Commodities Give Latin America a Boost

The surge in the price of oil, copper and other commodities is giving an economic boost to the Latin American nations that produce them and fostering a suddenly rosier outlook for the region in the coming year.

Many of those gains have come in the last several weeks as optimism has risen that Asian and European economies are headed up, lifting demand for raw materials, farm products and other basic goods.

Leading price gainers include oil, which is up 100% since December; copper, up 29%; gold, up 15%; and a range of agricultural products, including wheat and livestock, up 9%.

The climbing prices help developing nations and others that rely heavily on commodities, from Middle East oil exporters to U.S. grain farmers. But no single region gets a bigger boost than Latin America.

Although commodity prices are notoriously volatile and are hardly the only factor in Latin American economies, the latest increases have sent analysts scrambling to re-crunch their numbers. Most now predict Latin American economic growth of a robust 3.5% or more next year, up from negative 0.5% shrinkage this year.

And as long as prices do not rise so fast that they ignite inflation, a stronger commodities market can benefit U.S. interests by stimulating Latin economies so they can buy more U.S. goods. Latin America buys one-fifth of all U.S. exports.

Yet some worry the news may be too good for countries such as Mexico and Venezuela, whose governments rely on oil revenue for 30% and 70%, respectively, of their annual budgets.

Oil prices are up so sharply and unexpectedly that some economists worry that Mexico may be tempted to relax the fiscal discipline that low prices and other woes had forced upon it. And Venezuela may never get around to embracing that discipline.

“Higher prices just give slack to this guy [Venezuela President Hugo] Chavez. It lets him postpone things that Venezuela has to face,” said Alberto Pasco-Font, an economist at Grade, a research firm in Lima, Peru.

Commodity prices were hard-hit by the Asian economic crisis that began in 1997, a downturn that reverberated around the globe and helped touch off the Brazilian devaluation earlier this year and recessions around Latin America.

But the rebound in the global economy is helping drive up prices of commodities ranging from copper and zinc to lean hogs and soybeans, all South American specialties. Also helping are expectations that the U.S. economy, the largest global market for raw materials, won’t weaken as much in 2000 as was feared.

Oil prices are up not only because of increased demand in Asia but also because of producers’ success in restraining production. That, of course, cuts both ways, said Pasco-Font and others, benefiting exporting nations but also hurting countries such as Brazil and Chile, which are net energy importers.

But generally speaking, rising commodity prices cause rejoicing in South American governments because their economies are so dependent upon them.

A prime example is Chile, which leans on copper for 40% of its exports. With copper prices depressed earlier this year, Chile sank into recession. Now, Merrill Lynch is forecasting that its economy will roar back with 5% growth next year. And the surge in gold prices helps burgeoning gold mining projects in Peru.

“We need higher commodity prices for all of Latin America to have a better year next year and I think we are going to get them,” said Arturo Porzecanski, economist at ING Barings in New York.

Higher oil prices not only boost Venezuela’s revenue but also helped to bring about a slight decrease in the cost of Venezuela’s debt, which in turn has eased the troubled country’s dire fiscal situation, said Bear Stearns economist David Malpass. “The oil in the ground is worth more, so that makes Venezuela more credit-worthy.”

Global Economics Associates’ Larry Goodman said it is premature to say higher commodities prices have “come to the rescue of Latin America.” There is too much unresolved political turmoil clouding the picture, he said, ticking off upcoming presidential races in Argentina, Chile, Mexico and Peru.

Moreover, noted Francis Freisinger, Latin American economist at Merrill Lynch in New York, the oil price bump could prove fragile if the oil production cutbacks orchestrated by the Organization of Petroleum Exporting Countries unravel.

Others caution that prices of “soft” commodities, or agricultural products, are still down by double-digit percentages from recent highs, although up from rock-bottom levels of a few months ago.

Brazil, South America’s biggest economy, is especially smarting from a 30% year-to-date drop in coffee prices, a 16% decline in orange juice concentrate prices and a 12% decline in sugar, according to Goldman Sachs in New York.

“You can’t say that commodity prices are up and that’s great. You have to be specific,” said Geoffrey Dennis, Latin American equity strategist for Salomon Smith Barney. Still, although “sentiment can turn on a dime,” Dennis said investor views of Latin America have turned more positive in recent weeks.

Dennis said that commodity price improvement is opening investors’ eyes to “potential upsides for growth in Latin America next year, just as there were upside surprises in Asia this year.”

Higher commodity prices are one of three prerequisites needed for a broad Latin American economic recovery, Porzecanski said. The others are good weather, meaning no recurrence of El Nino, which devastated Andean countries last year, and a return of investment capital, which is scarce in the aftermath of devaluations and Ecuador’s looming bond default.

“So what does it mean? Normal weather seems to be in the bag, higher commodity prices are in the making. The renewed capital flows are the tricky part,” Porzecanski said.

BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Latin Relief

No region is helped more by the recent rise in commodity prices than Latin America, whose economic fortunes have improved along with oil, wheat, copper, gold and other raw-material prices. Three key commodities, their prices as of quarter-end, Thursday, and Latin American countries that are significant producers of them:

Copper: Peru, Chile

82 cents per pound

Oil: Mexico, Ecuador, Colombia, Venezuela

$24.51 per barrel

Wheat: Brazil, Argentina

$2.76 per bushel