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CRISIS OF CONFIDENCE BATTERS SOUTH AMERICAN EXPENDITURE.

South American households and businesses alike are cutting back on expenditure as confidence in the region's economic future falters. Commercial and industrial expenditure will be particularly hard hit as businesses find it increasingly difficult to borrow money for expansion. This comes at a time when foreign direct investment is being diverted to developing nations in Asia and Eastern Europe where investment risk is deemed to be lower.

Part of the problem lies in the fact that confidence in free-market capitalism has declined, but no viable alternative model has emerged. After a year of experimentation with orthodox economic policies, 44 percent of Latin America's residents live in poverty and the number of unemployed has more than doubled.

In spite of optimistic growth projections early this year, it now appears that 2002 will draw to a close with no significant growth in household expenditure. Declining purchasing power in Argentina and Brazil will be enough to drive year-on-year losses in South American household expenditure in excess of 5 percent this year. Deterioration in household budgets will continue into the first quarter of 2003, with modest signs of a weak recovery likely by midyear. South America's wild card is Brazil, where a default on foreign debt coupled with further deterioration in the value of the national currency (the real) could delay a South American recovery beyond 2003.

High-end spending in South America will remain depressed through the remainder of this year and at least the first few months of 2003. Product categories that will suffer most from delayed expenditure include new cars, building materials, and major appliances.

Imported goods with euro or dollar-based prices will find it extremely difficult to remain cost competitive in South America over the next year. Argentina and Brazil, which are home to about 60 percent of South America's consumers, have experienced dramatic devaluations this year that will give local products and services a pricing edge at least until mid-2003.

Projected growth in South American demand for household services, non-durables, and perishable goods will not materialize this year. For South America as a whole, sales of those products and services should be down 3 to 5 percent during 2002, relative to the level one year earlier.

What is most worrisome about South American household consumption is that nations considered to be the bastions of regional stability (Chile and Uruguay) could not sidestep the continent's decline. With no South American nation spared the contraction in private sector expenditure, it will be very difficult to attract foreign direct investment in the short- to medium-term.

The two strongest engines of industrial development on the continent (Argentina and Brazil) are in a state of crisis. A strong influx of domestic and foreign investment is needed in order to remain globally competitive, but it appears that capital investment will remain elusive into 2003. Year-on-year losses in capital purchases will be down more than 5 percent, with the greatest year-on-year losses noted in Argentina.

Depressed domestic sales will contribute to stagnant industrial demand for intermediate goods, raw materials, and services through the remainder of 2002 and first quarter of 2003 in all MERCOSUR member nations (Argentina, Brazil, Paraguay, and Uruguay). Industries in both Paraguay and Uruguay are heavily dependent on sales to Argentina and Brazil, which bodes ill for export growth until at least midyear 2003.

In most South American nations, an oppressive debt burden makes it impossible for governments to jump-start consumption through stimulus packages. As a result, the region will probably not experience sustainable private sector recovery until global economic recovery sets in.
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Comment:CRISIS OF CONFIDENCE BATTERS SOUTH AMERICAN EXPENDITURE.
Publication:Market Latin America
Article Type:Brief Article
Geographic Code:30SOU
Date:Oct 1, 2002
Words:589
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