The Essays

Commodity prices

12 July 2010 Hits: 479

Latin America has been a major beneficiary from the boom in commodity prices. In this section we will look at the prospects for three key commodities: oil, copper and soya. We take each of them to represent their particular sector: energy, base metals and agricultural commodities. Oil prices hit their highest level since 1990 on 3 May 2004. Ogres from past, such as the Oil Producing and Exporting Countries (Opec) are now jerking the strings of the world economy. Although the general view is that Saudi Arabia remains the driving (and not always pro-US) force in Opec, it is clear that Saudi Arabia and Opec's influence depends on its links to other important oil producers.

Mexico and Venezuela (an Opec member, which only started obeying Opec's instructions on quotas under President Hugo Chávez ) were key allies to Saudi Arabia in imposing production cuts which pulled oil prices back from the sub-US$10 a barrel levels of 1998. Both Mexico and Venezuela have long featured among the top five oil exporters to the US.

Venezuela is likely to continue with the policy of maintaining Opec discipline to hold prices up. The big threat to this policy, opening up the oil industry to foreign investment, has receded under President Chávez . Although the state oil company, Petróleos de Venezuela, talks about increasing its production capacity, there is little sign of this happening. Indeed, the International Energy Agency reported that PDVSA's oil output was 2.16m bpd in February. This is down 60,000bpd on January.

The official figure for PDVSA's output in February is 3.17m bpd, still some way below production levels before the strike-cum-lockout at the end of 2002 and beginning of 2003. The difference between the two figures is due to the fact that the official figure includes gas and oil distilled from the Orinoco tarbelt.

Mexico, however, is showing signs of changing its oil policy. Its state oil company, Petróleos Mexicanos, is now getting the investment it needs to expand its output. Pemex had record net exports in 2003 of US$15bn. Total exports were around US$17bn, the company said. It said that export volumes were 1.84m bpd of crude oil, 8% up on 2002.

Pemex's average daily production of crude oil in 2003 was 3.37m bpd. This was the highest ever recorded by the company. The company was also pleased to have produced more natural gas for the first time since 1998. In 2003 it produced about 4.5m cubic feet a day. The company claimed that its heavy investment in exploration and production was starting to pay off. In 2003, it found 41 new oilfields. The company claims that its replacement rate (ie the amount of new oil it found compared with the amount of oil it produced) jumped to 45%. In the 1990s the replacement rate had averaged 26%. In 2004 the company expects to invest another US$10bn in exploration and production.

The dilemma for Mexican policymakers is that while high oil prices help to balance the budget, they slow down the US economy, to which the bulk of Mexico's manufactured exports go. Around a third of the government's revenues come from oil royalties and taxes. Successive governments have wanted, but failed, to wean themselves off oil rents. Ironically, it could be a President from the oil-rich state of Tabasco, probably Andrés Manuel López Obrador, but possibly Roberto Madrazo, who could end the use of oil as an economic wet nurse.

The higher Mexico's oil production goes, the greater the temptation for policymakers to make up for lower prices by increasing volumes. The added kicker for Mexico is that lower oil prices should boost the US economy and thus demand for its manufactured products. The increasing hostility in the US to the House of Saud, shown by John Kerry's criticism of it and the Bush administration's embarrassment at the links between some of its members and prominent Saudis, is likely to shift the US towards a regional (or western hemispheric) energy policy. Kerry has hinted that this is way the US has to go, though he has yet to flesh out the way of achieving this.

A regional energy policy will increase US demand for Mexican, and possibly, Venezuelan oil. The US has already looked at the idea of importing gas from South America and at least one major project, to use Australian gas to produce electricity for the US in Mexico, has an even greater global reach.

The rise in Chinese demand for oil has been the main factor in pushing oil prices higher. If Iraq, or the Caspian, does not start producing a lot more oil in the next 18 months of so, Opec will have to produce at its stated capacity just to meet world demand. Simply from a strategic point of view the US is likely to seek oil suppliers from the region, which is now one of the more stable parts of the world. With the substantial exception of Colombia, political terrorism is almost unknown in the region.

Currently the US imports around 9.6m bpd. Around 5m bpd come from the US. By 2008, Latin America could be supplying the US with an extra 3.5m bpd (say 1.5m bpd from Mexico; 1m bpd from Venezuela and 1m bpd from smaller producers such as Ecuador, Trinidad and Tobago, Argentina and Brazil). This increase may be disproportionately important because US oil consumption is unlikely to increase substantially. If Kerry is elected policies to lower carbon emissions are likely to be imposed.

Copper
Copper is a crucial export for Chile, and to lesser extent Peru. It is also a significant non-oil mineral export for Mexico. Brazil and Argentina have both developed copper mines in the past five years to help meet their domestic demand. On the demand side, China has replaced the US as the main market for the red metal. So when China's monetary authorities tightened monetary policy at the end of April to try to bring the economy back under control, the price of the metal plummeted.

Even evidence that the US was likely to take up some of the slack created by slower economic growth in China did little to pep-up prices. US housing starts in March were 6.4% higher than they were in February. The construction industry uses around 40% of the copper consumed by the US.

The surge in US demand means that the world copper market will still probably run a substantial deficit this year. Unfortunately for copper bulls, there is plenty of mothballed mining capacity waiting to come back on stream. The world's biggest copper mining company, the state-owned Chilean mining company, Corporación del Cobre, which accounts for 12% of world output, is already increasing its production by 14% this year. By 2009 it expects to be producing 2.3m t a year. In 2003, it produced 1.56m t of fine-copper equivalent. Furthermore, high copper-prices, and more efficient mining and smelting techniques, may prompt renewed interest in the Central African copper belt and in developing deposits in the former Soviet Union.

Our assumption is that by 2008, Codelco alone will probably be supplying between 15% to 20% of the world's copper. Other Chilean mines will still probably match Codelco's production, at least until 2008. So by 2008 Chile should still be producing between a third and 40% of the world's copper.

On the demand side it is clear that China has been a huge factor in maintaining copper demand in the past 10 years. China has taken up some of the slack in the market created by the delicate state of the Japanese economy. Japanese demand may return, but the trend towards silicon-based miniturisation and wiring is likely to put a cap on demand. It is also likely that the spectacular growth in Chinese demand is now over. China's demand for copper has increased six-fold since 1990. In 2003 the country used 3m t, up from 500,000t in 1990. We doubt that China's demand for copper can continue to rise at the rate of the past 15 years. World copper demand was 15.44m t in 2003.

Our expectation is that copper demand will flatten off. In the US, we do not expect more houses to be built, though the comparatively impermanent nature of most houses built in the US means that there will be a fairly constant demand for copper. Scrap may become more important as a source for copper in construction, especially if President Kerry is elected and environmentalists hold greater sway.

Soya
The outlook for soya is dependent on three variables: US agricultural policy, China's economic development and the weather. Brazil and Argentina, taken together, have become the world's biggest exporter of the protein which is used to feed livestock. One of the first consequences of economic growth is an increase in meat consumption. This in turn leads to a demand for animal feed. Soya has replaced fishmeal (another significant Latin American export, from Chile and Peru) as the staple protein in animal feed.

In 2003/04 Brazil and Argentina grew around 92m t of soya. The US crop, harvested in 2003, weighed in at 85m t. China is by the far the most important market for soya products. Its imports of soya have doubled over the past three years to 21.5m t.

Unlike energy and metals, we expect China's demand for soya to hold up. The economy's peak period of rapid growth, powered by a burst of export-led manufacturing may be over, but Chinese demand for a better diet is likely to endure.

One of the issues with soya is whether genetically modified (GM) soya, grown largely in Argentina and the US, will find greater acceptance amongst consumers. China has been one of the pickier markets, preferring Brazil's (ostensibly) non-GM soya to Argentina's and the US's.

Soya is an environmentally damaging crop. In Argentina, environmentalists claim that the virtual mono-culture of oil seed is wrecking the pampas and that GM-soya is helping to create herbicide-resistant weeds. Some environmentalists even go as far as to claim that the soil is dying and dead weeds are not rotting because they have become pickled with herbicides.

In Brazil, soya is grown along the southern frontier of what used to be Amazonia. The lure of the easy money to be made from the crop has spurred the destruction of Amazonia.

Our view is that these problems mean that Latin America's output of soya has probably peaked. Over the next five years it is much more likely that soya will be grown in rotation with other crops and thus output levels will be a bit (15% to 20%) lower.

How will Latin America's relationship with Asia change?

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Latin America's dealings with Asia are centred on China, Japan and South Korea. In all three cases Latin America provides Asian countries with raw materials. In return, Asia invests (especially in maquiladora plants in Mexico and Central America) and sells the region textiles and tat (toys, watches, cheap furniture and low-value electronics and households goods). Traditionally, Japan was the region's main Asian trading partner, firstly, because there had been so much immigration from Japan to South America (especially Brazil and Peru) at the end of the 19th century and secondly because Japan was so economically successful. South Korea came in Japan's wake but now China is becoming far more important.

Japan has been a major investor in the region, most notably Mexico. The biggest Japanese car plant in Latin America is Nissan's in Aguascalientes, Mexico. This plant exports vehicles to Central America and the northern parts of South America. The other big Japanese motor company investment in the region is Toyota's plant in Brazil.

The bulk of Japan's investment, however, has been in maquiladora plants along the US-Mexican border. This investment has dwindled in recent years, partly as a result of the general fall in Japanese FDI but also because of changes to the rules on the way inputs to maquiladoras are now taxed: inputs from outside the Nafta area have lost their tax free status. As Japanese companies, like most Asian maquialdoras, have preferred to source inputs from Asia, they have tended to pull out of Mexico for cheaper, Asian locations.

This position may change once Japan and Mexico sign their trade agreement. Fernando Canales Clariond, the Mexican trade and industry minister, announced in Tokyo on 12 May that he expected the economic association agreement between Mexico and Japan to be signed in August when the Japanese prime minister, Junichiro Koizumi, visits Mexico. The two countries reached a broad agreement on the deal on 10 March. The agreement is now in the hands of the lawyers and will have to be approved by the Japanese Diet and the Mexican senate before it can be signed. The deal, which took 18 months to hammer out, is due to come into force at the beginning of 2005. Mexico expects the deal to redress the trade balance between the two countries: Mexico runs an annual US$5bn deficit with Japan.

Mexico claims that the deal should allow Mexico to increase its exports to Japan by 11%. The Japanese have made concessions on food, making it easier for Mexico to export more to Japan. The Mexicans hope that the deal will enable them to create 227,000 jobs in the food processing sector over the next 10 years.

Disagreements about agriculture and industry have been obstacles to the treaty since October. Mexico wanted Japan to raise quotas for imports of Mexican pork and orange juice, while Japan was dissatisfied with Mexico's offers on tariffs for cars and steel.

Mexico will reduce these tariffs over the next 10 years. In addition, Mexico promised to make it easier for Japan to make bids for public works in Mexico. The FTA is expected to increase Japan's access to North America and reduce the price of some Japanese goods.

Chile is the other Latin American country that is negotiating an FTA with Japan. Chile has already signed an FTA with South Korea and has started negotiations with China. These negotiations are expected to take two years.

Chile's trade relations with Japan are close. Chile has long been one of Japan's principal sources of copper and a Japanese investor (Mitsubishi) has a minority shareholding in the biggest private sector copper mine in the country, La Escondida, which is run by BHP Billiton and RTZ. Chile is also pleased to have managed to surmount Japan's notorious non-tariff barriers to export apples and grapes to Japan. Chile's pulp and paper industry also has close links to Japan.

Japanese trading companies have also been active in Venezuelan energy projects though the biggest project in which they had a stake, the huge Cristóbal Cólon gas project, which is to be led by Shell, has not got off the drawing board.

Japanese investment in Brazil and Argentina has been surprisingly limited, despite the 800,000 or so Japanese Brazilians in Brazil. These Japanese Brazilians traditionally dominate the market-gardening business. They also represent a pool of comparatively cheap, but Japanese-speaking, labour. This pool was tapped in the 1980s when the Japanese boom was at its height: one of the most profitable airline routes in the world was São Paulo-Tokyo because the jumbos were full, taking contract workers to and from Japan.

Japanese international investment has been comparatively small, given the size of its economy. At the end of 2002, the UNCTAD reckoned that Japan's stock of outward FDI (ie investment in other countries) was only US$351bn. This was less than the Netherlands, which had US$355bn. Of Japan's stock perhaps as little as 2% is in Latin America.

China
Brazil and Mexico represent the extremes in relations between Latin America and China. Brazil sees China as an opportunity rather than a threat. Mexico, by contrast, sees China as an increasingly dangerous competitor. Mexico sees China as an economic threat in two ways. Firstly as a supplier of manufactured goods to the US and secondly as a competitor for the foreign direct investment, which comes largely from the US, to build factories to supply the US market.

Brazil's confidence about China flows from its more assertive foreign policy and its mix of exports. Brazil's biggest foreign policy success was the creation of the Group of 20 (which temporarily reached 23 before dwindling to its current level of 17). The G-20 halted the World Trade Organisation ministerial summit in Cancún, Mexico last September: the G-20 was led by Brazil but was supported by both China and India, as well as South Africa, Nigeria and Turkey. The G-20 is refusing to open its markets to competition from the industrialised countries unless the US and the EU abandon the heavy protection of their agricultural industries. Brazil is a huge, and highly competitive, exporter of agricultural commodities, but few of the other G-20ers are.

Brazil is a major exporter of soya to China, supplying about 35% of that country's needs. It is also a significant exporter of beef (currently banned in China because of an outbreak of foot-and-mouth disease in South America last year) and chicken. Brazil should be able to grab market share from the Thai chicken industry which has been whacked by the outbreak of avian flu earlier this year. Brazil also exports other agricultural commodities such as sugar and orange juice to Asia. It is also interested in exporting non-agricultural commodities such as iron ore and steel.

Brazil is also hoping to increase its trade in manufactured goods. There are a range of products which should interest Asian consumers. One is vehicles which run on gasohol, the Brazilian mixture of petrol diluted with alcohol. These vehicles are likely to become popular if oil prices remain high. Brazil should also increase its exports of aircraft: it is one of only two manufacturers of medium-sized (fewer than 150 seats) jets.

Brazil also has a generic pharmaceuticals industry which should be of interest to some Asian countries. Big international pharmaceutical companies have long complained about the difficulties in enforcing intellectual property rights in Asia, and in particular Japan. China's legal system has also been criticised by patent lawyers because the courts reserve the right not to decide disputes.

Mexico's fears
Mexico, which already has a free trade agreement with the US that covers agricultural products, is much less concerned about the effect of US agricultural subsidies on international trade. Mexico's overriding concern in its foreign trade policy is to preserve its edge with the US, both as a supplier of manufactured goods, and as a destination for FDI.

The North American Free Trade Agreement (Nafta) which came into force in 1994, allowed Mexico to overtake Japan as the US's second largest supplier. Canada has remained number one. Indeed, every year since 1986 Mexican exports gained market share in the US until 2003. In 2003, Mexico was overtaken by China as the US's second biggest supplier. As the US also exports heavily to Mexico, Mexicans like to fudge things by claiming to be the US second biggest trade partner. In 2002, Mexican exports to the US were 11.6% of total US imports. In 2003, they fell to 11%.

Mexican policymakers are hoping that the Chinese sorpasso is an anomaly but they fear that it is a structural change. Indeed if Mexico's oil exports are stripped out, which last year came to US$17bn or about 10% of Mexico's total exports, China has been exporting more than Mexico to the US since 2001. When Mexico's exports again exceeded China's in February 2004 there was some self-congratulation in Mexico until economists pointed out that, compared to February 2003, Mexican exports were up by just 6% while Chinese exports were up by 17.5%.

What is undeniable, and more worrying to Mexican policymakers, is that foreign direct investment in Mexico fell to its lowest level for five years in 2003. The fear in Mexico is that the advantages won by Nafta, which came into force in 1994, have now been lost and that FDI, over three-quarters of which comes from the US, is now likely to head off to cheaper-labour and more profitable locations, most probably in China.

So how will the region's relations with Asia develop?
What Latin America would like from Asia is more investment and easier access for its exports. For South America, these exports are likely to be largely commodity based. Food and raw materials (metals, woodpulp and oil and gas) are likely to dominate. In addition, Brazil may be able to sell technology (deepsea oil-drilling skills, uranium enrichment and aerospace) and media products (music, films TV soaps and possibly soccer) to Asia. Mexico too may be able to sell media products, but its most likely manufactured exports are probably beer, (which has done well in the US), cement (Cemex is the world's third largest manufacturer and has started to invest in Asia) and food. Tacos, tortillas are becoming common across the world and could do well in Asia.

Over the next five years Latin American countries will make it a priority to try to rebalance their trade with Asia and ensure that they do not just export raw materials and import the finished products.

The outlook for capital flows: improving, but changing

12 July 2010 Hits: 63

Our forecast is that capital flows to Latin America will recover over the next five years. Our major contention is that the composition of these flows will change. Currently the split is between foreign direct investment (74%) and debt (30%); Portfolio investment is currently negative. We argue that a component which has hitherto been a bit ignored by macro-economists, remittances, will become increasingly important. So too will intra-regional flows of funds.

It is the pick up in remittances which is likely to drive total inflows of capital towards US$150bn. The UN's Comisión Económica para América Latina produced a gloomy report in May 2004 arguing that the decline in flows of foreign direct investment was worrying, and possibly structural rather than temporary. We would argue that the US need for energy security and the world's need for raw materials and food will increase investment in the region. We also will argue that while the inflows in FDI will rise, they will be complemented, not only by debt and portfolio flows, but also by remittances. We argue that remittances will have a strongly energising effect on the region's economies.

The Institute of International Finance reckons that total private flows to Latin America will jump from US$24bn in 2003 to US$43bn in 2004, largely because of an increase in FDI. If remittances are added to other private flows, the total inflow came close to US$60bn in 2004 and will probably take the flow up to US$90bn this year. Our view is that by 2008, total inflows will be up to US$150bn.

It is crucial for the region that remittances take up the slack created by weaker FDI. The recent academic research on remittance flows is changing the view of them: they are now seen as coming from some of the most dynamic elements in the economy and going to support equally dynamic elements. An emigrant working in the US to support the education of his nephews or nieces is adding as much to a country's intellectual capital as a foreign company setting up a simple factory.

The big issue for Latin America is how will the mix of flows change over the next five years. In the past, debt inflows have tended to tower over equity flows. This imbalance has meant that debt crises have been a constant threat to the region's financial stability. One reason why Brazil, in particular, did not collapse when the international capital markets turned against the region following Argentina's collapse in 2001, was that equity (in the form of foreign direct investments) had been unprecedentedly high and thus gave the total flows ballast and a better balance.

As portfolio flows, (ie purchases of locally listed shares or local currency bonds by international investors) have fallen and in fact turned negative as Chile, home to the region's biggest pension funds starts to invest more abroad, the big issue is what happens to a fourth element in the mix of inflows: remittances.

Significantly, the Institute of International Finance does not include remittances in its calculations, even though in most Latin American countries they are more valuable than foreign direct investments. Traditionally, remittances are lumped in the current account, rather than the capital account.

The argument then was that as the remittances went to the poorer people who simply spent the money, the money was not used for capital formation. There is now considerable evidence to suggest that this traditional use of remittance money has changed. The money is now often used by the receivers to buy land or property, or support or expand a family business. Of course some of it still goes on consumption, but there is a growing capital-transfer element in the flows.

Remittance flows are now huge. Latin America can probably expect to net at least US$50bn from remittances this year. This will be more than the IIF expects it to pull in from FDI: the IIF Bank is reckoning on US$32bn, up from US$25bn in 2003. In some countries, the remitters are now middle class: China recently announced that it had hired 60 Brazilian pilots to fly international routes for Shenzhen Airways. The pilots are being paid between US$4,000 and US$6,500 a month. This is, reportedly, two or three times what the pilots would get paid in Brazil.

Stats
The Cepal pointed out that FDI in 2003 for the whole of Latin America and the Caribbean was only US$36.7bn in 2003. To put that figure in perspective: China alone attracted US$55bn in direct investment in 2003. What is worrying is that FDI in Latin America has fallen heavily since 1999 when the region attracted a record US$88bn. This is why remittances are needed to offset the fall.

Cepal argues that the main reason for the fall is that the region's two big economies, Mexico and Brazil, have failed to attract their share of FDI. Mexico has failed to push through reforms which would open up its energy and electricity industries to foreign investment, while Brazil's privatisation programme has all but halted under President Lula da Silva's government. The big investments in the motor industry have also dried up following the recession last year and the sluggish growth before that.

Mexico still accounted for almost a third of the FDI going into Latin America in 2003 but at US$10.7bn the figure was well down on the US$14.4bn of 2002. The peak year had been 2001, when Citigroup took over Banamex and inflated the FDI figure to US$26.5bn. Despite President Vicente Fox's claims that the country will see a strong recovery in FDI this year, the net figure is likely to be affected by Femsa's decision to buyout Interbrew's 30% stake in it for US$1.25bn. Femsa, a major brewer, argues that its brands were competing with Interbrew's in the US.

In Brazil, FDI in 2003 fell by almost 40% compared with 2002 to US$10.1bn. In 2002 FDI had been US$16.5bn. Cepal points out that the biggest falls in FDI have been in South America, especially in countries inside the Mercosur. This would seem to be a reaction to the economic agony of Argentina. Arguably, the country botched its privatisation process and ended up selling most of its companies far too cheaply. The buyers, however, would disagree, arguing that the regulatory structure is flimsy and government interference in their business is far too great.

Cepal's figures for FDI in Argentina are notably more bullish than those from the Institute of International Finance which reckoned that foreign investors staked only US$100m in Argentina last year. Cepal reckons that the figure was 11 times higher at US$1.1bn in 2003.

One of the most interesting case studies is Chile. Here, FDI has fallen sharply in the past three years. This is probably more of a reaction to the commodity, and particularly the copper, cycle than any long-term change in investor perceptions. Indeed, now the copper cycle has turned, mining companies are restarting projects in the country and dusting down plans for new mines.

What is interesting about Chile is that the privatisation process was a success and the country is one of the few to have made a success of contracting out infrastructure projects to the private sector. Chile is also a special case because of the early privatisation of its pension system. This gave Chilean companies access to cheap funds in the late 1980s and early 1990s and allowed successive governments to escape the foreign-investment driven boom-and-bust cycles that afflicted other countries in the neighbourhood. Indeed, Chile's pension funds have now outgrown their domestic market and are investing abroad. It will be interesting to se how they cope in more ruthless and less regulated markets.

The combination of a large local savings pool and an efficient way of mobilising these savings should mean that Chile is likely to cease to be a regular net importer of capital. This year the country should run a current account surplus, thanks to strong copper prices. This demonstrates that Chile is Latin America's premier economy and the first to export capital for genuine economic-development reasons rather than as a desperate reaction to a crisis as is the case in Venezuela.

Intra-regional flows
One of our premises is that the other pension fund reforms in Latin America will start to pay off as Chile's have. This will boost the savings rate in countries such as Mexico, Argentina, Brazil and Peru and will also lead to a greater intra-regional flow of funds.

Chilean companies were big investors in Argentina in 1990s. The growth of trading areas is likely to mean that this pattern will start to be repeated on a greater scale. There is less local antipathy, often, to so-called multilatinas than to US or other foreign-owned companies.

The other point about the Chilean pension reforms is that they created funds with worthwhile pools of money. These funds have kept the Chilean stockmarket going. It may be that they will be tapped for capital by other regional companies.

The 2004 flows, according to the IIF
Of the US$225bn flowing to emerging markets, US$43bn will go into Latin America, the IIF reckons. Of this US$32bn will come in the form of foreign direct investment. The IIF reckons there will continue to be a flow out of investment in the region's stock markets. Last year there was a net outflow of US$3bn; this year the outflow is likely to be in the region of US$2bn.

The big jump in 2004, according to the IIF, will come in commercial lending to the region. The IIF has put bond investors down for US$19bn in new investments this year, up from US$10.9bn in 2003. There are two reasons for this: the improving fiscal position of most governments in the region, coupled with the commodity boom, means that most are now better risks with stronger revenue inflows. Indeed the regional probably had its first current account surplus for a generation in 2003. This situation is unlikely to last: Argentina will soon start to revert to importing capital and the current account surpluses in Venezuela and Brazil are likely to diminish.

The second reason is that with international rates still low, bond investors are prepared to take calculated risks for extra yield.

The IIF is forecasting that both commercial banks and official lenders will continue to be net takers of money from the region. The official sector is forecast to take a net US$7bn, while the banks are likely to withdraw about US$6bn.

The forecast for the official sector could be changed by the IMF's decision at its spring meeting to accept the Brazilian argument that capital investments by state-owned companies should not, necessarily, be included in fiscal deficit calculations. The Brazilians pointed out that this sort of spending is not included in the fiscal deficit calculations for developed countries.

Brazil further argued, and the IMF accepted, that the stigmatisation of capital investments was penalising developing countries' ability to finance projects with money from multilaterals. Increasingly the multilaterals demand some element of co-financing when they finance new dams or highways. The IMF rules on what should go into the fiscal deficit calculation has had the perverse effect of encouraging countries with IMF programmes to spend money on current expenditure, which buys political popularity, rather than to invest in new capacity.

Argentina
One of the big questions for the next five years is what will happen to Argentina. Argentina has to depend on debt, rather than FDI or portfolio investment, to fund its current account deficit. As Argentina traditionally has been an importer of labour, rather than an exporter, its share of remittances is low. They are, however, growing quite strongly as Argentines with skills try to cash in on them. Argentina is still beyond the pale for both official and commercial lenders. The country is unlikely to get any new net money this year, though it may not suffer a net outflow.

Foreign companies are still loath to invest in Argentina. Only super-rich individuals such as George Soros and now Carlos Slim from Mexico have been nibbling at the economy. The IIF, however, expects, foreign investors to risk only US$150m in Argentina this year, up from US$100m in 2003. In the second half of the 1990s an average of US$9bn a year was invested in the economy.

Where the country gets the money it will need to develop properly will be one of the key questions for the next five years.

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