By Mariana Santibáñez and Taimur Ahmad
Latin America's economic temperament in 2012 could hardly
have struck more of a contrast with the developed world,
crippled under the weight of debt burdens and facing lackluster
growth. The newfound vigor of the former, in the face of severe
economic headwinds, has proved an immense boon for a region
that, not so long ago, was a byword for financial turmoil.
This strength is reflected in LatinFinance's annual
finance ministry scorecard. Our ranking incorporates the views
of economists, analysts, investors and independent experts on
the adeptness of economic management in the region. It
considers the institutional strength of finance ministries, the
soundness of public finance management as well as success in
advancing policies that encourage economic development. We also
evaluate institutions in light of countries' overall
macroeconomic performance in the preceding calendar year.
Growth in the region's largest economy, Brazil, trailed off
sharply last year, amid fears that a more widespread slowdown
in the world's large emerging economies, led by China, could
cast a shadow over Latin America. Yet if anything, the past
year has cemented the status of a fresh crop of small, nimble
economies as the region's most dynamic - and resilient.
Top of this year's ranking is no stranger to praise for its
economic management. Chile shows a commitment to fiscal
rectitude that has long served as a model for emerging
economies. The past year, under the stewardship of Felipe
Larraín, its finance minister, has been no
"Chile's economy is doing well, and that is attributed to
very sound policymaking and a large part belongs to the finance
ministry," says Nick Chamie, global head of emerging markets
research at RBC Capital.
The government has made significant progress in addressing
growing social demands from the country's emerging middle
class. In September, lawmakers passed a tax reform to finance
an overhaul of the Chilean education system - a central plea of
protests that had rocked the country since 2011.
Under the new rules, Chile's businesses face a tax rate of
20%, up from 18.5%, and fewer loopholes to avoid them. The tax
overhaul will boost revenues by roughly $1 billion per
"We did what is responsible in terms of fiscal policy,"
Larraín tells LatinFinance in an interview. "We
wanted to step up the spending in education but we did it in a
way that we did not compromise our commitment to achieve a
structural deficit of 1% of GDP."
The tax reform, as Larraín puts it, was "moderate" -
raising 0.35% of GDP in net terms - and was part of a "more
complex package" that also provided incentives for
reinvestment, making it easier for small and medium sized
companies to operate. The reform has also helped private
investment become the main driver of growth.
Some observers have suggested that further tax rises will be
needed as the population demands better state services. But
Larraín rejects the suggestion outright: "There's no
reason to increase taxes any further," he says. "A higher tax
rate would kill that capacity of this economy to grow."
Foreign investment into Chile reached $28 billion in 2012.
"This is a record in our history," says Larraín, who
adds that the sovereign's return to international capital
markets under his watch has helped reduce the cost of capital
for public and private companies.
"This is a very significant aspect of what we're doing
here," he says. Last October the sovereign issued a 10-year,
$1.5 billion bond at 2.38%, the lowest yield achieved by any
emerging market sovereign. "Only developed countries have
achieved lower rates," Larraín says.
Amid increasing concerns among Chilean exporters over a
strong peso, Larraín has raised public spending
and increased a local debt program to curb upward pressure on
the exchange rate.
"We are helping with fiscal policy to prevent overheating,"
Larraín says. Chile's government plans to include
peso-denominated bonds as part of the $5 billion it
expects to raise locally.
The sovereign has been upgraded by all the major credit
ratings agencies in recent years, most recently in February
when Dominion Bond Rating Service (DBRS) notched Chile's rating
up to AA from A. "This is the first time in the country's
history that we've had four consecutive upgrades from the four
prominent credit rating agencies," Larraín says.
Standard & Poor's upgraded Chile in December, as did
Fitch a year earlier and Moody's in 2010. The main macro
imbalance facing the Chilean economy is the increase in its
current account deficit. Inflows of foreign direct investment
(FDI) particularly towards the mining industry are expected to
largely finance that, however.
Peru defies expectations
Peru came a close second, ceding ground to its southern
neighbor largely because of Chile's successful tax reform. Peru
is roundly praised for its solid fiscal performance, robust
growth and prudent economic strategy. The economy expanded by
6% in 2012, which, while a slight cooling on the 6.9% growth a
year earlier, was the highest in South America. GDP is expected
to grow by 6% in 2013.
President Ollanta Humala surprised observers after his
election in 2011 by seeking continuity in macroeconomic policy.
Under finance minister Luis Miguel Castilla, the economy has
benefited from solid fiscal and macroeconomic management.
Castilla says that while 6% growth rates can be maintained
over the medium term, the government must press ahead with
reforms. Those include addressing competitiveness, natural
resource use, institution building and inequality.
It will attempt to do so having cemented its credentials for
sound economic management. "Peru is the only country in the
region that continued to post fiscal surpluses in 2011 and
2012," says Shelly Shetty, sovereign analyst at Fitch. The
country has used windfalls from high copper prices prudently
while building its fiscal stabilization fund, Shetty says.
This year Peru plans to spend at least $4 billion on paying
back loans to multilateral creditors. "Our focus is on
prepaying expensive debt and on feeding the fiscal
stabilization fund," Castilla tells LatinFinance.
Peru's stabilization fund has accumulated foreign exchange
reserves worth 4% of GDP, a threshold Castilla says warrants
the state to think about investing internationally.
Like many other emerging market export-based countries, Peru
has faced a strong local currency versus the dollar, which is
hurting exporters. Castilla has ruled out capital controls to
stem the rise of Peru's currency. But he says the country is
considering other measures, including taxes on foreign
investment, raising the ceiling on what pension funds can buy
internationally, and hastening the set-up of a sovereign wealth
fund to invest dollar reserves overseas.
The central bank has also intervened heavily to temper the
appreciation of the sol, buying $13.2 billion last
Peru's external debt is one of the lowest in Latin America.
Government debt was 20% of GDP in 2012. Analysts expect that to
fall in 2013 and 2014, provided fiscal targets are met.
Colombia reforms taxes
Colombian finance minister Mauricio Cárdenas cut
income tax for foreign debt investors in December as part of a
broader revenue-neutral reform to spur the labor market and
make the tax code more progressive.
"Colombia has made efforts to develop the local markets and
reduce taxes for foreign portfolio investors which should aid
in inflows of foreign investment and in turn enhance the
domestic capital markets," says Fitch's Shetty.
The change reduces tax paid by foreigners on portfolio
investments to 14%, from 33%. For investors domiciled in tax
havens, it is reduced to 25%.
Market observers applaud the country's continued good
management of public finances, though last year's GDP numbers
were neither robust nor showing signs of outright weakness.
Colombia's growth slipped from 5.9% in 2011. JPMorgan
analysts forecast 4.3% full-year 2012 growth, followed by 4.5%
growth in 2013. Nevertheless, it has brought the fiscal deficit
down to 2% of GDP.
"Growth in the country has been disappointing, but Colombia
has reasonably good finance statistics for its overall debt
load," says Chamie. "The country is opening up the oil sector,
and with an improved security situation and strong FDI flows,
it suggests Colombia is well on its way for economic
'Right signals' in Mexico
Consistency in policymaking has made it easier for analysts
to forecast Mexico's fortunes. The economy benefits from
moderate government deficits, low debt, and an investment grade
Analysts say Mexico deserves credit not only for policy
continuity in a transition year, but also for having set the
stage for a sweeping economic reform agenda.
"[Mexican finance minister Luis] Videgaray is sending the
right signals to the market on energy, fiscal, competitive
reform and the Pacto por México which
could make a difference in the future growth of the country,"
says Bulltick Capital Market's head of research Alberto
In November, lawmakers passed a labor bill, which allows
employers to hire workers on trial and to pay hourly wages. It
also limits the amount of back-pay workers can collect in
employment disputes. Lawmakers hope the bill will increase
productivity and create thousands of new jobs. Education reform
followed in December, with a new system for hiring, evaluating
and promoting teachers. There is growing expectation that
reforms in fiscal policy, energy and competition, under the
Pacto por México, will proceed this year.
Uruguay's inflation hurdle
Uruguay earned its second investment grade rating in July,
when Moody's upgraded the sovereign, citing its economic
fundamentals, fiscal metrics and enviable government balance
By the end of the year, however, its budget surplus of 2% of
GDP in 2011 had turned to a 0.2% deficit - a deterioration the
government attributes to a number of factors including higher
energy costs, funding a national health scheme and other
Economy minister Fernando Lorenzo has pledged to remedy the
fiscal slippage and says the budget should return to a healthy
surplus this year. He expects 4% GDP growth in 2012.
Analysts, meanwhile, continue to praise the commitment to
sound economic management. But another pressing task faces
policymakers: addressing inflation. JPMorgan says the inflation
rate will remain at roughly 7.5% this year, before moderating
to 6.5% in 2014.
Some analysts are calling for a revision of the way wages
are adjusted, a factor adding to inflationary pressures.
Lorenzo says the government is taking a cautious line on public
sector salary increases to tackle inflation. It has not ruled
out measures to temper spikes in the peso.
"In line with the majority of other emerging markets,
Uruguay has seen strong capital inflows, caused by low rates in
developed economies and the good investment opportunities that
our country offers," Lorenzo tells LatinFinance.
"The government respects the fundamentals that allow the
currency to move in a balanced trajectory over the longer term.
At the same time we apply measures to avoid excessive
volatility in that trajectory." LF