 13.8 4.2 5.2 6.2 10.2 13.2 16.0Services balance -5.6 -8.0 -9.1 -10.2 -9.8 -9.8 -9.7 -10.7 -11.3 -11.9Income balance -19.6 -25.2 -32.0 -31.3 -29.0 -31.7 -34.4 -37.5 -39.8 -42.4

Current transfers balance 11.4 11.0 11.9 11.6 12.2 13.7 14.8 15.9 17.1 18.1Memorandum items Share of world population (%) 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5Share of world GDP (% at market exchange rates) 0.8 0.9 0.9 1.0 1.0 1.0 1.0 1.0 1.0 1.0Share of world GDP (% at PPP) 1.2 1.2 1.2 1.2 1.2 1.2 1.3 1.3 1.3 1.3

External debt Total external debt (US$ bn) 109.7 127.0 144.8 157.0 163.1 168.9 173.7 179.2 184.6 190.7

Total external debt (% of GDP) 24.9 24.0 23.5 23.0 22.9 23.1 22.4 21.7 21.2 20.8Debt-service ratio, paid (%) 17.9 15.4 10.1 14.8 19.8 17.1 16.5 15.0 14.5 13.9

a Comprises Bolivia, Colombia, Ecuador, Peru and Venezuela. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts.d Includes intra-regional trade.



Central America Central Americaa 2009 b 2010 b 2011b 2012 b 2013 b 2014 c 2015c

Economic growth (%) GDP -0.3 4.0 5.4 5.1 4.3 4.1 3.9

Private consumption -2.2 6.2 5.8 2.1 2.9 3.4 3.6Government consumption 7.6 5.9 2.7 3.7 5.1 4.3 4.1

Gross investment -24.6 12.9 17.1 6.4 5.8 8.6 6.8Exports of goods & servicesd -5.6 6.0 12.2 6.8 3.8 4.9 5.4Imports of goods & servicesd -15.8 13.8 15.8 2.6 2.4 5.6 6.0

Domestic demand -5.9 7.3 7.5 3.1 3.7 4.5 4.3GDP growth per head -2.4 2.1 3.3 3.0 2.2 2.1 1.9

GDP (PPP weights) -0.2 3.9 5.3 4.9 4.2 4.0 3.9Population, income and market size Population (m) 42.3 43.1 43.9 44.8 45.7 46.6 47.5

GDP (US$ bn at market exchange rates) 135 151 171 184 199 209 224GDP per head (US$ at market exchange rates) 3,191 3,502 3,890 4,118 4,362 4,495 4,712

Private consumption (US$ bn) 101 115 131 139 148 155 166Private consumption per head (US$) 2,394 2,674 2,990 3,106 3,231 3,330 3,494

GDP (US$ bn at PPP) 284 299 318 338 356 375 395GDP per head (US$ at PPP) 6,732 6,938 7,251 7,547 7,798 8,057 8,316Economic structure (% of GDP) Private consumption 75.0 76.4 76.9 75.4 74.1 74.1 74.2Government consumption 12.9 13.3 12.9 12.9 13.1 13.1 13.2

Gross fixed investment 19.2 18.6 19.5 20.0 20.4 21.2 21.7Exports of goods & services 40.2 40.3 43.7 43.4 41.7 42.2 42.6Imports of goods & services 45.5 48.7 54.0 52.4 49.6 51.1 52.3

Price inflation (%) Consumer prices (av) 3.2 3.8 6.0 4.2 4.2 3.7 4.4

Current account (US$ bn) Current-account balance -2.2 -7.2 -12.7 -11.9 -13.8 -13.4 -14.5

Current-account balance (% of GDP) -1.6 -4.8 -7.4 -6.5 -6.9 -6.4 -6.5Trade balance -15.2 -20.8 -27.4 -28.1 -29.6 -32.1 -34.8Services balance 5.7 6.2 6.8 8.5 8.7 10.3 11.2

Income balance -4.9 -5.7 -5.8 -7.0 -8.0 -7.7 -8.0Current transfers balance 12.2 13.1 13.8 14.6 15.1 16.1 17.1

Memorandum items Share of world population (%) 0.6 0.6 0.6 0.6 0.6 0.6 0.7Share of world GDP (% at market exchange rates) 0.2 0.2 0.2 0.3 0.3 0.3 0.3

Share of world GDP (% at PPP) 0.4 0.4 0.4 0.4 0.4 0.4 0.4External debt Total external debt (US$ bn) 54.2 57.2 64.1 69.0 76.8 81.0 84.9Total external debt (% of GDP) 40.2 38.0 37.5 37.4 38.6 38.7 37.9

Debt-service ratio, paid (%) 8.8 7.7 8.4 9.4 10.5 9.3 9.3

a Comprises Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts. d Includes intra-regional trade.



Guide to the business rankings model

Outline of the model The business rankings model measures the quality or attractiveness of the business environment in the 82 countries covered by Country Forecast using a standard analytical framework. It is designed to reflect the main criteria used by companies to formulate their global business strategies, and is based not only on historical conditions but also on expectations about conditions prevailing over the next five years. This allows The Economist Intelligence Unit to utilise the regularity, depth and detail of its forecasting work to generate a unique set of forward-looking business environment rankings on a regional and global basis.

The business rankings model examines ten separate criteria or categories, covering the political environment, the macroeconomic environment, market opportunities, policy towards free enterprise and competition, policy towards foreign investment, foreign trade and exchange controls, taxes, financing, the labour market, and infrastructure. Each category contains a number of indicators that are assessed by The Economist Intelligence Unit for the last five years and the next five years. The number of indicators in each category varies from five (foreign trade and exchange regimes) to 16 (infrastructure), and there are 91 indicators in total.

Almost half of the indicators are based on quantitative data (e.g. GDP growth), and are mostly drawn from national and international statistical sources for the historical period (2009-13) and from Economist Intelligence Unit assessments for the forecast period (2014-18). The other indicators are qualitative in nature (e.g. quality of the financial regulatory system), and are drawn from a range of data sources and business surveys adjusted by The Economist Intelligence Unit for 2009-13. All forecasts for the qualitative indicators covering 2014-18 are based on Economist Intelligence Unit assessments.

The main sources used in the business rankings model include CIA, World Factbook; The Economist Intelligence Unit, Country Risk Service, Country Finance, Country Commerce; Freedom House, Annual Survey of Political Rights and Civil Liberties; Heritage Foundation, Index of Economic Freedom; IMF, Annual Report on Foreign Exchange Restrictions; International Institute for Management Development, World Competitiveness Yearbook; International Labour Organisation, International Labour Statistics Yearbook; UN, Human Development Report; US Social Security Administration, Social Security Programs Throughout the World; World Bank, World Development Report; World Development Indicators; World Economic Forum, Global Competitiveness Report.

Calculating the rankings The rankings are calculated in several stages. First, each of the 91 indicators is scored on a scale from 1 (very bad for business) to 5 (very good for business). The aggregate category scores are derived on the basis of simple or weighted averages of the indicator scores within a given category. These are then adjusted, on the basis of a linear transformation, to produce index values on a 1-10 scale. An arithmetic average of the ten category index values is then calculated to yield the aggregate business environment score for each country, again on a 1-10 scale.

The use of equal weights for the categories to derive the overall score reflects in part the theoretical uncertainty about the relative importance of the primary determinants of investment. Surveys of foreign direct investors' intentions yield widely differing results on the relative importance of different factors. Weighted scores for individual categories based on correlation coefficients of recent foreign direct investment inflows do not in any case produce overall results that are significantly different from those derived from a system based on equal weights.

For most quantitative indicators the data are arrayed in ascending or descending order and split into five bands (quintiles). The countries falling in the first quintile are assigned scores of 5, those falling in the second quintile score 4 and so on. The cut-off points between bands are based on the average of the raw indicator values for the top and bottom countries in adjacent quintiles. The 2009-13 ranges are then used to derive 2014-18 scores. This allows for intertemporal as well as cross-country comparisons of the indicator and category scores.

Measurement and grading issues The indices and rankings attempt to measure the average quality of the business environment over the entire historical or forecast period, not simply at the start or at the end of the period. Thus, in the forecast we assign an average grade to elements of the business environment over 2014-18, not to the likely situation in 2018 only.

The scores based on quantitative data are usually calculated on the basis of the numeric average for an indicator over the period. In some cases, the �average� is represented, as an approximation, by the recorded value at the mid-point of the period (2011 or 2016). In only a few cases is the relevant variable appropriately measured by the value at the start of the period (e.g. educational attainments). For one indicator (the natural resources endowment), the score remains constant for both the historical and forecast periods.



List of indicators in the business rankings model

Political environment 1. Risk of armed conflict

2. Risk of social unrest

3. Constitutional mechanisms for the orderly transfer of

power

4. Threat of politically motivated violence

5. International disputes or tensions

6. Government policy towards business

7. Effectiveness of political system in policy formulation

and execution

8. Quality of the bureaucracy

9. Transparency and fairness of political system

10. Corruption

11. Impact of crime

Macroeconomic environment *1. Inflation

*2. Budget balance as % of GDP

*3. Government debt as % of GDP

*4. Exchange-rate volatility

*5. Current-account balance as % of GDP

Market opportunities *1. GDP, US$ bn at PPP

*2. GDP per head, US$ at PPP

*3. Real GDP growth

*4. Share of world merchandise trade

*5. Average annual rate of growth of exports

*6. Average annual rate of growth of imports

*7. The natural resource endowment

*8. Profitability

Policy towards private enterprise and competition 1. Degree to which private property rights are protected

2. Government regulation on setting up new private

businesses

3. Freedom of existing businesses to compete

4. Promotion of competition

5. Protection of intellectual property

6. Price controls

7. Distortions arising from lobbying by special interest

groups

8. Distortions arising from state ownership/control

Policy towards foreign investment 1. Government policy towards foreign capital

2. Openness of national culture to foreign influences

3. Risk of expropriation of foreign assets

4. Availability of investment protection schemes

Foreign trade and exchange controls 1. Capital-account liberalisation

**2. Tariff and non-tariff protection

*3. Openness of trade

4. Restrictions on the current account

Taxes **1. The corporate tax burden

*2. The top marginal personal income tax

*3. Value-added tax

*4. Employers' social security contributions

5. Degree to which fiscal regime encourages new investment

6. Consistency and fairness of the tax system

Financing 1. Openness of banking sector

2. Stockmarket capitalisation

**3. Distortions in financial markets

4. Quality of the financial regulatory system

5. Access of foreigners to local capital market

6. Access to medium-term finance for investment

The labour market **1. Incidence of strikes

*2. Labour costs adjusted for productivity

*3. Availability of skilled labour

4. Quality of workforce

5. Restrictiveness of labour laws

6. Extent of wage regulation

7. Hiring of foreign nationals

*8. Cost of living

Infrastructure *1. Telephone density

**2. Reliability of telecoms network

**3. Extent and quality of road network

*4. Production of electricity per head

**5. The infrastructure for retail and wholesale distribution

**6. Extent and quality of the rail network

7. Quality of ports infrastructure

*8. Stock of personal computers

*9. R&D expenditure as % of GDP

*10. Rents of office space

Note. A single asterisk (*) denotes a purely quantitative indicator. Indicators with a double asterisk (**) are partly based on data. All other indicators are qualitative in nature.

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