Playing the rebound: Latin America has hit bottom. Will it bounce--and how high? (2003 Forecast).

Beatriz Peralta Avalos wants to land a big deal. The executive director of Promoting Investment in El Salvador, Peralta has been wooing small and medium-sized commitments from international companies. But what the former Coca-Cola executive wants is an anchor investor like Intel or Electrolux to support the development of an entire industry in the Central American country.

"Once you land a big company, the suppliers come and it is easier to attract other companies from the same industry," she says. "Landing the anchor company, however, is like trying to make someone fall in love with you. You send flowers, chocolates, letters--whatever it takes to win the person's heart."

El Salvador and the rest of Latin America will need all of the sex appeal they can muster in the next 18 months. Volatile politics, slow growth and scarce international capital will continue to turn off most potential investors. However, the blemishes mask an emerging turnaround story.

According to the LATIN TRADE Consensus Economic Forecast, the region's eight largest economies will post mediocre, and in some cases awful, performances in 2002. Most notably, Argentina's gross domestic product will contract more than 14%. As Mexico rebounds with the United States, and Brazil leaves electoral uncertainty behind in October, however, all of the Big 8 Economies will post strong positive numbers in 2003, according to our annual survey or analysts at 11 of the world's leading investment banks.

Mexico is expected to lead the recovery. The region's largest economy will see rising GDP growth from 1.7% in 2002 to 4.6% in 2003. Brazil

will resume a faster pace of expansion too. Growth will rise from 1.6% in 2002 to 3.5%. Chile, Peru, Ecuador and Colombia should all see growth of 3% or better next year. Argentina and Venezuela will see no significant expansion in 2003, a major recovery from the economic collapses in 2002.

Trade will be a key component of the turnaround story. Exports from the largest Latin American countries will hold steady in 2002 at US$316 billion, but the consensus is that they will surge 8%, to more than $340 billion, in 2003. Mexico will be at the front of the charge with a massive expansion from $164 billion in 2002 to $181 billion in 2003.

Hockey-stick-shaped forecast graphs are always suspect, but actual figures, too, show signs of an emerging turnaround.

The Mexican economy expanded at an annual rate of 2% during the second quarter of the year, according to preliminary government estimates. Total exports and imports in Latin America's largest economies bottomed out in February 2002 and have nearly returned to 2001 1evels. The U.S. government has resumed Andean Pact commercial benefits as well as restoring trade negotiations under the so-called fast track system. According to London-based research group Consensus Economics, the world's leading economies will see expanded or resumed economic growth in 2003.

Until the turnaround becomes more widespread and stronger, however, Latin American countries will be challenged to woo foreign investment. Mexico attracted 18% less foreign investment in the first half of 2002 compared to the same period last year. Its full-year results are expected to be $13 billion, compared with $24.7 billion last year when Citibank paid $12.5 billion to take over Banamex.

Chile and El Salvador, two of the region's strongest economic performers, continue to push forward on sound fiscal management policies aimed at promoting growth and gaining secure access to markets for exports.

Chile will be the first in line for free trade with the United States, following its agreement with the European Union. On the basis of these agreements, growth is expected to jump from 2.7% in 2002 to 3.7% in 2003, with exports expanding at a near 10% pace in 2003, according to the LATIN TRADE Consensus Forecast. That reflects a significant turnaround given the difficult environment in which the region's economy as a whole is forecast to contract 1.2% in 2002.

Similarly, El Salvador also has sought to feed waning economic expansion with increased trade and investment. The Central American country has signed free trade deals with Mexico, Chile, the Dominican Republic and Panama in the last two years. The country is negotiating a deal with Canada to be signed this year and expects, perhaps optimistically, that U.S.-Central American trade negotiations will reap another agreement by the end of 2003.

El Salvador has lured $500 million in direct foreign investment during the last two years, but promoter Peralta Avalos admits that some of it generated low-wage jobs at assembly plants or call centers. "You have to start with the boring and repetitive jobs," she says.

Pain across the board. That the region's best economies are having trouble winning the hearts of investors reveals how far confidence has fallen in Latin America. In deep South America, Argentina has become a virtual money pit. Twenty-four leading multinational companies in Latin America reported combined Argentina related losses of more than a billion dollars in the first quarter of 2002. The country almost single-handedly lowered the profit projections of Spanish banks Banco Santander Central Hispano and Banco Bilbao Vizcaya Argentaria from a 10% increase to a 10% drop in the first half of 2002.

While hardly providing solace, the pain is across the board in Argentina. "We are hurting like everybody else," says Alan Witrock, regional operations manager for Eastman Kodak. "We are working with our customers because we don't want them to go out of business."

Kodak is offering clients a break on credit terms and pricing because Witrock believes building distributor loyalty during the down time will pay off in the long run. "When the dust clears in a crisis, our market share goes up," he says.

While long-time market participants hunker down in Argentina, Brazil has added to already complicated market conditions. Uncertainty regarding the policies of the next government, coupled with the winding down of privatization, has left little to lure significant new investment. Brazilian authorities expect foreign investment to finish 2002 at $22 billion, or about the same level as 2001.

The government taking power on Jan. 1, 2003, will face tough negotiations as it seeks to reduce the $264 billion debt burden, equal to more than 55% of gross domestic product. It will also struggle to bring back budget discipline to government finances without squashing economic growth. Perhaps the biggest single policy decision for the next Brazilian president will be whether to join the proposed Free Trade Area of the Americas.

Cross-border investments are growing. Brazilian companies Petrobras and AmBev are leading the charge to buy devalued Argentine assets with headline-making investments in Perez Companc and Quilmes,bn respectively. Mexico's Cemex, Bimbo and America Movil continue to make major acquisitions in the Americas. Colombia's Bavaria and two Venezuelan brewers, Grupo Cisneros and Polar, are fighting over Backus & Johnston in Peru.

U.S. input. Even though many companies have been buying abroad to strengthen their market position in Latin America and the United States in anticipation of a deal, obstacles remain. Brazilian authorities, for example, want U.S. officials to drop protectionist policies in steel and agriculture.

Whether the United States will come to terms with the Brazilians on these issues is uncertain. "The U.S. is no longer focusing efforts on Latin America," says Thomas G. Travis, a principal at trade consultancy Sandier, Travis & Rosenberg. "There's a different dynamic now." United States sought to restrict the flow of goods like textiles from Asia while providing reduced duties on Latin American products that used U.S. inputs, Travis says. The North American Free Trade Agreement included many provisions aimed at guaranteeing that Mexico-based companies bought U.S. content, like yarn, for their textiles.

While market access gave Mexico an initial boost; companies now complain that the strong peso combined with lack of flexibility on choice of the cheapest inputs has made the country an expensive place to locate.

If the Nafta model is extended throughout the Western Hemisphere, manufacturers will be tied into high-cost materials, says Travis. The decision of where to locate a plant now hinges on the cost of raw materials vs. the tariffs to get into the United States plus the size of a country's quotas for Southeast Asia. In 2005, however, Asian quotas go away in the United States--except for China. "When restraints are lifted for Asian countries, we'll see if Latin American countries can compete," says Travis.

Competition extends beyond the cost of labor and transit times. In many cases, the need to compete will force governments to implement far-reaching reforms to remain in the game. Mexico, for example, has surged ahead of Brazil in many areas because of its free trade agreement with the United States. To stay in front; though, Mexico will have to open up the energy sector to reduce power prices.

Many countries in Latin America are now struggling to continue with reform. The civil war in Colombia is intensifying. Argentina and Venezuela are immersed in a bitter public debate about the future course of their countries. Opposition congresses in Mexico and Chile have stymied changes across the board. Whatever the outcome of the Brazilian elections, continued. privatization, deregulation and economic opening will be a tough sell.

Travis even suggests that many parts of Latin America need to embrace cultural change to achieve faster response times to the demands of global business. "People tell me that it takes longer to get an answer in Latin America than many parts of Asia," he says.

The changes are already happening. To improve El Salvador's competitiveness, for example, officials streamlined regulations to allow a business to get a tax number in 24 hours and set up shop in seven days. The customs administration has earned ISO 9000 certification.

Salvadoran investment promoter Peralta says anchor investors are another key to maintaining competitiveness. The presence of Hanes and Fruit of the Loom has drawn some 250 other texile-industry companies to the Central American country "That base helps you sell the country to other textile and apparel investors because they don't have to find established suppliers," she says. To swap stitches for circuit boards, she has to make a big high-tech investor swoon.

CONSENSUS FORECAST

             '01 GDP     '01 GDP       '01            REAL GDP
           US$ Billion  Per Capita  POPULATION        % Change
                           US$       Million     2001     2002E

ARGENTINA     268.7       7,165        37.5      -4.4     -14.3

BRAZIL        503.7       2,913       172.9       1.5       1.6

CHILE          66.5       4,318        15.4       2.8       2.7

COLOMBIA       82.4       1,913        43.1       1.4       1.4

ECUADOR        14.4       1,119        12.9       5.6       3.0

MEXICO        618.2       6,157       100.4      -0.3       1.7

PERU           54.0       2,053        26.3       0.2       3.3

VENEZUELA     128.4       5,220        24.6       2.8      -4.8

            REAL GDP             INFLATION                EXCHANGE RATES
            % Change              % Change                End of Period
           2003F        2001   2002E     2003F        2001   2002E

ARGENTINA   0.8         -1.5   83.3      52.9         1.00    5.13

BRAZIL      3.5          7.7    5.9       4.5         2.32    2.57

CHILE       4.7          2.6    2.6       2.9          661     673

COLOMBIA    2.9          9.0    6.4       5.8        2,278   2,513

ECUADOR     3.7         22.4   11.5       6.7         1.00    1.00

MEXICO      4.6          4.4    4.8       3.7         9.16    9.85

PERU        3.8         -0.1    1.6       2.4         3.44    3.54

VENEZUELA   1.2         12.3   31.9      25.0          758   1,475

           EXCHANGE           CURRENT ACCOUNT             INT'L RESERVES
             RATES
             End of               % of GDP                  US$ Billion
             Period
           2003F        2001    2002E     2003F      2001     2002E

ARGENTINA   6.38        -1.6      8.3      9.2       14.5      11.1

BRAZIL      2.70        -4.6     -3.9     -3.9       35.7      34.1

CHILE        678        -1.9     -1.4     -1.9       14.2      14.5

COLOMBIA   2,685        -2.0     -2.6     -3.0       10.2      10.1

ECUADOR     1.00        -4.3     -5.5     -4.8        0.8       1.2

MEXICO     10.22        -2.9     -2.3     -2.6       44.7      43.1

PERU        3.60        -2.2     -2.0     -2.4        8.7       9.0

VENEZUELA  1,735         3.4      4.5      4.1        9.2      13.2

             INT'L                EXPORTS                    IMPORTS
            RESERVES
              US$               US$ Billion                US$ Billion
            Billion
           2003F       2001     2002E    2003F       2001     2002E

ARGENTINA  12.1         26.7     26.8     29.1        20.3     11.6

BRAZIL     31.5         58.2     56.6     60.4        55.6     51.7

CHILE      14.6         18.5     19.2     21.0        17.8     17.6

COLOMBIA   10.3         12.3     12.5     13.4        12.8     12.5

ECUADOR     1.4          4.6      4.6      5.0         5.4      5.7

MEXICO     46.5        158.5    164.4    180.6       168.3    173.7

PERU        9.4          7.1      7.4      7.8         7.2      7.3

VENEZUELA  14.3         27.4     25.1     24.4        16.2     14.7

            IMPORTS
              US$
            Billion
           2003F

ARGENTINA   12.9

BRAZIL      55.0

CHILE       19.6

COLOMBIA    13.7

ECUADOR      6.2

MEXICO     192.1

PERU         7.7

VENEZUELA   15.5

E = ESTIMATE F = FORECAST

SOURCE: Banamex, BBVA, CS First Boston, Deutsche Bank, Goldman Sachs,
J.P. Morgan Chase, Merrill Lynch, Morgan Stanley, Sanlander Central
Hispano Investment, Salomon Smith Barney, UBS Warburg, LATIN TRADE

RELATED ARTICLE: THE BIG VOTE

Brazilian President Fernando Henrique Cardoso hands over power to a new government on Jan. 1. During his eight-year administration, the septuagenarian sociologist ended hyperinflation, led one of the world's largest privatization programs and pushed toward global integration. Brazilians vote Oct. 6 for a president, 27 governors, the entire Chamber of Deputies and two-thirds of the Senate. If no candidate gets a majority, the top two finishers enter an Oct. 27 runoff. Presidential frontrunners are:

Luiz Inacio 'Lula' da Silva

In his fourth bid at the presidency, the Partido dos Trabalhadores candidate has softened his leftist line. With the help of Brazilian master pollster Duda Mendonca, the 56-year-old labor organizer-known as "Lula"--uses his TV time to hammer basic issues of jobs and economic well-being. Lula's big challenge is to allay fears of the domestic and international business community that his government would opt for populist measures.

Jose Serra

The former health minister is Cardosos choice. The Partido do Movimento Democratico Brasileiro candidate is pulling out all stops, picking Rita Camata as his running mate to win support from female voters. Exiled during the military coup, the 60-year-old economist now must overcome the Al Gore syndrome: This stiff, intellectual policy wonk must get credit for the best of the Cardoso government, while avoiding blame for Brazil's problems.

Ciro Gomes

Ceara state's ex-governor gets support from left-of-center parties as well as old guard powerbrokers like Antonio Carlos Magalhaes, He is coached by political guru Roberto Mangabeira Unger and scored big with women when he stopped campaigning to help girlfriend Patricia Pillar tend her ailing mother. The former finance minister casts himself as neither a government insider, like Serra, nor a leftist without administrative experience, like Lula.

--Carlos Adese