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The economy grew by 3.96% in 2004, slightly below both the government's target of 4%, and the 2003 rate of 4.02%. The government pointed out that if the illegal drug trade, which it said had a bad 2004, is stripped out the economy actually grew by 4.2%.

The best performing bits of the economy were those which traditionally have had close links to the drug trade: financial services and construction. Financial services saw growth of 12.2% in 2004. Construction also had a good 2004, growing by 10%. Admittedly, financial services and construction did even better in 2003.

According to the national statistics agency, DANE, the economy grew 4.28% year-on-year in the fourth quarter of 2004.

Fourth-quarter growth was stronger than independent economists had been suggesting and much better than the anaemic 2.4% of the third quarter.  

Apart from the decent contributions from financial services and construction, over 2004 as a whole, there was a 5.6% growth in the retail sector and a 4.8% rise in manufacturing output. Manufacturing started 2005 strongly, rising 6.8% in January from the same month in 2004. In 2004 manufacturing increased its rate of growth compared with 2003. In 2003 the growth rate was 4.2%; in 2004 it was 4.8%. The laggards in 2004 were the primary sectors. Oil and mining managed to grow by just 2.8% in 2004 against 13.4% in 2003. Agriculture's growth rate fell from 3.2% in 2003 to 2.1% in 2004.

Some analysts praised the role played by President Alvaro Uribe in increasing confidence in the Colombian economy. Others claim that Uribe's decision last year to devote his efforts to securing constitutional reforms allowing him to serve a second term rather than to push through much-needed tax reforms could harm the government's efforts to reduce poverty.

The poverty rate stands at around 60% while unemployment is also a problem. The unemployment rate in the 13 biggest cities stood at 16.1% in February according to figures published on 30 March. This is the same level as registered in January but below the 17.1% rate seen in February 2004. The national rate in February, however, was 14%, down 0.8% on January's rate.

Current account: The country's current account deficit in 2004 was 1.1% of GDP or US$1.1bn. This was virtually unchanged (up just US$83m) on 2003, the central bank reported. The capital account ran a surplus of US$3.4bn in 2004. The result of these movements was a US$2.5bn increase in the central bank's reserves to US$13.5bn. The central bank pointed out that reserves now amounted to 1.5 times the country's short-term debt (ie debt maturing in 12 months or less).

Trade: The country ran a trade surplus of US$1.1bn in 2004. Exports came to US$17.01bn while imports came to US$15.87bn. Exports were up by 23% compared with 2003, while imports were up by 19.8%.  

Retail sales: These rose 8.67% year-on-year in January 2005, DANE reported

Industrial output: This was up by 1.96% year-on-year in January 2005, DANE reported.

The economic consultancy, Indesa, run by a former finance minister, Guillermo Chapman, reckoned that the economy grew by 6% in 2005. The official figures will not be published until March.

The canal, and the associated shipping and financial services business, means that the economy reflects what happens in the global economy. The UN's Comisión Económica para América Latina pointed out that 2005 was a decent year for the global economy: the global growth rate was 3.3%.

Chapman reckons that the local economy's growth rate was driven by a 14% increase in exports and a 6% increase in consumption. The main evidence of the increase in domestic consumption was an increase in electricity use and a 21% jump in the sale of new vehicles.

On the export side, the turnover at the Colón free zone was up by 19% while there was a 17% increase in containers going through the canal and a 13% increase in canal tolls. Tourism revenues were up by 19%.

The pick-up in the local economy was helped by a 23% in bank loans.

Canal: The weight of cargo going through the canal increased by 1% in the first quarter of the fiscal year, (October 2004 to December 2005). The government said that by the end of January it should have received the various reports it has commissioned on whether to expand the canal. The second vice president, Rubén Arosemena, said that the government and Panama Canal Authority had more than 100 reports to review. These ranged from global economic forecasts to civil engineering assessments. Around 5% of world trade goes through the canal. The government has yet to put a figure on how much it will cost to expand the canal by building a third system of giant ship locks: the general estimate is around US$8bn.

The official government estimate for third quarter growth is 8.7%. This is significantly higher than the estimate of 8% from the economy ministry.

The government reported that all sectors of the economy, apart from the mining industry, were growing well. It singled out construction; farming and retailing as growing particularly strongly.

The strength of the domestic economy is clear from the surge in imports. In September, imports were up by 31% year-on-year. Imports of fuels and lubricants were up by 60% in value terms while imports of raw materials for industry were up by 16%.

Encouragingly, imports of capital goods were up by 17%, year-on-year. The biggest importers of capital goods were the construction industry and the transport sector. Manufacturers also increased their purchasing.

In 2005 the economy grew by 6.5%, its fifth consecutive year of decent growth. For this year the government was forecasting growth of 6.6%, but President Alan Garcí­a has recently started to assume that 7% growth is all but assured.

GDP grew by 9.6 % year-on-year in August. In the first eight months, the economy grew by 7.25%. The central bank is expecting a slowdown in 2007, forecasting growth of between 5.5% and 6%. The bank expects inflation to remain below 2%.

Exports are currently rising at an annual rate of 50%, thanks to strong metal prices. Peru is a significant exporter of silver, copper and tungsten.

The central government is running a balanced budget, at least for the first nine months of 2006.

Foreign investment: A smallish British mining company, Monterrico Metals expects to invest US$1bn in developing its Rí­o Blanco copper project near Piura. The company reckons that the project should develop into Peru's biggest copper mine soon after it comes on stream in 2010.

Inflation: Inflation in October was 0.04%, much the same as September's 0.03%. The rate for the first 10 months was 1.4% and the rate for the 12 months to October was 1.9%. In 2005 inflation was 1.5%.

This is our fifth effort at forecasting what will happen in the region in 2007 and our first stab at forecasting what will happen in 2008. We are making these forecasts in late-September, just after the US Federal Reserve Board cut US interest rates by half a percentage point. Our view of the global economy is bearish. We think that world growth will slow, despite the Fed's action, and the effect of higher commodity prices (oil, metals and grains) will push up inflation.

Given this overall background, South America, is, unusually, rather well placed. It is a major producer of commodities, so will benefit from higher prices. South America's exposure to the US, which is likely to be the world economy that will have to make the biggest adjustments to its current mix of economic policies, has generally been shrinking over the past decade.

Right across Latin America governments have been rebuilding their economic credibility (even, we would argue, in economies influenced by President Hugo Chávez of Venezuela) so they should be in a position to weather a rough patch, provided it does not last too long. Our view is that growth in South America over the next few years will be significantly faster than in Mexico and Central America. Mexico and Central America are much more dependent on the US than South America, especially for remittances, so their political stability may wax and wane alongside the US economy.

Our view three months ago was that Brazil and Chile would have better economic performances (ie growth of 5% or more and an inflation rate below that) in 2007 than they did in 2006. Brazil, definitely, looks on course for decent growth in 2008. The outlook for Chile is rather cloudier, given the upswing in inflation and the government's uncertain performance. Colombia, Peru, Panama and El Salvador all look as though their economies will grow fast (around or above 5%) without triggering faster inflation.

Although the outlook for South America is better than for Central America, growth in the Chávez economies (Argentina, Bolivia, perhaps Ecuador, Nicaragua and Venezuela) will slow a bit, largely because its has been so fast in the past three years. No-one really knows whether the Cuban economy is growing fast or slowly. It is clearly, however, growing.

Strategically, what happens economically in Mexico is likely to have the greatest implications for the region. Only if oil prices collapsed (unhinging Chavismo) would the geopolitical implications be greater. Mexico, though, not as dependent as Venezuela and the other Opec countries on oil is still hugely vulnerable to a collapse in oil prices. The Mexican government depends on oil for 35% of its revenues, 90% of which are committed to wages and pensions. A 50% collapse in oil prices, as happened at the end of 1990s, coupled with a weak US economy (so no jobs for Mexican emigrants and export industries) would create social tensions in Mexico that could easily erupt into something vicious. The government of President Felipe Calderón Hinojosa is playing the very difficult political hand, bequeathed him by his increasingly discredited predecessor, Vicente Fox, rather well. But with the oil running out, a guerrilla group set on a bombing campaign and a war against the drug trade, he and his government face the greatest challenges in the region.

The issue for Mexican economic policymakers is whether or not they decide to take risks with inflation to keep the domestic economy growing. Their initial answer, provided by the Banco de México's decision to raise interest rates in May, is that the battle against inflation is all-important. It is worth remembering that the Banco de México, unlike the US Fed, has only an inflation target. The Fed has to balance inflation with employment. The worry for the financial markets in Mexico should be that the Banco de México's action has not had a noticeable effect on inflation: the rate is still around 4%, significantly above the US's 2.5%.

A weakening US economy is also likely, so that means that 2008 will be another year in which local currencies are strong. Colombia, Brazil and Chile have all suffered from this phenomenon in 2007. Ecuador, El Salvador and Panama, which are dollarised, have benefited.

Our view is still that Argentina is still the region's most vulnerable economy. It looks as though, however, the government has timed things nicely. It has kept the lid on inflation to allow Cristina Fernández, wife of the current President, Néstor Kirchner, to win the presidency, almost certainly in the first round at the end of October. She has been making international connections this year (in Mexico and Europe) which may signal that she will try to propel Argentina out of its current orbit around Venezuela.

As we warned three months ago, the crisis in the US housing market has affected the financial markets. We would argue that second shoe has yet to drop: an apparent collapse in the house construction market must have implications for municipal finance and general consumption. We think that the US is on the verge of a major recession. This, we define as at least three consecutive quarters of either quarter-on-quarter or year-on-year contractions in output.

What is interesting is how well Latin American economies, with the exception of Mexico and Central America are diversifying their economies away from relying on the US. China's demand for metals and food has helped. What has been less remarked upon is the European Union's rekindled interest in South America. As we noted three months ago, the bulk of the record levels of foreign investment in Brazil is coming from Europe. The Europeans are as interested in buying into service businesses as well as manufacturing. As we noted three months ago the corollary to this increasing trans-atlantic trade has been that more cocaine is flowing northeast across the Atlantic. There are signs that the drug industry is finding the US cocaine market at near saturation point, while demand from Europe is growing.

In the Andean countries, Bolivia's economy is moving. The pick up in inflation suggests that more people are entering the economy which has put pressure on supplies. The political uncertainty has not had much effect on the economy, either way. If a rightwing government was in power, the radical Left would, almost certainly, be protesting deterring foreign investment. Around the world, investment in gas has tailed off: when gas prices recover foreign investment in Bolivia will pick up again. In Ecuador, the economy is doing ok: the constituent assembly elections at the end of September may well give the economy a leftward tilt, but the new constitution is likely to be more socially inclusive (ie specifically guaranteeing gay and indigenous people's rights, for example) than economically radical.

In Venezuela, President Hugo Chávez can go on with his heterodox economic policies for as long as oil prices stay high. It is worth noting that only one foreign oil company, ENI from Italy, has confronted the government over its policy of turning foreign investors into minority shareholders in oil projects. Even US oil companies have shied away from confronting the government. As the foreign oil companies who have settled with the Chávez government will retain management control, it is far from clear that the shift in shareholdings will make much difference on the ground.

In Colombia growth in the second quarter was 6.87% year on year. Industrial output was up by a staggering 12%, thanks to the oil-fuelled boom in Venezuela.

Colombia's trade is dominated by two countries: the US, which buys 33% of the country's exports and Venezuela, which buys 14%. The country's biggest trade surplus (US$1.2bn in the first half of 2007, three times more than in the first half of 2006) is with Venezuela. Colombia's trade surplus with the US fell by 65%, compared with the first half of 2006, to US$615m.

Now to our specific forecasts. Three months ago, we forecast that the US Federal Reserve Board would not alter interest rates, either up or down until after the summer. We were right about that. Until the Fed cut rates the Six month Libor (London Inter-Bank Offer Rate) was in line with our target of between 5.50% and 5.30%. It is now 5.09%. We expect another 25 basis point cut by the end of year bringing Six Month Libor down to around 4.8%in December. Our bearishness on crude oil prices was hopelessly wrong. Again. Three months ago we expected the price to fall back below US$60 a barrel by September. In fact crude oil traded close to its all-time high of US$84.1 a barrel in the penultimate week of September. We still expect the oil price to fall back to below US$70 a barrel by the end of the year.

On copper we expected prices to ease back to US$3 a pound by September. In fact the price fell close to that level before recovering to US$3.5. We expect copper prices to have weakened by 10% by December.

Argentina
The right-wing opposition is trying to generate a row over inflation. The government, in the form of the prime minister,was tempted into making the bizarre statement that there was no inflation in Argentina. The central bank governor, Martí­n Redrado, annoyed President Kirchner by saying that inflation was worrying. Despite this, the economy is still humming along at 8% plus growth. Unemployment is falling and the fiscal position looks sustainable in the short term. The big economic problem is investment: the economy is increasingly becoming a satellite of Brazil. The Argentine car industry serves the much larger Brazilian industry, while Petrobras is one of the main investors in the energy industry.

Brazil

The government and private sector forecasters are steadily increasing their forecasts to around 5%. We still think that this is an underestimate and 6% growth is possible. What is hugely encouraging is the level of foreign direct investment. The government is now expecting over US$32bn in FDI this year. Some of this is corporate activity but the bulk is "real" investment in new factories, and machinery. The government had been forecasting US$25bn in FDI in 2007. The strength of FDI should mean that the economy will continue to grow fast in 2008. We expect 5% growth.

Exporters, even of manufactured goods, have coped with the rise in the Real against the dollar. They now seem able to live with a dollar at sub R$1.90 levels. The question is could they cope with a dollar down at R$1.70. It is worth remembering that a year ago the dollar was at R$2.20.

The other hugely positive development is the lowering of interest rates. This is leading to wider access to credit: construction and housing loans is up by 70% in the first five months of the year compared to the same period of 2006. This surge in credit means that the service sector is booming. Credit is likely to become even more widely available if the country achieves investment grade status. Several investment banks reckon that this could happen before the end of the year.

Chile
The central bank raised interest rates in August and then again in September. Both times it increased rates by 0.25%, bringing them to 5.75%. The bank has been disconcerted by the run up in food prices which has taken the 12 month inflation rate up to 4.7%. This is the highest rate for six years. Growth, though, has been strong, prompting the government to raise its forecast for 2007 to 6%. Domestic demand is running at around 6.8%. The resurgence of copper prices will keep government revenues buoyant, though whether the bureaucrats have the capacity to spend the money wisely is far from clear, given the expensive mess and muddle of the Transantiago urban transport scheme which despite having money chucked at it, is still not functioning properly.

Colombia
The peso surged against the dollar when the US cut interest rates. The strength of the currency is taking some of the edge off inflation, which is already about 50% ahead of the government's 2007 target.

As we noted three months ago, the central bank has all but admitted that raising interest rates has not been effective in bringing inflation to heel. It, and the government, have now moved on to trying to discourage financial investors putting money into the country and Colombian companies borrowing abroad. The government's changed policies have yet to deliver.

The real economy is still benefiting from the strong growth in Venezuela. Exports to Venezuela are booming while sales to the US are showing signs of wilting, after their strong growth in 2006.

Politically, President Alvaro Uribe has trouble on several fronts. His biggest headache is the Democrats' control of the US Congress. They will thwart his free trade agreement with the US and may yet force the US to scale back the military support provided under Plan Colombia. The likely loss of the US base at Manta, Ecuador, will also have implications for US anti-drugs policy.

Another issue for Uribe is France's renewed interest in securing the release of Ingrid Betancourt, held hostage by the Farc. The Farc has ignored Uribe's first gesture, releasing Rodrigo Granda, a prominent Farc leader, gambling correctly that France's new president, Nicolas Sarkozy, will heap pressure on Uribe and force him to make more concessions.

The third problem, the controversial peace process with the paramilitaries, will come under a spotlight in the run up to the regional elections, due at the end of October.

Ecuador
President Rafael Correa's focus on reforming the constitution means that all he wants from his economic team is no nasty surprises. He has, in fact, done rather better. The economic sluggishness that seemed to be manifesting itself in July has dissipated. Employment, energy usage and manufacturing output are all increasing. The only problem is that oil production is sticky.

Businessmen are pleased by the government's decision to cut, and in some cases, eliminate import tariffs on capital goods and imported inputs.

What is interesting is that despite dollarisation inflation remains low. Only Peru has a lower inflation rate. The government is confident that it can keep the rate at the current level of below 3% for 2008. It is also forecasting that growth in 2008 will be 4.3%. This is above the long term trend rate of annual growth of 3% and the government's target for 4% growth in 2007.

Mexico
The economy has slowed down, but the strength of domestic demand, fuelled by cheap credit, has taken the edge off the sharpness of the fall in US demand. The short-term problem for policymakers is that cheap credit may have led to some distortions in the domestic economy. The structural problems for the economy are the dependence on oil, which is now running out fast and on the US. Our view of both is bearish, so we are gloomy about the long run prospects.

The main bull point for the economy is the practical outlook of the government of President Felipe Calderón. Business does not like his fiscal reform, as adjusted by congress, but it is a significant start. The electoral reform is far more radical and would switch the emphasis in election campaigns away from money and back to organisation. The reform will clearly benefit the Partido Revolucionario Institucional, which lost the presidency in 2000, but has retained control of a majority of Mexican states. The electoral reform will also weaken Elba Esther Gordillo, the hugely powerful leader of the teachers' union, Latin America's biggest trade union. Gordillo has controlled education policy in Mexico since the early 1990s and extended her power into politics under President Vicente Fox: she was probably decisive in the 2006 election in tilting the result Calderón's way. Yet Calderón has not become beholden to her. With Agustí­n Carstens at the finance ministry it is quite possible that Calderón's administration will develop into the technocratic, but reforming, administration that Mexico needs.

Peru
President Alan Garcí­a's impressive response to the Ica earthquake in mid August has transformed the commentariat's view of his administration. His big challenge now is to manage the prosecution, and conviction, of a former president, Alberto Fujimori. Fujimori was extradited to Peru, from Chile, on 22 September. The problem for Garcí­a is that he depends on the Fujimoristas for his majority in congress.

The economy looks well set. Growth will be around 7% this year and there is little reason for the rate to slow in 2008. Retailing and construction are booming. The Camisea gas project will underpin exports and keep the economy moving. Inflation is negligible, in international terms, running at less than 2.5% a year. This low rate did not stop the central bank from raising rates to show that it was not happy. In 2006 inflation was only 1.1%.

Venezuela
President Hugo Chávez 's anti-capitalist rhetoric disguises some pretty impressive orthodox economic achievements. The most important is probably the reduction in the foreign debt burden from 37% of GDP three years ago to 17% now. Some of this achievement is the result of strong economic growth; the rest is down to using the oil surpluses to pay off expensive debt.

The economy is running into capacity constraints. Investment has been stuck at 19% of GDP even though the economy has grown by an average of 13% a year over the past three years. Orthodox economists argue that something must change: either the growth rate will wilt or investment will have to go up. The surge in inflation is one indication that demand is exceeding supply.

We would argue that it is more sensible to see Venezuela and Colombia as complementary economies. Business investment in Colombia has been huge as its export trade with Venezuela has soared. What Chávez has done is to increase spending on health, education (and defence). He has also bought political influence in both South America and the Caribbean by either lending money (Argentina) or providing potential allies with cheap oil.

Chávez 's critics claim that the imbalances in the economy will lead to a devaluation. Chávez 's advisers will probably camouflage any devaluation in the currency reordering scheduled for the beginning of 2008 when the government lops three zeroes off the dollar exchange rate. A devaluation will boost government revenues (and thus reduce the budget deficit) because half the government's revenues come from oil exports, which are denominated in dollars. The budget deficit is anyway pretty notional because the government is budgeting on an average price of US$29 a barrel in 2008. Venezuela is currently selling its oil for two and half times that figure.

On 14 July Standard & Poor's, an international credit ratings agency, upgraded Peruvian debt to investment grade. The government of President Alan Garcí­a must be hoping that Peru does not suffer Brazil's fate: ever since Brazil achieved its investment grade rating on 30 April, the economic outlook has become cloudier.

Indeed S&P's reasons for granting Peru the investment-grade rating now are odd: the agency claimed that there was growing support for President Alan Garcí­a's orthodox economic strategy. This announcement came a week after a well-supported national strike called specifically to protest against Garcí­a's neo-liberal economic policies. On 27 July, the second anniversary of Garcí­a's assumption of the presidential sash for the second time, opinion polls showed that 70% of the population had doubts about his economic policies. Most of the complaints are about higher inflation. The annual rate is on course for 7%, though food prices are rising much faster.

What is undeniable is that the economy is doing well, thanks to high metal prices and the Camisea gas project, whose revenues should bolster the economy against a collapse in metals prices. In 2007 the economy grew by 9%.

S&P now rates Peruvian long term debt BBB-, up from BB+. Moody's is now the only major ratings agency not to rate Peru as investment grade. Moody's rates Peru Ba2, two notches below investment grade.

A recent (7 July) opinion poll for the Pontificia Universidad Católica del Perú (PUCP) found that most Peruvians think Garcí­a is doing better than he did in his first administration, which ran from 1985 to 1990 and ended with hyper-inflation and a confrontation with two violent guerrilla organisations. However the majority of respondents also felt that the inflation outlook has deteriorated since Garcí­a took office in 2006. In June 2008, consumer prices reached 5.71% on an annual basis. Inflation was 3.93% in 2007.

Peru's economy in April was 13% bigger than it was in April 2007. This was the largest year-on-year increase in 13 years and means that the country has now enjoyed annual growth for 82 consecutive months. Over the first four months of the year, the economy was 10.5% bigger than over the comparable period of 2007.

The main drivers of this growth are: construction, fishing and manufacturing. The April figures were also flattered by the earliness of Easter this year: in 2007 Easter and Holy Week fell in April and so depressed the April 2007 output figures.

Construction in April 2008 was up by an unsustainable 34%. Fishing, which was boosted by an ending to the anchovy ban, was up by 29%. Manufacturing growth was an impressive 17%, year-on-year.

Inflation: Inflation in the first half of 2008 was 3.5%. In June the monthly rate was 0.77%. The June figure brought the annual rate to 5.71%, according to the Instituto Nacional de Estadí­stica e Informática (Inei).

The main worry about the June figure is that it was the third highest so far this year after March's 1.04% and February's 0.9%. In May the inflation rate was 0.37% and in April it was 0.15%.

The Inei said that the main reason for the June surge was the increase in the prices of products with a high imported-goods content. Most of these products have a strong oil price component.  The price index covering this category of goods rose by 3.4%. There was also a nasty 7.44% jump in the price of seafood and a 6.3% jump in the price of vegetables.

The economy is being squeezed by the fall in oil revenues. In the first quarter of 2009, total export revenues fell 44% year-on-year, with oil revenues down 66% year-on-year. Non-oil revenues were down just 4.5%, according to figures from the Cámara de Industriales de Pichincha.

In the first quarter of 2009, the country ran a trade deficit of US$820m, compared to a surplus of US$1.1bn in the same period of the previous year. Exports came to US$2.5bn, compared to US$4.62bn in the first quarter of 2008. Imports in the first quarter came to US$3.41bn, down only fractionally on the US$3.47bn recorded in the first quarter of 2008.

The main reason for the fall in exports was the slide in oil revenues. In the first quarter of 2008, Ecuadorean oil was selling for an average of US$81.2 a barrel. In the first quarter of 2009, the price averaged only US$29.8 a barrel. It is worth noting, however, that by the end of May the price had recovered to US$50.4 a barrel.

Remittances: On 20 May the central bank reported that remittance inflows in the first quarter were down 27% year-on-year. The fall in remittances to Ecuador is much higher than in Mexico or Central America and suggests that the slowdown in Spain's economy is hitting immigrants there hard. The Ecuadorean figures have bleak implications for Bolivia and Colombia, which also have many migrant workers, mostly women, in Spain.

In the first quarter, remittance inflows came to US$555m, down from US$760m in the first quarter of 2008. In the fourth quarter of 2008, they were worth US$644m.

The central bank pointed out that the unemployment rate in Spain jumped from 9.5% in the March 2008 to 17.43% in March 2009. This means that there are now 4m unemployed in Spain. Ecuadorean consular officials estimate that there are about 50,000 Ecuadoreans out of work, but determined to sit out the recession in Spain rather than go home.

In the first quarter of 2009, Spain accounted for 41% of the total remittances sent to Ecuador, while the US supplied 45% (or US$30m more). The other big remittance sender is Italy, which supplied 8% of the total. Remittances account for 14% of the country's current account inflow.

Inflation: In April inflation was 0.65%, considerably down on March's 1.09%. In the first four months of 2009, the rate was 2.95% and in the past 12 months it was 6.5%. In 2008 inflation was 8.83%.

A mission from the International Monetary Fund (IMF) arrived in Tegucigalpa on 15 March to assess the state of the economy. Simultaneously, the Inter American Development Bank (IDB) announced that it was re-starting lending to the country.

William Chong Wong, the finance minister, said he hoped that the IMF would come up with clear solutions to the country's problems and he promised not to mislead the Fund. He expected the Fund team to remain in the country for about 10 days.

In early March, the IMF freed the country's quota of 160m of Special Drawing Rights (SDRs). This quota had been frozen after the overthrow of the elected president Manuel Zelaya on 28 June 2009. The IMF recognised the newly elected president, Porfirio Lobo, on 5 March. He took office on 27 January, following elections on 29 November.

Chong Wong said that he expected the SDRs to be disbursed gradually in 2010 and 2011. The government also expects US$280m in loans from the World Bank to become available. The local multilateral, the Banco Centroamericano de Integración Económica (BCIE), has also recognised the Lobo government and will also therefore re-start lending.

Parastatal: On 9 March the Lobo government took the controversial and possibly provocative step of naming the former head of the armed forces, General Romeo Vásquez, as the new president of the state telecoms company, Empresa Hondureña de Telecomunicaciones (Hondutel). Vásquez was heavily involved in the coup against Manuel Zelaya in June 2009. Vásquez's appointment to Hondutel had been heavily leaked before he officially 'retired' as head of the armed forces on 1 March 2010.   He was not due to step down until January 2011.

Finance Minister Chong Wong argued that Vásquez was a proven administrator, both in the armed forces and during his stint in charge of the host of companies controlled by the servicemen's pension fund, the Instituto de Previsión Militar (IPM). Hondutel went through three managers under Zelaya's abbreviated administration: one of them, Marcelo Chimirri, was accused of telephone tapping in 2007 and convicted of corruption in February 2010. Chimirri is one of Zelaya's in-laws and was accused of receiving bribes from US telecoms companies.

The world's car makers view Latin America as one of the most promising markets in world. Unlike either the US or Europe, demand for vehicles in the region looks likely to exceed supply for some years. This makes Latin America different from even China, where policymakers are already becoming concerned that the country's roads cannot cope with many more vehicles.

Brazil, the region's biggest economy, is the biggest vehicle manufacturer and car market. In 2010 sales of cars and light trucks in Brazil increased again, setting a   fourth consecutive annual record. The country's carmakers are enjoying the boom in the financial services industry which has made car ownership possible for many Brazilians whose parents did not have disposable incomes.

Brazil is not the only market where sales of new cars are booming. They were also up significantly in the Southern Cone's other two big economies, Argentina and Chile. In the Andean region, although new vehicle sales were down in Venezuela, they appear to have stabilised and should rise in 2011. In Peru, a record number of new vehicles (120,000) were sold in 2010 and motor traders reckon that sales could rise by 25% in 2011 as tariffs drop by a third (from 9% to 6%). Since 2006, taxes and tariffs have fallen for 46% of a new vehicle's sticker price to 25%.

Even in Mexico the vehicle industry is improving, though this is due much more to reviving exports to the US than to a buoyant domestic market. In 2010 Mexico's vehicle production was up 50%, year-on-year, at 2.26m thanks to a 52% year-on-year jump in exports to 1.86m. Domestic sales in Mexico were up 8.7% at 820,406, but are still 20% below 2008's domestic sales. The encouraging aspect of these figures is that domestic sales picked up in the final month of 2010, rising by 104,941(or 14% year-on-year). Exports were up by 6.6%, suggesting that 2011 may be a trickier year.

Mexico's dependence on export markets makes it unusual in the region. Only Colombia, which supplies Venezuela, is comparable.

In Brazil, 3.52m new vehicles were licensed in 2010. This was 11.9% more than for   the whole of 2009. The motor industry built 3.64m vehicles, up from 3.14m in 2009. It is also worth noting that Brazil's buoyant agricultural industry means that the country's agricultural machinery industry had another strong year in 2010. Sales were up 23% at 68,500. Almost 99% of the agricultural machines sold in Brazil are manufactured in the country.

What is important in Brazil, however, is the domestic vehicle market. Sales in December reached 381,500 vehicles, the highest ever monthly figure. International carmakers such as Fiat, Volkswagen, and   U.S.-based General Motors Co and Ford Motor Co now count on growing sales in Brazil to offset weaker demand in mature, developed economy markets. Brazil has recently lured manufacturers from China and new investments from Japanese and French companies looking to grasp a piece of the market.

Fiat led sales in Brazil in 2010 with 611,336 vehicles, down 1.2% on 2009, followed by VW with 604,000, down 4%. GM sold 561,732, up 11.8% on 2009, while Ford pushed up sales 12.8% to 265,068.

Argentina's vehicle makers had a gang busting year in 2010, with output setting a new record on the back of soaring domestic demand and exports to neighbouring Brazil. Like Mexico, the Argentine industry is increasingly dependent on a neighbour. Vehicle exports from Argentina increased by 38.9% compared with 2009 levels, up to 447,953 units. Most of the country's automotive exports go to Brazil, Adefa said.

Argentina's total vehicle production in 2010 hit 724,023, up 41.2% on the year, the carmakers' association Adefa reported. That marks a sharp recovery from the downturn suffered in 2009 due to slack demand amid the international financial crisis. Vehicle exports, the vast majority of which go to Brazil, jumped 38.9% on the year to 447,953. Total dealership sales - including locally made cars and imports - were up 43.3% on the year in 2010, Adefa said.

For the government, the most pleasing aspect of the boom was an increase in investment in the auto-industry.   Adefa reported that the industry had attracted Ar$5bn (US$1.25bn) in new investment.

The increase in car sales in Argentina reflects its strong economic growth. Cynics say that worries about rising inflation have persuaded increasing numbers of Argentines to buy real financial assets. As there is no financing available for property, vehicles, which are invariably bought either totally or mostly for cash, are a good hedge. According to Adefa, it now takes 18.6 average monthly salaries to buy a typical car, compared with 37.6 in 2002 when the country's economy collapsed amid a massive sovereign-debt default.

While the pace of growth is expected to slow somewhat in 2011, car makers are anticipating further surges in domestic sales and exports. Adefa is expecting production and exports to rise about 12%, with domestic sales rising 5%-6%.Car makers hope to build 840,000 vehicles in 2011.

The lower chamber of congress approved the government's pension fund reform last night. The bill now goes to the senate. It has to get through two committee votes and two by the full senate. Only if the senate alters the bill will the lower chamber get a further chance to vote on it. The government is confident that the bill will become law by mid-November.

Despite the threat from one of its nominal allies, the Partido Democrático Trabalhista (PDT), the government held its alliance together in congress. In the first round, the voting had been 358 to 126 with nine abstentions. Last night it was 357 to 123 with six abstentions. The PDT wanted to extend the privileges granted to judicial employees to those employed by legislatures and state and federal governments. This would have cost more money and, more importantly, annoyed the state governors, all of whom are still backing the government's proposal. The core of the government's proposal is to tax larger state pensions (at 11%), raise the pensionable age and reduce some of the most extravagant pensions. Judges get some of the juiciest pensions in Brazil.  

The PDT does have a valid point that the new system is riddled with inconsistencies. For example, state and municipal employees will be exempt from tax on their pensions, provided their pensions are less than R$1,200 (US$400) a month. Federal employees can get up to R$1,440 a month before being taxed.  

The proposal produced splits in President Lula da Silva's Partido dos Trabalhadores (PT) and led to some of the PT's allies breaking with it over the issue. The proposal also triggered a series of strikes in the public sector. The most strike-hit parts of the bureaucracy were the customs service and the social security agency. These strikes are now petering out.  

The government reckons that it will take at least a couple of weeks for things to get back to normal at the Instituto Nacional do Seguro Social. After all, officials have been on strike for almost two months. The pension ministry reckons that there is a backlog of 227,000 pension applications which need to be verified. On top of this there are probably another 200,000 applications which need to be submitted. The pension minister, Ricardo Berzoini, said that office hours would be extended by two hours a day until the backlog is expunged. Even this may not be enough: the ministry's computer systems keep on crashing because of the extra workload.  

The question for the government is whether the splits in the PT will heal as easily. Last night, the former PT leader in the lower chamber, Walter Pinheiro, joined three of his radical colleagues in voting against the government. In May, the PT started expulsion proceedings against members, notably Heloisa Helena, a senator from the north-eastern state of Alagoas, who publicly campaigned against the government line on pension reform. The PT is being gentler with its dissidents and abstainers in the lower chamber: they face suspension for a month (or possibly three months) according to the party president, José Genoino.  

The soft-peddling in the lower chamber seems to have paid off. Lindberg Farias, an outspoken opponent of pension reform when it was launched four months ago, amazed his colleagues by making an impassioned speech in support of the reform last night: he argued that the bill had been improved by the concessions the government has made. Farias sprung to fame in 1992 as one of the student leaders who led the campaign for the impeachment of President Fernando Collor de Mello.  

The ruling alliance in congress provided 297 of the 308 votes (two-thirds of the lower chamber) to push through constitutional reforms. The centre-right parties such as the Partido da Social Democrácia Brasileira (PSDB) and the Partido da Frente Liberal (PFL) provided 60 votes. The PFL itself split over the reforms: supporters of Antônio Carlos Magalhães, from Bahia, backed the government while supporters of the party's leader, another Bahian politician, José Carlos Aleluia, opposed the reforms. The only party in the governing alliance that was 100% pro-reform was the Partido Liberal, which has 26 seats.

The government needs to treat its supporters tenderly because the pension fund reform is to be followed by a tax reform proposal. Even the arch-conciliator, finance minister Antônio Palocci, admits that it will be tough to get the fiscal reform through congress. Palocci's technique, he admits, is not to blame the previous government for the dodgy financial position and to be open to any suggestions from governors and mayors.

Colombia's public prosecutor, Luis Camilo Osorio, said yesterday that the government has no information linking the tourists kidnapped last month by the Ejército de Liberación Nacional (ELN) to alleged gun-running activities. The eight tourists, who were captured by the ELN in the Sierra Nevada de Santa Marta, include four Israelis, two Britons, a Spaniard and a German. One of the Britons has since escaped and returned to the UK.

Osorio's comments came a day after the head of Colombia's senate, Germán Vargas Lleras, declared that 'With each day there are further indications that two of the tourists were involved with arms trafficking'. Suspicion surrounding the hostages intensified when Jorge Noguera, the uncommonly outspoken head of Colombia's secret police (DAS), said that two of the Israelis had entered the country illegally. Armed forces chief General Jorge Mora Rangel then got in on the act, saying yesterday that the military was cooperating extensively with the DAS to investigate the illegal entry of some of the tourists. Osorio merely said yesterday that the government was doing all it could to secure the release of the hostages.

Meanwhile, the Fuerzas Armadas Revolucionarias de Colombia gave a further indication that they might be stepping up their activities when a booby-trapped house exploded yesterday wounding five soldiers. The attack happened in the municipality of Puerto Rico in eastern Colombia. This was the third such bomb discovered in Colombia within a week, although the military succeeded in disarming the others.

For the first time in almost two years, the country's non-oil industry is forecasting that it will increase output over a quarter. The Confederación Nacional de Industria reckons, in its latest quarterly survey, that it will increase output by 4% in the final quarter of the year.

Even with the final quarter recovery, Conindustria's president, Lope Mendoza, noted that industry's output would have fallen by 23% between 2000 and 2003. He implied that the 4% improvement in the final quarter did not represent much more than a dead-cat bounce. He said that the better performance in the final quarter could not be construed as evidence of a recovery.

Mendoza pointed out that the country's industrial base has been shrunk. He claimed that the number of companies operating in the country was down by 60% over the past three years, falling from 11,300 to 4,600. As a result unemployment was still over 25%.

Mendoza said that the apparently consistent statistical evidence of a turnaround in industry was false. In the first quarter output was down by 35% (year-on-year), in the second quarter the decline was 14%, and in the third it was 10% down. Mendoza said that the statistics were too easily affected by a modest pick-up at a few companies. He said that the current mix of economic policies made any prospect of a sustained recovery impossible. He pointed out that 70% of the respondents to the Conindustria survey said that they did not expect any improvement in sales in the short-term and over half expected to lay off more staff. A staggering 88% said that they would not be making any investments.

Colombia's murder rate this year has dropped to a level last seen in 1986, while the number of kidnappings is set to be down 28.2% from 2002.

According to the Fundación Seguridad y Democracia (FSD), 2003 will be the least violent year for 16 years unless something dramatic happens in the last half of December. There have been 50 homicides for every 100,000 Colombians this year, a figure comparable to 1986 when the rate fell to 48 per 100,000. The FSD attributed the fall specifically to an improving security situation in and around the city of Medellí­n, where the peace process between the government and Colombia's largest paramilitary organization, the Autodefensas Unidas de Colombia, has made greatest gains.

That is not to say, however, that Colombia's security is necessarily improving on the back of the government's democratic security initiative. There have been a 2,312 clashes between armed groups this year (or an average of 6.3 a day), which represents a 73% rise on 2002. FSD said the rise was due to a significant increase in military mobilisations, especially in the departments of Caquetá and Meta.

The government will on the whole have been pleased by the FSD figures. The number of rebels and paramilitaries killed has doubled this year, from 3.8 per day to 8.2, while fatalities among the security forces have more than halved from two in every ten clashes in 2002 to just one in every 16 in 2003.

Of major significance is the fall in the rate of kidnappings to 2,145 in 2003 from 2,986 in 2002, although the rescue rate has remained constant at one in five. The petroleum infrastructure was once again the preferred target for attacks on the economy, accounting for 70% of all such attacks. The number of such attacks rose 59.5% year-on-year.

One in five 'paulistanos' was out of work in 2003. This is the highest ever level of unemployment since records began in 1985. According to the Inter-syndicate Department of Statistics and Socio-economic Studies (Dieese), more than 1.9m workers could not find work in the metropolitan region of São Paulo last year.

Real income - or salary minus inflation - shrunk by 6.4% in 2003. This is the sixth consecutive year of decline. The average salary in São Paulo in 2002 was R$991 (US$346). Last year it fell to R$928 (US$324). Since 1998, income has decreased by 30.6%. Patrí­cia Lino Costa, an economist from the Dieese, said the labour market felt the income decline. Job cuts were mostly in activities that depend directly on consumers, such as hairdressers, garages, and repair shops.

Unemployment figures improved in December, when 19.1% were jobless. This was the best figure since July. However, in comparison with the same period in 2002, when 18.5% people were out of work, unemployment rose by 3.2%.

Last week, official government figures showed a different picture. According to the Brazilian Institute of Geography and Statistics (IBGE), the unemployment rate in São Paulo was only 11.8%. The disparity in the numbers can be explained by the method by which the data is calculated. The government considers people who were working in the black economy while still looking for a permanent position as self-employed.

The Peruvian government has outlined its plan of action until 2006 in a so-called 'road map'. The scheme was outlined last Thursday (4 March) by Carlos Ferrero, the president of Peru's council of ministers, who described it as 'a proposal, not a recipe' and invited suggestions and criticism from supporters and opponents of the government respectively.

Peru's various ministries outlined their plans. Ferrero stressed the importance of clean governance and the fight against corruption. New economy minister Pedro Pablo Kuczynski said that the government would seek to 'reprofile' external debt, maintain fiscal discipline, press on with infrastructure projects and pay greater attention to the social sector.

The health ministry said it was aiming to bring down mortality rates amongst mothers, tackle tuberculosis and HIV, and improve distribution of contraceptives. The labour ministry said it would be encouraging small- and medium-sized enterprises as well as introducing policies aimed at reducing unemployment in cities and amongst the young. The education ministry, meanwhile, said it would be improving wages for teachers, and establishing an 'emergency education programme' concentrating on the first three years of primary education and the last two years of secondary schooling.

The monetary policy committee of the central bank, Copom, cut interest rates by another 0.25 of a percentage point yesterday. This brings the rate down to 16%. This is the lowest they have been since March 2001, when they hit 15.75%.

The bank said that the improving inflation outlook was the main reasons for the cut. The financial market viewed the size of the cut as cautious. Most analysts had been expecting a 0.5 point cut. The bank cut rates by 0.25 of a point at its March meeting after holding rates unchanged in January and February.

Some independent forecasters claim that the slow pace at which the bank is cutting rates mean that the government's economic growth target of between 3% and 4% for 2004 will not be reached. In 2003, the economy contracted by 0.2%.

President Néstor Kirchner celebrates his first anniversary in office today, 25 May. He is hugely popular, with opinion polls giving him approval rates of over 80%. Other politicians and political commentators sniff that Kirchner is only popular because he has not taken any hard decisions.

Economists argue that the next 12 months will not be as easy as the last 12. They argue that the soya boom, which has showered the rural sector with dollars, is showing signs of running out of steam. Argentine farmers dumped other activities, notably dairying, and ploughed up their fields to produce the oilseed. Another looming problem is the energy crisis. This is starting to have an effect on industrial output. Companies are again mothballing projects because they are not sure that they will have the power they need.

The third economic problem looming over Kirchner is Argentina 's debt. Next month, June, his government will have to deliver its final proposals to the IMF and to its creditors, who are owed US$83bn. The government has been adamant that it will not make a substantial change to its terms, which call for its creditors to write-off 75% of what they are owed. This tough line plays well with Argentine public opinion, but less well with the IMF and is a major cause of concern to the big industrialised countries.

There are hints that the government is having a rethink and is improving its terms. On 24 May, the government again floated the idea of improving the offer. It sent muddled signals to the market, probably deliberately, but an authoritative article in Clarin today suggests that the government is making some substantial improvement in the terms.

The big change, Clarin reported, is that the government is now thinking of making the 75% cut in the value of the debt on the net present value of the debt rather than on the face value of the debt. There have been hints that the government had been considering such a move, but the Clarin report is the strongest indication yet.

It is not quite clear what the government means by net present value: the guidance given to Clarin indicates that it actually means market price, adjusted for a longer term and lower interest-rate on the bonds into which the new debt will be swapped. As the market price for the country's defaulted debt is around 50% of face value, a cut of 75% on that is half what a cut of 75% of the face value would be.

The guidance given to Clarin suggests that in fact the actual cut in the face value of the debt will be around 45%. The newspaper also points out that the government can also improve the terms (and the net present value) by increasing the interest rate on the new debt or shortening the maturity.

All in all, the changes mean that the write-off of US$66bn that bond holders faced is probably now down to between US$44bn and US$50bn. The big bondholders, who have probably already written down their Argentine holdings to zero, will take the improved offer. The problem will be the small bond holders who were lured into buying Argentine paper by the high interest-rates it offered.

That the government is hatching something is clear from its sudden decision to dispatch the economy minister, Roberto Lavagna, to the Ibero-American summit in Guadalajara which starts on 28th May. He will brief bankers and policymakers about the new offer and assess whether it will fly.

Kirchner's decision to move on the debt is not without its risks. If the economy turns down just when he is shown to be paying foreign creditors more, he will find his opinion poll ratings collapsing.

Development: The triumphant presidential candidate for the Partido Blanco, Jorge Larrañaga, named former foreign minister, Sergio Abreu, as his running mate on 29 June for October's elections.

Significance: Larrañaga's selection of Abreu is shrewd. It will shore up support within his own party (some of whom were disappointed at Larrañaga's defeat of Lacalle in the primary elections on 27 June). Abreu served as foreign minister in the administration of Luis Alberto Lacalle (1990-1995). It should also appeal to traditional Colorado voters disillusioned with the disastrous performance of Batlle. Abreu is a big-hitter. Aside from serving as foreign minister he presided over the GATT Uruguay round and ran for vice-president in 1999. He served as minister for energy and mines under incumbent president Jorge Batlle for two years before the Blancos broke away from the ruling Colorados after the 2002 financial debacle.

The Blancos will still have their work cut out overhauling the lead of frontrunner Tabaré Vázquez, who is running for the left-wing coalition Encuentro-Progresista-Frente Amplio. Vázquez fell short of the 50% of the vote required to win the elections in the first round when voters cast their ballots in primary elections on 27 June but some commentators argue that this was purely due to apathy as, unlike Larrañaga, Vázquez was not facing a rival for his party's ticket.

Development: The senate started its review on 4 August of the social security reforms approved by the lower chamber of congress at an extraordinary session.

Significance: The reforms are highly controversial because they will prevent employees' social security payments being used to pay pensions and benefits for civil servants at the (virtually bust) Instituto Mexicano de Seguridad Social. The second element of the reform is a hiring freeze at the IMSS.

IMSS employees are furious at the changes and senators had to be protected by 500 policemen as they started their deliberations. The start of the session was delayed until 5pm on 4 August by protests by IMSS employees.

Other elements of the proposed reform include raising the minimum term for pension eligibility for IMSS employees from 28 years to 30 years and increasing the pension contributions IMSS employees will have to make to their pensions. Currently, they only pay 3% of their wages towards their pensions. The government wants the contribution to rise to 15%; the IMSS unions are only prepared to see it go to 10%. Another benefit, under which IMSS employee's wages on which their pensions are based is increased by 30% when they reach pensionable age, will also be dropped.

The proposed changes were, significantly, backed by the two biggest parties in the lower house of congress, the Partido Revolucionario Institucional and the Partido Accion Nacional, to which President Vicente Fox belongs. In the senate, the PRI is split over the issue, through its ally, the Partido Verde Ecologista de Mexico has already said that it will vote with the PAN.

Development: The government has decided to give Marta Suplicy a major helping hand in her campaign for re-election as mayor of São Paulo. According to José Genoí­no, the national president of Partido dos Trabalhadores (PT), the idea is to 'intensify the campaign'. Genoí­no said in São Paulo on 8 September that the government has instructed ministers to show support for Marta.

Significance: The PT's leadership considers a favourable result in São Paulo fundamental for the re-election of President Lula da Silva in 2006. Over the last few weeks the municipal election in São Paulo has polarised popular support between Marta and the former health minister, José Serra, candidate for the opposition Partido da Social Democracia Brasileira. According to the last opinion polls they are running neck-and-neck, although in the event of a second round the surveys show Serra would win with a 15% margin.

Last week Marta requested the government show more commitment to her campaign. There has been talk that the government might even offer cabinet posts to other parties to support Marta in a second round. So far the agreed tactic has been to use ministers and other well-known names from the party in the campaign.

On 8 September Finance Minister Antônio Palocci, one of the most popular members of the cabinet, went to São Paulo to drum up support. Palocci, who used to be a doctor, eulogized Marta's municipal health programme, calling it 'effective and inexpensive'. Marta's campaign has been centred on the programme, and she has criticized Serra's record when in command of the health ministry under former President Fernando Henirique Cardoso.

Now that she knows she can count on the government's backing, Marta has decided to go for a full attack. In a speech on 8 September she said that an opposition victory could result in a political crisis that would paralyse the country. The opposition dismissed Marta's claims as 'electoral terrorism'.

Development: On 12 October thousands of Costa Ricans took to the streets to protest against the corruption of their country's political classes.

Significance: Costa Rica has long projected an image of transparency in its financial and political institutions, even if the reality did not always match. A series of high-profile corruption scandals, involving three presidents, past and present, has shattered this image. According to a recent survey conducted by Demoscopia and published by the daily Al Dí­a, if an election were held tomorrow 64.2% of the population have become so disillusioned with the political class they would not vote for anyone.

The demonstration, organised by the rectors of the four state universities, passed off peacefully, with two notable exceptions. The first came when President Abel Pacheco attempted to join the crowd and was hounded out by angry shouts. The second was when marchers hurled water bombs and paint at the office of Corporación Fischel, the pharmaceutical company that allegedly defrauded the social security services.

The march was called in response to a number of corruption scandals. The first to break was the so-called 'Finland Project', a US$39.5m loan by the government of Finland to the Costa Rican social security services (CCSS) to update medical equipment in public hospitals. A number of CCSS officials and politicians, including former president Rafael Angel Calderón (1990-1994), are now under investigation for expediting the issuing of the contract to Corporación Fischel in return for hefty kickbacks.

Most recently, another former president, Miguel Angel Rodrí­guez, was forced to resign his position as head of the OAS, following allegations that he received money from the French telecoms giant Alcatel. The Costa Rican attorney general is also now investigating a payment of US$400,000 by the Taiwanese government to Rodrí­guez's private bank account in Panama.

Rodrí­guez's resignation comes into effect on 15 October; he has promised to return to Costa Rica immediately to face the charges against him.Pacheco, a former TV psychiatrist, has made a song and dance about Rodrí­guez's behaviour. Pacheco has yet, however, to answer why he failed to declare the US$100,000 donated to his presidential campaign by Alcatel.