Latin American business environment

* .~.

2005 LATIN AMERICAN BUSINESS ENVIRONMENT
REPORT

Terry L. McCoy
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^ UNIVERSITY OF
OFLORIDA
September 2005

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AN 0 0040 *

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1I

September 2005

Preface

This is the seventh edition of the Latin American Business Environment Report (LABER).
Latin America is in the third year of a strong economic recovery, but it is a region of
considerable volatility, and the question arises whether we are witnessing another stop-go
cycle or long-term sustained growth. There are also questions regarding political
developments and their consequences for business.

LABER is designed to help answer these and other questions regarding the environment
for business and investment in Latin America. The report presents an overview of
developments in the region over the past 12 months and then examines in more detail the
20 largest economies. It does not make recommendations, but attempts to provide
information and analysis useful for making businesses and investment decisions.

As with past reports, the 2005 LABER draws on a variety of publicly available sources to
monitor the business relevant events in the region. This and previous reports are
available at http://www.latam.ufl.edu/publications/publisting.html. The
report may be cited without permission, but users are asked to acknowledge the source.

LABER is a publication of the Latin American Business Environment Program in the
Center for Latin American Studies at the University of Florida. The program is dedicated
to making the Latin American expertise and resources of the University available to the
business community through the training of students, conferences and workshops,
research, consulting and publications.

The Center for International Business Education and Research in the Warrington College
of Business Administration also supports the Latin American Business Environment
Program including publication of the 2005 LABER. Paolo Spadoni and Meghan
Reynolds assisted me in its preparation, and Charles Wood provided useful editorial
suggestions. I alone, however, am responsible for the content and analysis.

Terry L. McCoy, Director
Latin American Business Environment Program
Center for Latin American Studies
University of Florida
tlmccoy@latam.ufl.edu
www.latam.ufl.edu/labeD.html

2

CONTENTS

Preface

EXECUTIVE SUMMARY.......................................................................5

INTRODUCTION ......................................................................................7

I. REGIONAL OVERVIEW............................................................. 9

EXTERNAL ENVIRONMENT....................................................9

Global Developments
Regional Developments

DOMESTIC ENVIRONMENT.............................. ................... 11

Economic and Financial Performance
Social Environment
Politics
Policy/Regulatory Environment

II. COUNTRYPROFILES......................................................................17

NAFTA REGION ...........................................................................17

Mexico

CENTRAL AMERICA..................................................................18

Costa Rica
El Salvador
Guatemala
Honduras
Nicaragua
Panama

CARIBBEAN..............................................................................23

Dominican Republic
Jamaica
Trinidad & Tobago

ANDEAN SOUTH AMERICA.........................................................25

Bolivia
Colombia
Ecuador
Peru
Venezuela

BRAZIL AND THE SOUTHERN CONE...........................................29

Brazil
Argentina
Chile
Paraguay
Uruguay

II. OUTLOOK..................................................... ..........................34

REGIONAL OUTLOOK...................... .....................................34

External Environment
Domestic Environment
Paradigm Shift?

COUNTRY OUTLOOKS..............................................................35

Attractive Environments
Problematic Environments
Mixed Environments

TA BLE S..........................................................................................41

SELECTED SOURCES ON LATIN AMERICAN BUSINESS........................54

2005 LATIN AMERICAN BUSINESS ENVIRONMENT REPORT

Terry L. McCoy

EXECUTIVE SUMMARY

Entering the final quarter of 2005, the environment for business and investment in Latin
America is attractive. By the end of the year, the region will have experienced 30
consecutive months of economic growth with 2004 producing the highest regional
growth rate in 25 years. Equally encouraging is the fact that growth has not triggered an
increase in inflation, which remains at historically low levels. Although prospects are
good for the positive economic performance to continue through 2006 making the
current growth cycle the most robust in recent decades the outlook is clouded by the
sharp upturn in oil prices and the large number of countries holding national elections
before the end of 2006.

Individual environments are largely but not uniformly positive. The table below
categorizes each of the 20 Latin American countries profiled in this report according to
the overall character of its environment attractive, problematic or mixed in 2004 and
2005, and indicates whether the environment improved (4), deteriorated (+) or
remained unchanged (=) during the year. The final column is the outlook for 2006.

2004 Environment
Attractive Problematic Mixed

2005 Environment
Attractive Problematic Mixed

2006
Outlook

Mexico =
Costa Rica =
El Salvador
Guatemala
Honduras
Nicaragua +
Panama + +
Dom Rep +
Jamaica +
Trin & Tob +
Bolivia
Colombia +
Ecuador =
Peru
Venezuela =
Brazil
Argentina
Chile + +
Paraguay =
Uruguay =+

Total

4 12

4 5

6

2005 LA TIN AMERICAN BUSINESS ENVIRONMENT REPORT

INTRODUCTION

The Latin American business environment continues to be favorable. As it enters

the last quarter of 2005, the region is completing a third year of economic recovery

sustained by international commodity markets, favorable financing and rising domestic

consumption. Political developments in some countries of the region are nonetheless

cause for concern. The framework shown in Figure 1 was developed to systematically

assess the regional and national business environments. The 2005 LABER uses the

framework to evaluate developments over the past 12 months and to assess the prospects

that the current recovery will turn into a long-term growth cycle. Alternatively the

recovery may only be the latest of the boom-bust cycles that have long defined Latin

America's political economy.

Figure 1
Latin American Business Environment: A Model

External Environment

NAFTA

The report is \
CARICOM
divided into three Mexic
Dominican
Jamaica :=7p Republic
parts. Part I ama Repu
Honduras
summarizes major Guatema Nicaragua
El Salvador trinidad and
regional Costa Ric Tobago
Cot Ric Venezuela
developments CACM Panam

during 2004 and Ecua or

into 2005. Part II
Per
presents profiles of ANDEAN

the 20 largest COMMUNIT
Bolivia
markets, grouped by

geographic sub-
MERCOSUR
regions and regional Chil

trading blocs (see
Truguay
Map and Table 1).

Part III assesses the

outlook through

2006 with the 20

countries arranged

this time according to the overall attractiveness of their business environments. There are 12 tables at

the end of the report that contain country level data and regional averages on key economic, social and

political indicators. There is also a list of selected sources on Latin American business news.

I. REGIONAL OVERVIEW

EXTERNAL ENVIRONMENT

Over the past 18 months the external environment has been favorable to Latin

America, especially South America, as global commodity prices rose and interest rates

remained low. Foreign direct investment (FDI) in emerging markets has also accelerated.

Because of low domestic savings and low investment rates, Latin America depends on

the inflow of foreign capital to finance growth. Growing openness and trade dependency

- only partially offset by export diversification renders the region's economies even

more sensitive to fluctuations in terms of trade.

Global Developments *1

Positive terms of trade
Thanks to a sharp rise in global commodity prices, Latin America in enjoying the
best terms of trade in more than a decade (Figure 2), but the trend was not
uniform across the region. The energy exporting economies of the Andean region
profited from record high oil prices, while the terms of trade for the Central
American countries, which import oil and export light manufactures, were
stagnant (Table 2). Mexico's performance reflects its mixed export profile. U.S.
growth is the most important determinant of global economic trends, but China's
dramatic emergence as a market for Latin American raw materials, and as a
competitor for manufactured export markets, continues. The Chinese conducted
diplomatic offensives to strengthen economic ties with Latin America.
Revaluation of the Chinese yuan in July had no appreciable short run impact on
Latin America.

Favorable global capital markets
FDI, up in 2004 after fours years of decline (Figure 3), is growing even more
rapidly in 2005, although Latin America lost has ground to other emerging
markets. Low interest rates and improved risk spreads facilitate sovereign and
corporate bond placements and restructuring. Honduras, Nicaragua and Bolivia
stand to benefit from the G-8 debt reduction initiative.

1 Symbols are used here to suggest overall trends over the past 12 months: t improving; declining; = no
significant change.

Figure 2

Terms of Trade for Latin America and the Caribbean, 1995-2004
(Source: CEPAL 2005)

108

106

104

102
o
o
S100
LO
0')
0')
98

96

94

92

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Figure 3

Net Foreign Direct Investment in Latin America and the Caribbean, 1995-2004
(Source: CEPAL 2005)

90,000

80,000

70,000

S60,000

-6
S50,000

0
S40,000
.2

30,000

20,000

10,000

0

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

*Important World Trade Organization rulings
If implemented, the WTO ruling rejecting proposed European Union tariff on
banana imports would favor Latin America banana exporters but hurt those in the
Caribbean. WTO rulings on cotton and sugar favored the Latin American
position against those of the U.S. and E.U., but disagreement over agricultural
subsidies continues to hold up the Doha round of WTO negotiations, which have
been stalled since August 2003.

Regional Developments=

Only limited progress in hemisphere trade negotiations
U.S. congressional approval of the Central American-Dominican Republic Free
Trade Agreement (CAFTA-DR) keeps regional trade talks alive, but the razor thin
majority suggests that it will be difficult to restart the Free Trade Area of the
Americas process, stalled since November 2003. Doubt surrounding the outcome
of negotiated agreements makes it easier for the opponents of hemispheric free
trade to drag their feet. The next test facing the hemispheric trade agenda comes
from U.S-Andean free trade negotiations. Will they be successfully concluded?
If so, will the U.S. Congress ratify the agreement?

U.S-Latin American relations drifting
The Bush administration made an effort to re-engage with the hemisphere
following the president's re-election, but it never gained momentum. The
growing rift between Washington and the Chavez regime in Venezuela has the
potential to further polarize Inter-American relations by forcing Latin American
governments to choose sides.

DOMESTIC ENVIRONMENT

Economic and Financial Performance#

The Latin American economy performed well in 2004, and the outlook for 2005 is

positive. The region is enjoying the longest period of growth in ten years. Revived

financial markets complement economic advances.

2004 economic growth highest in 25 years
The forecast of 4.3% for 2005 (Figure 4) is better than any year since 1997,
except last year, and all of the 20 countries in this report are expected to grow for
the second year in a row (Table 4).

Inflation continues decline
Regional rate has dropped for third year in row (Figure 5), and only three of the
20 countries are predicted to finish 2005 with double digit inflation (Table 5).

* Stronger capital markets
Equity markets, which did very well in 2004, are up again in 2005, thanks in part
to pension funds now investing in stocks and private companies again issuing
initial public offerings. Debt financing is also up. Banks have increased
commercial lending and consumer credit. Finally, overseas remittances reached a
record $48.8 billion in 2004.

* External performance strong
Favorable terms of trade have generated strong export growth and current account
surpluses (Figure 6), reduced debt burdens and stable currencies. Exports
increased in 19 of the 20 countries (Table 6). Total external debt and the
debt/export ratio were both down in 2004 (Figure 7), although more than half of
the countries have large foreign debt loads (Table 7 and 8). In all but six
countries local currencies have appreciated against the dollar since the beginning
of 2004 (Table 9).

Figure 4

Regional GDP Growth Rates for Latin America and the Caribbean, 1990-2005
(Source: CEPAL, December 2004)

38 39

-0 3

5 G 5 G
GIc~

1
III
*T u"' 0
;^~ ;^

0 5 0 4
I 0 -

c o o- o
d d ',1

6.0

2 5.0
01
01
C 4.0

3.0

2.0

1.0

0.0

-1.0

o o
o o
rC.i rC.i

Figure 5

Average Annual Inflation Rate for Latin America and the Caribbean, 1996-2006
(Source: CEPAL 2005)

0200
c
0r)
a)
C

S150

100
0.

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Figure 6

Exports and Imports of Goods and Services in Latin America and the Caribbean,
2001-2004
(Source: CEPAL 2005)

550,000 -

500,000 -

450,000

o

S400,000
o
.2

350,000

300,000

250.000 -

2001 2002

SExports
SImports

2003 2004

Figure 7
Gross Disbursed External Debt, 1995-2004
(Source: CEPAL 2005)
800
700

a 600
500
400
2 300
_-
200
100

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Debt ($US billions) Debt as % of exports of goods and services

Social Environment#

The social environment presents a mixed picture. Latin America has begun to

reverse some of the short-term erosion of the social environment caused by the economic

downturn that ended in mid-2003. Also encouraging is the decline in infant mortality

rates, lower incidence of hunger and an increase in school enrollments. However, violent

crime afflicts countries throughout the region, and structural poverty and inequality

continue to be major problems. A U.N. study estimates that over 220 million Latin

America and Caribbean citizens live in poverty. Of this total 96 million are classified as

"indigent." To reduce these numbers, governments must achieve higher rates of

economic growth, and adopt policies that directly address the problems.

Unemployment and short-term poverty falling

Kidnapping serious threat to the business environment
Latin America, which has an estimated 7,500 kidnapping a year, accounts for
approximately 75% of the world's abductions, according to insurance industry
estimates.

Politics 4

All Latin American political systems are nominally democratic but the

commitment to and practice of democracy is deeper in some than others. The four war-

torn republics of Central America have made encouraging progress in distancing

themselves from their authoritarian pasts. Especially problematic, however, are the

"incomplete, interrupted democracies," which regularly hold elections but then just a

regularly experience "popular coups" that force the winners to leave office before serving

out their constitutional terms. This cycle has become institutionalized in Ecuador and

Bolivia. In these two countries weak political parties have been unable to effectively

integrate the increasingly mobilized indigenous peoples into the political process and

dysfunctional governments cannot meet the needs of their poorest citizens. Corruption is

both a cause and effect of unconsolidated democracy.

Unscheduled changes in government weaken democracy
Public protests forced the presidents of Ecuador and Bolivia from office in 2005.

Corruption undiminished
This year's bribery scandals in Brazil, Costa Rica and Nicaragua reaffirm that
corruption continues to reach the highest levels of government. Chile and
Uruguay countries with strong democratic traditions and institutions stand
apart as being relatively free of corruption. Costa Rica was once in this category,
but the current scandal raises doubts about its business environment.

Policy/Regulatory Environment=

Latin America has a history of major policy shifts. In the late 1980s, governments

in the region began to abandon inward-looking development models in favor of open,

market-friendly development. During the 1990s, following the prescriptions of the New

Economic Model, referred to as the Washington Consensus, economies were stabilized

and opened to foreign trade and investment. State-owned enterprises were privatized and

business practices were deregulated. With the economic downturn that began in 1997, the

electoral shift to the left in recent years and popular protests against "neo-liberalism,"

conditions might be conducive to another policy shift.

Continued adherence to orthodox macroeconomic policies
The current recovery has reinforced the hemispheric commitment to orthodox
macroeconomic management using inflation targeting (Figure 5), strong fiscal
anchors (Figure 8) and floating exchange rates (Table 9). The new president of
Uruguay was quick to assure the international financial community that his
government would adhere to the pragmatic path chosen by the left-leaning
presidents of Brazil and Chile. In Peru, President Toledo picked his finance
minister to be prime minister in order to guarantee continuity in economic policy
until the new government takes over.

Structural reform less certain
While Brazil, Chile and Mexico make some headway, reform has lost momentum
and is under forceful attack elsewhere in the region. Uruguay's new president is
not likely to promote privatization or other reforms that face strong opposition.

Figure 8
Fiscal Deficit/Surplus, 1995-2004 (% of GDP)
(Source: CEPAL, December 2004)
-3.5

-2.5

-2.0

1 T -1
S-1.5
0-1 '3

-1.0

-0.5

0.0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

II. COUNTRY PROFILES

NAFTA REGION

At the mid-March North American Summit in Texas, the three leaders proclaimed

the "Partnership for Security and Prosperity of North America." The agreement is a

trilateral program to deepen regional integration by transforming NAFTA into a full

North American Community by 2010, and taking action on important regional issues. In

practice, immigration and border security dominate U.S.-Mexican relations. It appears

unlikely that President Bush will be able to push a guest worker program through

Congress, which has a strong anti-immigration faction, while Mexico's inability to

effectively police its side of the border fuels security concerns in the U.S.

The fact that Mexicans living abroad (the overwhelming majority in the U.S.)

remitted a record $16 billion in 2004 to their relatives in Mexico demonstrates that the

migrant stream north continues unabated. Forecasts anticipate $18 billion in remittances

this year. Employment and output in the maquiladoras industry both recovered in 2004,

but still remain short of peak levels in 2000. Most of the gains came in service

maquiladoras as Mexico faces increasing competition in light assembly jobs from Asia.

The loss of sales and market share predicted for the Big 3 U.S. auto companies will have

negative implications for Mexico.

Mexico=2: Stable economic performance as U.S NAFTA partner gears up for elections

Moderate growth
Rising exports, investment and domestic consumption spurred by increased
consumer credit have contributed to growth, while the manufacturing sector has
not recovered to previous levels. Most observers attribute Mexico's disappointing
performance to long term structural weaknesses, close ties to U.S. manufacturing

2 The symbols for each country indicate the following trends: +t business environment improved, 4
business environment deteriorated, = no significant change since 2004 report.

and rising Chinese competition for manufactured export goods. The central bank
implemented a new instrument for adjusting interest rates to combat inflation,
which has been running slightly over the targeted rate but is not a problem. The
stock market has reached record high levels as local pension funds begin to invest
in equity-linked notes.

*Solid externalfinancial position
FDI is rising, the peso is up against the dollar and exports are up, thanks largely to
high oil prices. Most impressive has been the government's management of the
external debt to extend maturities and lower interest payments. This has reduced
both total debt and the debt/export ratio. Rating agencies responded by upgrading
Mexico.

Increase in high profile violent crimes
According to estimates Mexico now has more kidnapping than any country in
the world. Drug and gang-related criminal activities grew even more violent on
the border with the U.S. over the past year.

2006 presidential election dominates politics
The country dodged a major crisis in April when popular Mexico City mayor and
candidate of the left-leaning PRD, Andres Manuel L6pez Obrador, was allowed to
run for president after questionable corruption charges against him were dropped.
His nomination assured, he will face the nominees of the ruling PAN and PRI to
be selected in primaries.

Sound macroeconomic program but structural obstacles remain
Two of the most pressing and thorny issues the new government will have to deal
with is the need to reform the tax code to boost revenue and the need to open the
energy sector to private investment.

CENTRAL AMERICA

The most significant development affecting the business environment in Central

America was U.S. Congressional approval of the free trade agreement with five Central

American countries (Panama and the U.S are currently negotiating a separate bilateral

FTA) and the Dominican Republic. Ratification of CAFTA-DR was in doubt until the

July 2005 vote in the House of Representative passed the agreement by just two votes.

The legislatures of Costa Rica and Nicaragua must still ratify the agreement with only

Costa Rican approval in doubt.

CAFTA-DR assures preferential access to the U.S. after the temporary one-way free

trade arrangements adopted during the civil wars of the 1980s expire. However,

CAFTA-DR concedes only limited gains to Central American sugar and textile exporters.

Central America is a relatively small market composed of 45 million mostly low income

consumers. Liberalized access to Central American markets is important for U.S. farm

products and selected manufactured goods. The agreement immediately grants duty-free

status to 80% of U.S., with the remaining tariffs to be phased out over 10 years. CAFTA-

DR further commits all member governments to adopt common standards regarding

intellectual property rights, dispute resolution and treatment of foreign investment.

CAFTA-DR comes at a time when Central America is in a cycle of moderate

expansion. In contrast to the rest of Latin America, Central America's terms of trade are

stagnant. This is a function of the region's commodity mix of traditional exports, such as

coffee (that saw price gains only slightly above historical lows) and non-traditional

exports like textiles (that faced increased competition from China following the end of

the Multi-Fiber Agreement) combined with a heavy dependence of oil imports. Exports

are up, but all countries are running current account deficits. Growth rates are

satisfactory, and inflation is holding steady. With the exception of Costa Rica and

Panama, gang-related (las maras) violence continues to undermine the social

environment. For a region with a recent history of political unrest and violence, the

political environment is stable. All six countries have elected constitutional

governments. The environment in Nicaragua has seriously deteriorated over the past

year, and the scene is changing in Costa Rica.

While it is unlikely that CAFTA-DR will produce dramatic changes in Central

America, it will affect trade and investment as it comes on line and more closely

integrates the region into the expanding North American-NAFTA economy. The

region's outlook is certainly more favorable than it would have been had the U.S.

Congress not ratified the agreement.

Costa Rica 4: Corruption and policy inaction weaken attractive environment

Soft economic performance
Growth for 2005 is down from last year, and is 1.3% lower than the annual
average for 1995-2004. Inflation will exceed 10% for the second year in a row.
Exports are up less than 5.0%.

International standing remains favorable
FDI increased in 2004. Its debt/export ratio is the best of the countries covered in
this report (Table 8). The colon lost the most of any Latin American currency,
except the Venezuelan bolivar, against the dollar.

Unsettled political environment
Major corruption scandal and pre-election maneuvering unsettled the political
environment, but institutions remain fundamentally sound. Three past presidents
are charged with accepting bribes, forcing one to step down as Secretary General
of the OAS a post he held for just three weeks. A second resigned from a top
position with the World Economic Forum.

Fiscal reform and CAFTA-DR stalled
President Pacheco has refused to submit the trade pact to the National Assembly
for ratification until the legislative body approves his fiscal reform bill and his
appointed "Council of Notables" advises him on CAFTA-DR. The risk now is
that there will be no action on either of these important measures until after the
February elections.

El Salvador=: Awaits payoff from dollarization and liberalization

Economy disappoints expectations
Although up in 2004 and 2005, inflation is under control, but growth is sluggish
and per capital income stagnant.

Mixed external position
On the plus side is the investment grade credit rating. However, export growth is
weak, in part because of low coffee prices (still a major export), but also because
dollarization (now in its fourth year) has raised relative prices of El Salvador's
manufactured goods, especially textiles. It remains to be seen whether CAFTA-
DR will help offset the downside of a dollarized economy by guaranteeing
preferential access to U.S. markets. Overseas remittances (around $2 billion
annually) are crucial to the economy (equivalent to 15% of GDP).

Gang-related violence
In spite of various measures to reduce the rate of violent crime, homicides
increased by 25% (from 1,500 to 2,000) in the first half of 2005 compared to
same period in 2004, according to the National Civil Police.

Stablepolitical environment

Guatemala#: Small but significant steps strengthen weak environment

Flat economic performance
GDP growth is up since 2003, but GDP per capital stagnant. Inflation has also
increased. Exports are up, but country has large trade and current account
deficits.

Improved international standing
In recognition of the government's efforts to combat organized crime, drug
trafficking and corruption, the U.S. restored military aid, and the Organization for
Economic Cooperation and Development removed Guatemala from its blacklist
of countries that did not cooperate in efforts to control money laundering and
terrorism. Its external debt and debt/export ratio both decreased, and the
government successfully issued 30-year bond in September 2004.

Problematic social environment
Poverty, social exclusion and criminal violence undermine the business
environment and efforts to consolidate democracy. Although the new president
has undertaken measures to address these problems, the indigenous population
(estimated at 5 million) remains on the margins, and criminal violence is
pervasive.

More settled political environment
Working with a multi-party congressional coalition and cabinet, President Oscar
Berger has reduced the size of the army and ended military practices associated
with human rights violations.

*Significant policy advances.
Congress ratified CAFTA-DR in the face of public demonstrations that turned
violent. It also approved a measure allowing tax revenues to rise from 8% to 11%
of GDP in order generate greater infrastructure investment and social spending.

Honduras#: Growth encouraging but gang violence persists

Three years of strong growth
Inflation has increased over the past two years.

Mixed external profile
Healthy terms of trade (compared to the rest of Central America, except Panama)
sustain modest export growth, but FDI is flat and the debt-servicing burden high.

Crime and violence serious
In December 2004, a gang assault on a bus killed 28.

National elections in November
For the first time the two major parties used primary elections to select their
presidential nominees. Security and organized crime are major issues in the
campaign. Neither candidate has established a convincing lead in the polls.

Important business policy decisions
The Maduro administration had deregulated the telecommunications industry,
pushed through a property-titling reform and secured ratification of CAFTA-DR.

Nicaragua : Escalating constitutional crisis threatens to erase recent gains

Economic performance on balance positive.
Although inflation is up, growth is running 4.0%, which translates into higher per
capital income for one of region's poorest countries.

International standing weaker
The U.S. suspended military aid when the Nicaraguan Congress prevented
President Bolahos from carrying out his commitment to destroy shoulder-fired
missiles acquired under the Sandinista government. As a poor country with a
high debt burden, Nicaragua needs private investment (up in 2004) and public
assistance. Its current IMF loan runs out at the end of 2005. It has the least
favorable terms of trade of the 20 countries.

Highly polarized political environment
Former presidents Aleman and Ortega have rallied their forces in Congress to
strip President Bolahos of key powers. Their goals are to get Aleman released
from house arrest on a bribery conviction in order to pave the way for Ortega
(who has seized control of the Sandinista party) to run for president again. Not

even popular protests, U.S. pressure or OAS intervention have headed off the
crisis.

*High fiscal deficit
Upcoming elections and confrontation between the executive and legislative
branches makes it difficult to narrow the deficit. Congress has not yet ratified
CAFTA-DR.

Panama#: Environment improves under new administration

Three consecutive years ofrapid growth.
Inflation is not a problem in the dollarized economy.

External position positive
FDI dropped in 2004, but was still highest in Central America on a per capital
basis. Exports increased and the current account deficit declined. Negotiations
for a U.S.-Panama FTA are in final stages.

More sealed political environment

Unpopular fiscal and pension reforms passed.
The Torrijos government's next challenge is to win approval for a plan to widen
the Panama Canal, a project that must be submitted to popular referendum.

CARIBBEAN

Strong commodity prices, record-level overseas remittances and recovery of tourism

combined to produce an upturn in the Caribbean in 2004, which has carried over into

2005. The quick turnaround of the Dominican Republic, which has the largest market

economy in the region, is positive for the region. However, with the exception of

Trinidad & Tobago, countries in the region carry heavy debt burdens and depend heavily

on tourism. Furthermore, recent WTO decisions endanger the Caribbean's preferential

access to E.U. commodity markets. The Venezuelan government has entered into

agreements with Caribbean governments to supply them oil on concessionary terms.

On the institutional level, CARICOM leaders revived plans to create the Caribbean

Single Market Economy (CSME), an idea that has been around for 30 years. In April

2005, CARICOM established the Caribbean Court of Justice. The Court replaces the

Privy Council as the final court of appeal for cases in member states and as the body

responsible for interpreting and applying the CSME treaty. They also proposed a free

trade agreement with the U.S., modeled after CAFTA-DR. These initiatives come in the

context of two developments: the erosion of preferential access to E.U. and U.S. markets

and sub-regional trade negotiations that displaced the stalled FTAA process.

Dominican Republic#: Economic recovery under new administration lifts environment
out of problematic category

Strong turnaround in economic performance
Following the 2003 collapse, growth slowly resumed last year. Forecasts called
for expansion of 3.5% this year, but the economy grew 5.8% in the first half of
2005. Equally encouraging is the rapid decline in inflation and falling interest
rates.

New IMF standby loan anchors improved external position
To qualify for the loan, the government had to commit to implementing fiscal
austerity, restructuring its public debt and reforming the banking and energy
sectors. Both FDI and exports are up, and the country has a current account
surplus. Moody's upgraded its outlook for the DR in May. Since the end of
2003, the peso has strengthened against the dollar by 50%. Some observers worry
that it is now over-valued and hindering export growth.

High unemployment, frequent blackouts and rising crime

Parties gearing up for 2006 legislative elections
The election will decide control of Congress, currently in the hands of the
opposition PRD, during the last two years of President Fernandez's term. The
PRD has been hurt by defections and splits.

Important items on policy agenda
Congress must approve tax reform and reform of the power sector. The
government needs to increase tax revenues in order to reduce the fiscal deficit.
Chronic power blackouts generate social tension and added uncertainty for
business. Both houses voted overwhelming approval of CAFTA-DR in
September.

Jamaica#: Weak recovery continues

Positive economic performance
Rising bauxite exports and record tourist revenues have delivered three years of
economic growth. Inflation is falling into the high single digit range, permitting
the central bank to lower interest rates. The 2004 hurricanes did not inflict major
damage on the economy.

Improved external position
High bauxite prices, fueled by growing Chinese imports, help offset rising cost of
oil imports. In early 2005 Standard and Poor's upgraded the country's sovereign
credit rating because of the country's improved external and fiscal situations.

Chronic gang-related violence
In the first seven months of 2005 homicides reached 1,000, surpassing the number
for the same period in 2004 by 210 murders.

Two major parties to select new leaders for next election
P. J. Patterson announced that he would step down in April 2006 after 13 years in
office and turn power over to a new prime minister before the 2007 election.

Trinidad & Tobago*: High energy prices and political stability make environment
more attractive

Economic growth to reach 6.0% for second year in row

Strong external position
Soaring demand for liquefied natural gas has boosted export earnings and
attracted FDI. In recognition of T & T's strong external and fiscal accounts,
rating agencies upgraded its credit rating.

Kidnappings increasing

Ruling PNMparty strengthened in by-elections

Priority to long-term policy initiatives
The government is giving priority to increasing gas exploration, diversifying the
economy and building up the stabilization fund, all of which would strengthen the
country's long-term outlook.

ANDEAN SOUTH AMERICA

Andean South America continues to be the most problematic region in Latin

America, but there have been positive developments. On the negative side, two of the

five countries Bolivia and Ecuador had unscheduled presidential changes. On the

positive side, the Andean countries benefited from favorable terms of trade (all five are

energy exporters). The economies performed well for the second year in a row, with

healthy growth rates, low inflation (except Venezuela), increased exports, and favorable

current account profiles.

Although negotiations for the Andean FTA between the U.S. and Colombia, Peru

and Bolivia have fallen behind schedule (missing the December 2004 deadline to finish

the negotiations), it still appears that the four countries will eventually produce and sign

an agreement. The issue then becomes whether the U.S. Congress will ratify it.

Bolivia #: Protests force president from office and weaken problematic environment

Economic growth
Under trying domestic circumstances, but aided by rising natural gas export
earnings, the economy is growing, at 3.5% annually over the last 24 months.
Although low by historical standards, inflation has increased during this period.

Weakened external position
Despite highly favorable terms of trade, escalating political instability and
uncertain policies make Bolivia less attractive. Of particular concern is
uncertainty over foreign participation in the energy sector. FDI, which fell
sharply in 2003, dropped again in 2004. The debt burden is heavy, although the
Group of 8 agreed to consider forgiving Bolivia 40% of its foreign debt.

Widespreadpoverty and socialfragmentation dominate social environment

Prolonged political crisis
In June, Carlos Mesa stepped down as interim president in favor of Eduardo
Rodriguez, Bolivia's third chief executive in three years. Congress voted to cut
short the current executive and legislative terms by 18 months and hold a
constitutional convention and referendum. The demise of the traditional parties,
confirmed in the December 2004 municipal elections, and rise of radical
indigenous movements weakens the state and complicates governability.

Unsettled policy environment
Both macroeconomic stability policies and structural reform measures, in which
Bolivia was a pioneer, are at stake. There is a large fiscal deficit. In an
unsuccessful effort to end the street protests that shortly forced him from office,

Carlos Mesa allowed passage of a bill that sharply raised taxes on foreign energy
companies amid calls to nationalize all natural resources.

Colombia#: Commodity prices and stable politics sustain economic recovery

Encouraging economic performance
The economy is now in fourth year of growth, and inflation is falling, in spite of
large fiscal deficit.

Favorable external position
The terms of trade are strong, and FDI is rising. Surging exports and a falling
dollar forced the government to control short-term capital flows to curb
appreciation of the peso. Colombia's close relationship with Washington
cultivated by Presidents Uribe and Bush will likely lead to renewed U.S. funding
for Plan Colombia.

Improved security
Although still a dangerous social environment, Colombia has become safer with
fewer homicides and kidnapping. The trend is less clear with respect to drug-
trafficking.

Popularity high for President Uribe
Despite resurgence of FARC guerrilla attacks and questions about the president's
amnesty proposal for the paramilitary forces, popular approval of Uribe is at 70%
in polls as he moves toward re-election bid.

Controlling fiscal deficit biggest policy challenge
Colombia is committed to bring the fiscal deficit down under terms of the current
IMF agreement. The Senate failed to approve reform of the pension system that
would have reduced the drain on federal treasury. The government earlier had to
withdraw a tax reform bill because of lack of support in Congress.

Ecuador : Weak institutions and chronic instability offset high oil prices

Economy slowing down
Growth in 2005 projected to be half the 6.3% achieved in 2004. Most of the
growth was in the oil sector, although retail sector increased 4.1%. Dollarization
kept inflation under control.

Shaky external position
Standard & Poor's lowered Ecuador's credit rating in June citing concerns about
the new government's ability to cover a growing financing gap. Fitch changed its
outlook to negative in late August following protests that disrupted oil production.
Multilateral lending agencies have held up loan disbursements.

Precarious political environment
In April popular demonstrations over an attempt to pack the Supreme Court
forced President Lucio Gutierrez from office. Congress named Vice President
Alfredo Palacios as Ecuador's seventh president in eight years. The interim
president who belongs to no party is struggling to cobble together a
constitutional referendum and make it through until a new chief executive is
chosen in November 2006.

Policy influx
On assuming power, Palacios promised to increase social spending, even if it
violated the fiscal responsibility law and diverted funds from oil reserve set aside
for debt servicing. His first finance minister, an opponent of dollarization who
pushed for looser fiscal policy, was forced to resign after striking a deal to sell
$300 million in bonds to Venezuela, allegedly without informing Palacios.

Peru#: Economic and financial environment effectively insulated from politics

Economic performance continues strong
The economy is in an unprecedented four-year growth spurt. Inflation is low and
declining.

Favorable external position
Exports jumped in 2004 in response to improving terms of trade while FDI is
steady. External debt is down slightly. Currency appreciation and low inflation
has allowed the government to adopt a series of measures to move away from use
of the dollar in the local economy. Peru suggested that it would seek to conclude
a separate bilateral FTA with the U.S. if the three-country Andean negotiations
break down. Although the coveted investment grade rating continues to elude
Peru, Standard & Poor's upgraded its outlook in July.

Democratic and policy advances under weak administration
In spite of low approval ratings and political turmoil swirling around his
administration (his cabinet resigned in August), President Toledo will serve out
his constitutional term and leave his successor a strong economy anchored in solid
macroeconomic policy-making.

Venezuela#: Political consolidation and economy growth but policy uncertainty define
problematic environment

*Good prospects for continued economic growth
Inflation remains high as does the fiscal deficit. Benefiting from highly favorable
terms of trade, exports have soared. Rising public revenues allowed the
government to reduce the value-added tax.

Record oil prices and escalating tension with U.S.
Oil revenues have generated a large current account surplus, strong hard currency
reserves, lower external debt and upgraded credit ratings. They have also allowed
the Chavez government to embark on a diplomatic offensive that includes
building closer relations with Cuba and courting allies in the Americas for his
"Bolivarian" project. The deterioration in U.S.-Venezuela relations as well as
policy uncertainty regarding the role of the private sector keeps foreign
investors wary of oil-rich Venezuela. The government devalued the Bolivar by
33%.

Poverty and unemployment persist
Heavy government social spending has alleviated short-term unemployment and
raised family incomes among the poor. Social spending does not constitute a
long-term solution to poverty.

Increased Presidential power
Following his victory in the August 2004 referendum, Chavez increased the
power of the presidency at the expense of the other branches of government. He
also took steps that politicized the armed forces and civil society. The opposition
is disorganized and leaderless. The ruling MQR won more than 80% of the seats
in the August 2005 municipal elections.

Contradictory policy agenda ofBolivarian revolution
Chavez rejects Western-style capitalism in favor of yet-to-be-defined "21st
century socialism." The government is promoting land reform and a co-
management scheme (co-gesti6n), which turns bankrupt enterprises over to
management councils with worker participation. At the same time, it has not
threatened to eliminate the private sector and continues to solicit foreign
investment.

BRAZIL AND THE SOUTHERN CONE

Buoyed by global commodity prices and stable political systems, the business

environment in Brazil and the Southern Cone region of South America continues to be

positive. Chile is especially attractive, looking much like it did in the 1990s. Argentina,

which continues to recover from the painful 2002 collapse, took an important step in

reaching agreement with most of its private bondholders. The Argentine recovery has

spilled over into Uruguay. Of the five countries, only Paraguay has failed to break out of

its stagnation.

There were no major developments that affected MERCOSUR, either in terms of

expanding membership to other countries or deepening integration toward a full customs

union. Argentina expressed reservations that Brazil's ambitious foreign policy, which

includes a campaign for a permanent seat of the UN Security Council and leading role in

global trade talks, is threatening to detract from IMERCOSUR. The political turmoil in

Bolivia and it potential to cripple energy supplies in the Southern Cone led to a proposal,

underwritten by Venezuela, to create a South American energy consortium to assure the

MERCOSUR members and Chile reliable energy flows.

Brazil : Corruption scandal yet to reverse economic recovery

Encouraging economic performance
The 2004 growth rate was the best since 1994, thanks to dramatic increase in
exports and strong consumer spending. It will be lower in 2005 but so will
inflation (falling within targeted range). The stock market, matching the
economic performance, was up over 18% in dollar terms for the year in August.

External confidence persists
FDI fell in 2004 but was up 88% in the first seven months of 2005. The real,
which has steadily gained value against the dollar under Lula, remains strong, too
strong for Brazilian exporters but helpful (combined with current account surplus)
for reducing dollar denominated debt. Brazil's strong external position allowed it
to forgo renewing stand-by loan from the IMF.

Violent crime remains serious but unemployment falling

Political environment has deteriorated
So far the President has not been directly implicated in the scandal that erupted in
May, but his closest advisor and top PT officials were forced to resign. Lula's
standing in the polls began to weaken in late August. The President's troubles
started in February when his candidate for president of the Chamber of Deputies
lost to a veteran politician from minor party. This required a reorganization of the
cabinet to reconstitute congressional support for the administration.

Macroeconomic policies secure but structural reform more problematic
Although the bankruptcy reform passed and some progress was made on tax
reform, in late August Congress overrode for the first time in his presidency -
the President's veto of wage increase for legislative employees. The Central
Bank pushed the benchmark Selic interest rate back up during the year (19.75% in

August), but now appears prepared to begin bringing it down as the threat of
inflation recedes.

Argentina#: Debt settlement and continued growth improve weak environment.

Mixed economic performance
High commodity prices and recovering domestic consumption have given
Argentina three years of growth above 7.0%, but inflation is on the rise.

Strengthened external position
The government won acceptance of a deeply discounted (70%) restructuring
package on its $103 billion debt from domestic and most foreign bond holders.
Argentine companies reached less discounted settlements with their creditors on
the estimated $30 billion private sector debt. The other positive developments
include: Rating agencies upgrade; FDI starting to return; a current account
surplus, issuing first dollar denominated bond issue since 2002 default and a
stable peso. In June the government imposed controls on short-term capital flows.
The foreign debt burden is still quite high, and the government has yet to put
together a new agreement with the IMF.

Decline in unemployment and poverty
Both have fallen from the levels reached in 2002 economic crisis. The daily
public protests (piqueteros) that started during the crisis continue to disrupt the
social environment.

Mid-term elections next test for president
President Kirchner, who was elected with only 22% of the popular vote in 2003,
is asking the voters to give him a mandate in the mid-term elections in October.
His competition comes from a dissident wing of the Peronist party led by his
predecessor, Eduardo Duhalde.

Important policy challenges
While maintaining fiscal discipline during current election campaign is a
challenge, the larger policy challenges include rebuilding the banking system and
coming to agreement with the utility companies on rate hikes.

Chile#: Strong economic performance and stable politics strengthen attractive
environment as country prepares for national elections

*Sustained high growth
Soaring copper export revenues, low interest rates, increased investment and
growing consumer spending are generating higher GDP growth in 2005 than
2004. But inflation, although moderate by historic standards, is up, forcing the
Central Bank to increase the benchmark lending rate.

Strong external position
FDI and exports increased substantially in 2004, and Chile has a healthy current
account surplus. With the FTA with the U.S. going into effect in January 2004,
trade between Chile and the U.S. is up. Chile continues to have the least corrupt,
most competitive business environment in Latin America.

Lagos administration ending on a high note
Congress has approved constitutional reforms that consolidate full democracy in
Chile's democracy by removing special military prerogatives and eliminating
appointed senators.

Paraguay#: Modest improvements in problematic environment

Slow growth and low inflation

Favorable IMF review
The IMF blessing and extension of stand-by loan signal growing external
confidence in environment, but exports and FDI are stagnant.

Kidnapping and growing crime
Government is forced to take steps including using armed forces for public
security tasks and recruiting 4,000 additional police officers to strengthen public
security.

Peasantprotests
Demands for land reform constitute political challenge for President Durarte.

Mixed policy performance
Although macroeconomic policy has improved, the opposition-dominated
congress and public protests makes it difficult to secure passage of reform
measures. Government again retreated on privatization, which is condition of IMF
agreement.

Uruguay#: New administration balances economic orthodoxy with social intervention

Economic recovery continues
Growth is strong for second consecutive row, and inflation is declining. Exports
jumped in 2004 and helped generate a current account surplus.

New IMF agreement
Agreement gives the new administration international legitimacy and credit based
on its commitment to maintain fiscal discipline and service the large foreign debt.
The peso reached a 30-month high early in 2005.

* Social environment improving
On taking office, the new administration launched a major antipoverty program
(Panes) to lift the standard of living of the poorest of the poor, and recovery is
bringing unemployment down.

* Political realignment
The October 2004 elections voted the traditional Blanco and Colorado parties out
of power. Tabare Vasquez, a Socialist, won a first-round victory in the
presidential contest, and his leftist EP-FA coalition won majorities in both houses
of congress.

* Pragmatic policy agenda
President Vasquez adopted the model of neighboring Socialist chief executives by
pursuing orthodox macroeconomic policies. Given Uruguay's strong statist
tradition, and in light of the preferences of his congressional allies, he must be
cautious when promoting structural reforms. Recent referendums constrain him
from privatizing public enterprises.

III OUTLOOK

REGIONAL OUTLOOK

The outlook for the Latin American business environment is favorable through

2006. Prospects are good for the recovery that began in mid-2003 to continue, making it

the longest period of growth since the early 1990s. However, the rapid jump in global

energy prices in recent months and the large number of elections scheduled in the region

over the next 15 months add more uncertainty to the outlook than was the case a year

earlier.

External Environment

Global =
The global outlook is, on balance, positive for Latin America, although oil prices
are a growing concern. With oil prices now over $65 a barrel, both the importing
and exporting economies face fiscal, monetary and external imbalances. Rising
energy prices are generating social unrest and political pressure on governments
to protect their citizens from the increases. Soy bean and coffee prices showed
signs of softening, prior to the Hurricane Katrina disaster.
Keys: Commodity prices, especially oil, and resumption of WTO negotiations

Regional?
A dramatic improvement in U.S.-Latin American relations is unlikely, but it is
important for Washington to stay engaged with the region, especially with the
next presidential Summit of the Americas scheduled for Argentina in November.
U.S. concessions to jump-start the stalled FTAA negotiations would be a
significant gesture. How the challenge from the Chavez government in Venezuela
in an escalating tit-for-tat confrontation with the Bush administration while
using oil diplomacy to cultivate friends in Latin America plays out will affect
Inter-American relations. As the Lula government has been touted as the
responsible model, what happens in Brazil has implications for the region.
Keys: U.S.-Venezuela relations, developments in Brazil and regional trade
negotiations

Domestic Environment

*Economic and Financial Performance =
The 2006 economic performance should duplicate that of 2005 with regional
growth around 4.0% and mild inflationary pressures. The continued economic

recovery and local currency appreciation may increase imports and produce or
deepen current account deficits. FDI should continue increasing.
Keys: Global growth and commodity prices

Social Environment#
Four years of growth will lower unemployment, increase per capital income and
improve the standards of living of families in lower income brackets.
Keys: Continued growth and anti-crime measures

Politics #
Given the elections scheduled over the next 15 months, the region's political
environment promises to be unsettled. Victories by leftist-populist candidates, (a
plausible outcome in at least five countries Nicaragua, Bolivia, Ecuador, Peru
and Mexico and guaranteed in Venezuela), would lay the foundation for a
significant shift in the business environment. In the meantime, the campaigns
themselves will generate greater uncertainty.
Keys: Eleven presidential elections by end of 2006

Policy/Regulatory Environment =
If Latin America shifts further to the left, and the new administrations pursue a
more populist line, pressure would increase in these countries to abandon New
Economic Model (NEM) in favor of a return to the more protected, inward-
looking, statist development model championed by President Chavez. While such
an outcome might signal an end to the Washington Consensus as a consensus, it
would not trigger a region-wide paradigm shift. Chile, Brazil and Colombia are
firmly in the NEM camp, while Costa Rica, Honduras, Peru, and, most
importantly, Mexico are likely to stay the course, regardless of who wins their
elections.
Keys: Election outcomes and make-up of new governments

COUNTRY OUTLOOKS

To further assess the outlook for the next 15 months, we divide the 20 countries

into three categories attractive, problematic and mixed. The categories correspond to

the current overall character of their business environments but recognize that significant

internal or external developments can affect the classification. This year, three of the 20

countries are in different categories than in the 2004 LABER: Argentina and the

Dominican Republic were upgraded from problematic to mixed, while Ecuador was

downgraded from mixed to problematic. Within each of the three categories, we indicate

the likelihood that the national business environments will get better ()), get worse (+)

or stay the same (=) through 2006 and suggest key events to monitor in each

environment. This year, six of the 20 environments are expected to improve compared to

12 in 2004.

Attractive Environments

Although not without weaknesses, four business environments (Mexico, Costa

Rica, Trinidad and Tobago, Chile) are fundamentally sounder and offer an attractive risk-

reward balance. The combination of factors that make the environment attractive differs

somewhat from country to country, as does the outlook for each. Mexico's strength

comes from its close integration with U.S. through NAFTA, its systematic

implementation of the NEM and its strong institutions. Election-year politics cloud the

short run outlook as is the case with Costa Rica, which derives its strength from the

relatively high level of its social development and stable democratic politics. Trinidad &

Tobago has a rich resource endowment and a history of parliamentary democracy.

Measured on all dimensions, Chile has the most attractive business environment in Latin

America.

Mexico #
Presidential elections have a history of unsettling the business environment in
Mexico. Even though the government has taken steps to maintain investor
confidence by building up a foreign currency reserve fund to meet all foreign debt
obligations through 2007, should L6pez Obrador maintain his lead in the polls
and sweep to victory, we can expect the markets to soften on Mexico (much as
happened in Brazil in 2002) until the new administration defines itself. The new
president who ever he turns out to be is unlikely to have a majority in
Congress.
Keys: July 2006 presidential election

Costa Rica J#
The two-party arrangement that gave Costa Rican democratic stability and
predictability is unraveling, making the outcome of the upcoming election and

nature of the next administration less certain. Former President Oscar Arias, a
proponent of CAFTA-DR, has a lead in the early polls, but the heavy-handed way
he secured the nomination (and the judicial decision reversing the ban on re-
election) further weakened the PLN. Ott6n Solis, second in the polls as the
nominee of one of the new parties, opposes CAFTA-DR.
Keys: CAFTA vote and February 2006 elections

Trinidad & Tobago#
Over the next 12-18 months, there are no serious threats to the environment.
Keys: Energy prices

Chile#
With the ruling Concertaci6n candidate, Michelle Bachelet commanding a
healthy lead in the polls, the October election seems likely to produce a smooth
transition and policy continuity. Bachelet is a free-market Socialist in the mold of
incumbent President Ricardo Lagos.
Keys: November 2005 presidential election

Problematic Environments

Political instability, weak institutions and unresolved policy issues make the

business environments of the four countries in the problematic category fundamentally

unattractive. Bolivia and Ecuador downgraded to problematic this year are deeply

divided nations with mobilized populations, dysfunctional political parties and weak

governments. Uncertainty in Venezuela surrounds both how the president and opposition

will address their deep differences and which policy agenda the government will pursue.

The administration in Paraguay is not strong enough to make significant progress in

reducing corruption or pushing stalled reforms through congress. Three of the four

countries will hold national elections over the next 15 months, but the outcome of these

contests is unlikely to alter the problematic character of their business environments.

Bolivia 4
Bolivians will go to the polls in December, ahead of schedule, to select a new
president and Congress. The two presidential favorites offer voters a real choice:
U.S.-educated Jorge Quiroga calls for staying on the free market course while Evo
Morales, leader of the indigenous coca growers and admirer of Hugo Chavez,
says that he would nationalize natural resources, including the gas fields. As

things now stand, it seems hard to see how either could effectively govern this
nation so deeply divided by ethnicity, class and region.
Keys: December 2005 elections and constitutional reform

Ecuador
Ecuador must not only elect a new president, but also find a way to build a more
stable political system. The Palacio administration proposes to popular
referendum that would make major changes in the system of government, but it is
losing the authority to define the situation. The business environment over the
next 18 months promises to be quiet unstable, and dollarization may not survive
the turmoil.
Keys: Constitutional referendum and October 2006 elections

Venezuela=
Hugo Chavez seems firmly in control of Venezuela and determined to extend his
influence beyond it borders. Less clear is what he intends to do to Venezuela and
whether he is on a collision course with Washington.
Keys: Oil prices, relations with Washington and December 2006 election

Paraguay=
The IMF waived non-fulfillment of certain conditions in its last review, but at
some point the government must win congressional approval for controversial
reforms committed to in the agreement.
Keys: Compliance with IMF agreement

Mixed Environments

The business environments in the remaining 12 countries feature varied

combinations of attractive and problematic traits. It is worth noting, however, that the

short-term outlook for only two of these countries is negative, while seven will be

unchanged and three are forecast to become more attractive. Four of the most important

economies in the region Colombia, Peru, Argentina and Brazil fall in this category.

Of particular importance is Brazil. A serious downturn in Latin America's largest country

would reverberate throughout the region.

El Salvador=
In spite of taking all the prescribed policy moves and achieving investment grade
credit rating, the economy is expected to again experience modest growth even
with CAFTA-DR coming on line.
Keys: Boost from CAFTA-DR and reduction in criminal violence

* Guatemala#
Given its fragile political institutions, anything could quickly reverse the limited
but important advances of the last two years. At present, President Berger seems
capable of maintaining a steady hand on government. Greater investment and
growth under CAFTA-DR umbrella would strengthen environment.
Keys: FDI flows and success in dealing with crime

* Honduras=
The election is unlikely to produce a significant shift in the environment, given
the similarities between the two parties and their near monopoly over electoral
politics.
Keys: November 2005 elections and new administration

* Nicaragua #
The political class seems incapable of coming to an agreement on how to select a
successor to President Bolahos who is legitimate in the eyes of the Nicaraguan
people and credible to the international community. A victory for Daniel Ortega
would seriously unsettle the business environment.
Keys: November 2006 election and transfer ofpower to new administration

* Panama#
The Torrijos government had a good first year, but it must now win popular
approval for a plan to modernize the canal.
Keys: FTA negotiations with U.S and advancing plan for canal

* Dominican Republic#
Well on the way to recovery, winning control of Congress would make it easier
for the Fernandez government to assure compliance with the IMF program and
meet expectations of investors and Dominican people.
Keys: Fiscal deficit, debt management and May 2006 legislative election

* Jamaica=
The environment has improved, but it is fragile and could lose its momentum.
Keys: Fiscal policy as parliamentary election approach

* Colombia=
National elections will dominate the environment until April. Although there are
still some constitutional hurdles, it is likely that Uribe will be cleared to run for
re-election and win a second term because of popular support for his security
program and the improving economy.
Keys: April 2006 elections and FTA negotiations

* Peru =
The August 2005 appointment of respected finance minister Pedro-Pablo
Kyczynski as prime minister assures continuity in economic policy until the new
administration takes office in August 2006. It may also strengthen the practice

that has evolved under the unpopular Toledo of entrusting economic policy-
making to the cabinet. There are no clear favorites in the presidential race,
although it seems unlikely that either former president Garcia or Fujimori can
win.
Keys: Conclusion to FTA negotiations and April 2006 elections

SBrazil=
The fact that the ongoing scandal has not derailed the recovery nor undermined
confidence in economic policy is testimony to how much Brazil has matured in
the 15 years since the Collor impeachment crisis. Nevertheless, the outlook for
the next 16 months is uncertain. The forced resignation of Finance Minister
Palocci much less President Lula would constitute serious setbacks. By the
same token, should Lula effectively deal with the crisis while sustaining economic
momentum, he would not only likely be re-elected but further strengthen the
environment. Otherwise it will be early 2007 when the next government takes
power before the business environment settles down.
Keys: Course of corruption scandal and October 2006 elections

* Argentina=
President Kirchner is asking for a mandate in the midterm elections, in which his
wife is running for a senate seat in Buenos Aires Province (against the wife of
former president Duhalde). If the voters do not give him a mandate, the business
environment will become more unsettled and a new agreement with the IMF more
difficult. Growth is slowing and inflation increasing.
Keys: Outcome of October 2005 legislative elections and negotiations with IMF

* Uruguay=
Thus far, President Vasquez has held together the multi-party ruling coalition in
support of his middle-of-the-road agenda. Uruguay's strong institutions are a plus
for the environment.
Keys: Relations within ruling coalition and compliance with IMF agreement

TABLES

Table 1 MAJOR SUBREGIONAL TRADE AGREEMENTS

Table 2 TERMS OF TRADE, 1995-2004

Table 3 NET FOREIGN DIRECT INVESTMENT, 1995-2004

Table 4 GDP GROWTH RATES, 1995-2005

Table 5 ANNUAL INFLATION RATES, 1995-2005

Table 6 EXPORTS, IMPORTS (GOODS AND SERVICES) AND
CURRENT ACCOUNT BALANCE, 2001-2004

Table 7 GROSS DISBURSED EXTERNAL DEBT, 1995-2004

Table 8 DEBT EXPORT RATIOS, 1995-2004

Table 9 EXCHANGE RATES AND IMF AGREEMENTS, 2005

Table 10 SOCIAL ENVIRONMENT, 2005

Table 11 POLITICAL ENVIRONMENT, 2005

Table 12 FISCAL DEFICIT SURPLUS, 1995-2004

Table 1

MAJOR SUBREGIONAL TRADE AGREEMENTS
ANDEAN

COMMUNITY

MERCOSUR

CARICOM

I. Type of Agreement Free Trade Area Customs Union Customs Union Customs Union Customs Union

II. Entry into Force 1994 1961 1969 1995 1973

1. Eliminate tariff barriers 1.Create economic 1. Create customs union 1. Liberalize trade 1. Stimulate/promote
III. Agreement Objectives on most goods union economic integration
2. Liberalize market 2. Implement a CET: 2. Implement a CET: 2. Implement a CET: 2. Implement a CET:
access in several sectors common external tariff common external tariff common external tariff common external tariff
3. Facilitate movement of 3. Reduce 3. Eliminate intraregional 3. Adopt a sectoral
business and people intraregional tariffs trade barriers approach
4. Become a common
market by 2005

IV. Member Countries United States Costa Rica Bolivia Argentina Haiti
Mexico El Salvador Colombia Brazil Jamaica
Canada Guatemala Ecuador Paraguay Trinidad & Tobago
Honduras Peru Uruguay 12 Other Members
Nicaragua Venezuela (Bolivia)* FTA w/ Dom. Rep.
(Chile)* (Peru)*

V. Total Population (2003) 424.7 million 35.3 million 119.2 million 222.4 million 15.0 million

VI. Total GDP (2003) $12.4 trillion $68.1 billion $259.7 billion $639.1 billion $35.2 billion

VII. Regional Trade (2004)1
Exports within own region $737.8 billion (55.6%) $3.6 billion (22.1%) $7.1 billion (9.4%) $17.7 billion (13.0%) NA
Exports to Latin America $175.2 billion (13.2%) $4.8 billion (29.4%) $17.7 billion (23.5%) $37.1 billion (27.3%) NA
Exports to World $1.32 trillion (100%) $16.3 billion (100%) $75.3 billion (100%) $135.8 billion (100%) NA

VIII. 2003 Subregional United States (40.1%) Guatemala (35.4%) Colombia (38.3%) Brazil (45.0%) N/A
Trade Leading Exporters2 Canada (36.1%) El Salvador (24.3%) Ecuador (21.2%) Argentina (43.9%) N/A
*associate member
Source: World Bank, World Development Indicators 2005.
(1) IADB. Integration and Trade in the Americas: A Preliminary Estimate of 2004 Trade.
(2) World Trade Organization. International Trade Statistics 2004 (www.wto.org).
* Data for Guatemala and El Salvador are 2003 estimates from SIECA (Secretaria de Integraci6n Econ6mica Centroamericana ).

NAFTA

CACM

Table 2
TERMS OF TRADE, 1995-2004
(1995=100, except where indicated)

1995 1996 1997 1998 1999 2000 2001 2002

2003 2004

NAFTA REGION

Mexico

CENTRAL AMERICA
Costa Rica
El Salvador
Guatemala
Honduras
Nicaragua
Panama

CARIBBEAN
Dominican Republic
Jamaica*
Trinidad & Tobago*

ANDEAN SOUTH AMERICA
Bolivia
Colombia
Ecuador
Peru
Venezuela

BRAZIL AND SOUTHERN CONE
Argentina
Brazil
Chile
Paraguay
Uruguay

100.0 102.8 104.0 100.4 102.3 107.4 104.6 105.1

100.0 94.9 100.6 103.9 102.8 95.8 94.2 92.8
100.0 93.6 94.1 91.8 86.9 82.7 84.8 84.1
100.0 87.7 94.8 94.3 87.2 84.7 81.9 81.1
100.0 92.8 115.4 118.0 110.2 103.8 98.4 95.5
100.0 88.1 83.9 87.4 81.1 77.3 68.4 67.3
100.0 101.3 103.4 103.3 105.9 99.8 102.5 101.5

100.0 97.7 102.0 103.1 104.0 102.0 103.0 102.4
83.4 89.4 ... ... ...
98.9 88.3 90.0 ... ...

100.0 111.7 115.6 109.9 109.8 112.0 107.2 107.7
100.0 103.7 104.4 95.8 102.6 115.8 109.2 107.1
100.0 109.6 111.9 99.6 106.2 123.8 104.7 107.4
100.0 96.5 103.2 89.7 83.3 80.9 77.3 79.6
100.0 115.6 110.8 79.9 107.0 157.4 129.4 137.8

100.0 108.5 108.9 103.9 98.5 108.8 108.0 107.4
100.0 98.0 103.8 103.8 93.6 90.9 90.5 89.4
100.0 80.7 83.0 73.3 73.5 73.6 68.6 71.5
100.0 100.0 99.9 92.4 87.7 84.2 84.4 81.4
100.0 96.7 96.4 103.1 94.9 86.2 95.1 92.8

106.1 109.2

91.4
80.8
78.8
91.3
65.0
97.0

87.1
78.5
76.6
88.0
63.8
95.1

101.4 98.1

110.3
110.3
111.1
82.7
155.3

116.6
88.1
75.6
85.4
81.6

119.8
123.8
114.3
92.3
174.2

124.3
90.6
90.5
87.9
82.3

LATIN AMERICA AND
CARIBBEAN

100 100.8 102.9 97.2

97.5 103.4 99.1

98.6 99.9 105.5

SOURCE: CEPAL, Anuario Estadistico de America Latina y el Caribe, 2004.
* Source: Inter-American Development Bank, Facing Up to Inequalityin Latin America,1998 (Index 1980=100).
Year 2004 are preliminary CEPAL estimates.

Table 3
NET FOREIGN DIRECT INVESTMENT, 1995-2004
(Millions of US dollars)

1995 1996

1997 1998 1999 2000 2001 2002 2003 2004

NAFTA REGION

Mexico

CENTRAL AMERICA
Costa Rica
El Salvador
Guatemala
Honduras
Nicaragua
Panama

CARIBBEAN
Dominican Republic
Jamaica
Trinidad and Tobago

ANDEAN SOUTH AMERICA
Bolivia
Colombia
Ecuador
Peru
Venezuela

BRAZIL AND SOUTHERN CON
Argentina
Brazil
Chile
Paraguay
Uruguay

LATIN AMERICA AND
CARIBBEAN

9,526 9,186

331
38
75
50
75
223

414
***

393 472
712 2,784
452 500
2,550 3,488
894 1,676

IE
4,112 5,348
3,475 11,667
2,205 3,681
98 144
157 137

25,789 40,301

12,831 11,897 13,055 16,075 23,147 14,216 9,463 13,500

404 608 614 404 445 628 550 585
59 1,103 162 178 289 496 68 370
84 673 155 230 456 111 116 125
122 99 237 282 193 176 198 195
203 218 337 267 150 204 201 261
1,299 1,203 864 700 405 78 792 467

97 421 700 1,338 953 1,079 917 310 463
*** *** *** *** *** *** *** *** ***

728 947 1,008 734 660 674 195 134
4,753 2,033 1,392 2,069 2,493 1,258 837 2,240
724 870 648 720 1,330 1,275 1,555 1,200
2,054 1,582 1,812 810 1,070 2,156 1,317 1,332
5,645 3,942 2,018 4,180 3,479 -244 1,338 600

5,507 4,965 22,257 9,517 2,005 1,413 -296 1,800
18,608 29,192 26,886 30,498 24,715 14,108 9,894 7,100
3,809 3,144 6,203 873 2,590 1,594 1,587 7,161
230 336 89 113 79 11 85 80
113 155 235 274 314 121 271 230

57,599 63,677 79,342 68,890 64,901 39,196 28,491 37,848

SOURCE: CEPAL, Anuario Estadistico de America Latina y el Caribe, 2004.
Preliminary estimates for Year 2004 from CEPAL.

Table 4
GDP GROWTH RATES, 1995-2005
(% Change)

1995 1996 1997 1998 1999 2000 2001

2002 2003

Average
2004 1995-2004

-6.1 5.4 6.8 5.1

3.6 6.7 -0.3 0.7 1.2 4.1 2.7

CENTRAL AMERICA
Costa Rica
El Salvador
Guatemala
Honduras
Nicaragua
Panana

CARIBBEAN
Dominican Republic
Jamaica
Trinidad & Tobago

ANDEAN SOUTH AMERICA
Bolivia
Colombia
Ecuador
Peru
Venezuela

BRAZIL AND SOUTHERN CONI
Argentina
Brazil
Chile
Paraguay
Uruguay

LATIN AMERICA AND
CARIBBEAN

3.9 0.8 5.4 8.3 8.0
6.2 1.8 4.2 3.8 3.4
5.0 3.0 4.4 5.1 3.9
3.7 3.7 4.9 3.3 -1.5
6.0 6.4 3.9 3.5 7.0
1.9 2.7 6.8 7.3 4.0

4.7 7.2 8.2 7.4 8.1
2.2 -0.1 -1.8 -0.8 0.6
4.2 4.4 4.0 5.3 7.8

4.7 4.5 4.9 5.0 0.3
4.9 1.9 3.3 0.8 -3.8
2.1 3.0 5.2 2.2 -5.7
8.6 2.5 6.9 -0.6 0.9
5.9 -0.4 7.4 0.3 -5.7

E
-2.9 5.5 8.0 3.8 -3.4
4.2 2.5 3.1 0.2 0.9
9.0 6.9 6.7 3.3 -0.5
5.7 0.4 3.0 0.8 -1.5
-2.4 5.2 5.4 4.4 -3.5

1.1 3.7 5.2 2.3 0.5

4.0 4.3 -0.4
1.8 0.9 2.3
4.3 3.0 4.2

1.6
1.5
5.5
0.1
3.4

-4.4
1.3
3.5
2.0
-3.6

3.7 0.4

2.7 2.4
1.9 4.8
3.8 2.3
4.9 3.8
-8.9 -9.7

-10.8
1.5
2.0
-1.6
-12.7

-0.6 2.0 5.9 2.4

NAFTA REGION

Mexico

2005

3.8
3.3
6.3
4.6
18.0

8.2
5.2
5.8
2.8
12.0

SOURCE: CEPAL, Anuario Estadistico de America Latina y el Caribe, 2004.
Preliminary estimates for 2005 from CEPAL, America Latina y el Caribe: Proyecciones 2005, April 2005.

Table 5
ANNUAL INFLATION RATES, 1995-2005
(% change in CPI)

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

NAFTA REGION
Mexico

CENTRAL AMERICA
Costa Rica
El Salvador
Guatemala
Honduras
Nicaragua
Panama

CARIBBEAN
Dominican Republic
Jamaica
Trinidad & Tobago

ANDEAN SOUTH AMERICA
Bolivia
Colombia
Ecuador
Peru
Venezuela

BRAZIL AND SOUTHERN CONE
Argentina
Brazil
Chile
Paraguay
Uruguay

LATIN AMERICA AND
CARIBBEAN

52.0 27.7 15.7 18.6 12.3 9.0 4.4 5.7 4.0 5.2 4.4

22.6 13.9 11.2 12.4 10.1 11.0 11.0 9.7 9.9 13.1 11.5
11.4 7.4 1.9 4.2 -1.0 4.3 1.4 2.8 2.5 5.3 4.1
8.6 10.9 7.1 7.5 4.9 5.8 8.9 6.3 5.9 9.2 8.9
26.8 25.3 12.7 15.6 10.9 10.1 8.8 8.1 6.8 9.2 9.1
11.1 12.1 7.3 18.5 7.2 9.9 4.7 4.0 6.6 8.9 9.7
0.8 2.3 -0.5 1.4 1.5 0.7 0.0 1.9 1.7 2.5 2.1

9.2 4.0 8.4 7.8 5.1 9.0 4.4 10.5 42.7 28.7 12.3
21.7 15.8 9.2 7.9 6.8 6.1 8.7 7.3 14.1 13.7
5.3 4.3 3.5 5.6 3.4 5.6 3.2 4.3 3 3.2

12.6 7.9 6.7 4.4 3.1 3.4 0.9 2.5 3.9 4.6 5.0
19.5 21.6 17.7 16.7 9.2 8.8 7.6 7.0 6.5 5.5 5.1
22.8 25.6 30.6 43.4 60.7 91.0 22.4 9.4 6.1 1.9 2.1
10.2 11.8 6.5 6.0 3.7 3.7 -0.1 1.5 2.5 3.5 2.3
56.6 103.2 37.6 29.9 20.0 13.4 12.3 31.2 27.1 19.2 19.4

1.6 0.1 0.3 0.7 -1.8 -0.7 -1.5 41.0 3.7 6.1 9.5
22.4 9.6 5.2 1.7 8.9 6.0 7.7 12.5 9.3 7.6 6.6
8.2 6.6 6.0 4.7 2.3 4.5 2.6 2.8 1.1 2.4 2.5
10.5 8.2 6.2 14.6 5.4 8.6 8.4 14.6 9.3 2.8 4.9
35.4 24.3 15.2 8.6 4.2 5.1 3.6 25.9 10.2 7.6 6.5

25.9 18.2 10.4 10.3 9.5 8.7 6.1 12.2 8.5 7.4 6.6

SOURCE: CEPAL, Anuario Estadistico de America Latina y el Caribe, 2004.
Preliminary estimates for 2005 from CEPAL, America Latina y el Caribe: Proyecciones 2005, April 2005.

Table 6

EXPORTS, IMPORTS (GOODS & SERVICES) AND CURRENT ACCOUNT BALANCE, 2001-2004
(Millions of US dollars)

2001

2002

2003

2004

SExports Imports C/Account I Exports Imports C/Account I Exports Imports C/Account Exports Imports C/Account

NAFTA REGION
Mexico

CENTRAL AMERICA
Costa Rica
El Salvador
Guatemala
Honduras
Nicaragua
Panama

CARIBBEAN
Dominican
Republic
Jamaica
Trinidad & Tobago

171,103 190,494 -18,103

6,820
3,587
3,905
2,436
947
7,997

7,295
5,636
5,568
3,336
1,996
8,122

8,387 10,852
** **
** **

ANDEAN SOUTH AMERICA
Bolivia 1,521
Colombia 14,952
Ecuador 5,693
Peru 8,517
Venezuela 27,648

2,079
14,410
4,927
9,723
21,300

BRAZIL AND SOUTHERN CONE
Argentina 30,846 32,822
Brazil 67,545 72,443
Chile 22,571 21,817
Paraguay 2,431 3,286
Uruguay 3,276 4,193

LATIN AMERICAN AND
CARIBBEAN 390,624 421,647

-737
-190
-1,253
-293
-932
-174

-741
**
**

-274
-1,251
-550
-1,184
2,062

-4,429
-23,213
-1,192
-275
-545

-53,368

173,454 185,419 -13,792

7,140
3,803
3,964
2,511
907
7,567

8,236
**
**

1,555
14,182
6,121
9,267
27,841

28,684
69,913
22,509
2,426
2,693

7,719
5,914
6,857
3,508
1,953
7,625

10,151
**
**

2,072
15,409
7,828
9,946
17,329

13,135
61,749
20,909
2,488
2,492

-916
-412
-1,235
-219
-870
-92

-798
**
**

-352
-1,452
-1,358
-1,127
7,599

9,627
-7,637
-885
73
322

393,194 383,735 -13,571

177,551 187,680 -8,741

8,190
3,987
4,107
2,661
997
7,608

8,875
**
**

1,872
15,527
7,095
10,664
27,738

33,231
83,552
25,851
2,850
3,051

8,483
6,430
7,302
3,821
2,092
7,437

9,100
**
**

1,976
16,642
7,858
10,864
13,834

18,485
63,851
23,602
2,869
2,707

-929
-734
-1,051
-258
-860
-408

865
**
**

35
-1,345
-455
-1,061
11,524

7,941
4,016
-594
146
52

425,871 396,430 8,102

202,865 213,977 -7,200

8,524
4,079
4,465
2,862
1,102
8,594

9,166
**
**

2,350
18,303
8,618
14,157
39,217

38,622
106,994
37,319
3,230
3,828

9,164
6,775
8,093
4,294
2,399
8,120

9,261
**
**

2,209
19,128
8,892
12,610
19,629

27,578
78,492
28,672
3,625
3,509

-882
-714
-1,102
-484
-991
-35

1,124
**
**

225
-1,267
128
-16
15,594

3,653
11,094
2,908
-223
28

514,800 467,944 21,845

SOURCE: CEPAL, Anuario Estadistico de America Latina y el Caribe, 2003 and 2004.
Preliminary estimates for Year 2004 from CEPAL.

Table 7
GROSS DISBURSED EXTERNAL DEBT, 1995-2004
(Millions of US dollars)
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
NAFTA REGION
Mexico 165,600 156,443 149,028 160,258 166,380 148,652 144,527 140,097 140,555 137,105

CENTRAL AMERICA
Costa Rica 3,259 2,859 2,640 2,872 3,057 3,151 3,243 3,338 3,753 3,833
El Salvador 2,168 2,517 2,689 2,646 2,789 2,831 3,148 3,987 4,687 4,792
Guatemala 2,107 3,026 3,197 3,618 3,831 3,929 4,100 4,200 4,548 3,484
Honduras 4,243 4,121 4,073 4,369 4,691 4,711 4,757 4,922 5,122 5,535
Nicaragua 10,248 6,094 6,001 6,287 6,549 6,660 6,374 6,363 6,596 5,165
Panama 3,938 5,069 5,051 5,180 5,412 5,604 6,263 6,349 6,502 6,639

CARIBBEAN
Dominican Republic 3,999 3,807 3,572 3,546 3,661 3,682 4,177 4,538 5,899 6,400
Jamaica 3,452 3,232 3,278 3,306 3,024 3,375 4,146 4,348 4,192 4,192
Trinidad & Tobago 1,905 1,876 1,565 1,471 1,585 1,680 1,638 1,596 1,526 1,526

ANDEAN SOUTH AMERICA
Bolivia 4,523 4,366 4,234 4,655 4,574 4,461 4,412 4,300 5,042 4,735
Colombia 26,340 31,116 34,409 36,681 36,733 36,131 39,109 37,336 38,193 37,985
Ecuador 13,934 14,586 15,099 16,400 16,282 13,564 14,376 16,236 16,586 16,870
Peru 33,378 33,805 28,642 29,477 28,704 28,150 27,195 27,840 29,708 29,792
Venezuela 37,537 34,117 37,242 35,087 37,016 36,437 35,398 35,114 38,043 37,752

BRAZIL AND SOUTHERN CONE
Argentina 98,547 110,613 125,052 141,929 145,289 146,575 140,214 134,147 145,583 147,319
Brazil 165,447 186,561 208,375 259,496 241,468 236,157 226,067 227,689 235,415 221,384
Chile 21,736 26,272 29,034 32,591 34,758 37,177 38,032 40,395 41,179 43,931
Paraguay 1,742 1,801 1,927 2,133 2,697 2,819 2,652 2,866 2,871 2,352
Uruguay 5,193 5,387 5,459 6,036 5,618 6,116 5,855 8,328 8,626 10,837

LATIN AMERICA AND
CARIBBEAN 598,746 633,475 666,750 754,365 750,670 727,977 711,086 709,257 740,195 727,226

SOURCE: CEPAL, Anuario Estadistico de America Latina y el Caribe, 2004.
CEPAL, Balance Preliminar de las Economias de America Latina y el Caribe, 2003 and 2004.
Year 2004 are preliminary CEPAL estimates.

Table 8
DEBT/EXPORT RATIOS, 1995-2004
(as a percentage of exports of goods and services)

1995 1996 1997

1998 1999 2000 2001 2002 2003 2004

176.0 146.6 122.5 124.1 112.3

82.5 84.5 80.8

79.2 67.6

CENTRAL AMERICA
Costa Rica
El Salvador
Guatemala
Honduras
Nicaragua
Panama

CARIBBEAN
Dominican Republic
Jamaica
Trinidad & Tobago

64.2 59.2 49.4 41.7 37.1 40.7 47.5 46.7 45.8 45.0
123.4 114.3 92.3 86.8 87.8 77.3 87.6 104.9 117.6 117.5
107.2 108.2 100.2 103.8 110.1 101.7 105.0 105.9 110.7 78.0
252.1 214.4 185.9 180.2 210.3 189.2 195.8 196.1 192.4 193.4
995.6 841.7 665.6 665.5 680.2 604.4 673.4 701.2 661.4 468.8
66.6 68.4 60.2 63.0 75.8 71.5 78.3 83.9 85.5 77.2

66.4
101.7
68.1

61.5
97.3
66.6

50.6 47.4
96.4 97.7
52.3 50.2

45.8 41.1 49.8 55.1
87.0 94.1 123.6 138.7
50.4 37.7 36.3 39.4

66.5

***

69.8

***

ANDEAN SOUTH AMERICA
Bolivia
Colombia
Ecuador
Peru
Venezuela

BRAZIL AND SOUTHERN CONE
Argentina
Brazil
Chile
Paraguay
Uruguay

LATIN AMERICA AND
CARIBBEAN

353.9 332.6 299.5 343.5 349.0 303.4 290.1 276.5 269.4 201.5
253.1 236.5 242.0 273.0 262.8 229.1 260.1 263.3 246.0 207.5
280.7 259.9 249.7 327.7 304.6 226.6 254.7 265.3 233.8 195.8
503.2 463.6 341.9 391.4 373.7 328.9 318.6 300.4 278.6 210.4
164.4 135.0 147.9 183.4 165.9 105.0 126.2 126.1 137.2 96.3

444.3 389.7 403.9 455.1 520.3 470.6 453.0 467.7 438.1 381.4
354.4 355.3 352.1 441.6 437.4 365.7 334.7 325.7 281.8 206.9
135.7 130.0 133.4 160.7 165.3 159.6 169.7 179.5 159.3 117.7
37.5 41.0 48.4 51.1 93.4 99.1 108.5 118.1 100.7 72.8
153.6 140.0 129.4 145.5 158.1 167.1 179.5 309.2 282.7 283.1

238.6 214.7 203.7 230.6 218.8 178.3 181.9 180.4 173.8 141.3

NAFTA REGION

Mexico

SOURCE: CEPAL, Anuario Estadistico de America Latina y el Caribe 2003 and 2004,
Year 2004 are preliminary CEPAL estimates,
* Gross disbursed external debt includes the public-and-private sector external debt. Also includes International Monetary Funds loans.

Table 9

EXCHANGE RATES AND IMF AGREEMENTS, 2005

EXCHANGE RATE
January 2, August 8,
2004 2005

han
chanae

Current Exchanae Rate Reaime

IMF Aareements (Dates)

NAFTA REGION
Mexico

CENTRAL AMERICA
Costa Rica
El Salvador
Guatemala
Honduras
Nicaragua

Panama

CARIBBEAN
Dominican Republic
Jamaica
Trinidad & Tobago

ANDEAN SOUTH AMERICA
Bolivia
Colombia
Ecuador
Peru
Venezuela

BRAZIL AND SOUTHERN CONE
Argentina
Brazil
Chile
Paraguay
Uruguay

peso

col6n
col6n/U.S. dollar
quetzal
lempira
c6rdoba oro
balboa/U.S.
dollar

peso
Jamaican dollar
Trin. dollar

boliviano
peso
sucre/U.S. dollar
nuevo sol
bolivar

peso
real
peso
guarani
peso

11.17

418.74
8.75
8.03
17.97
15.75

1.00

35.00
60.61
6.27

7.86
2779.08
1.00
3.48
1600

2.95
2.87
588
6100
29.80

10.60 5.10% Independent Float

481.42
8.75
7.59
18.93
16.84

-14.97%
0.00%
5.48%
-5.34%
-6.92%

Managed Float
Dollarized
Managed Float
Managed Float
Managed Float

n/a
n/a

PRGF1 (2/04-2/07)
PRGF1 (12/02-12/05)

1.00 0.00% Dollarized

29.07
62.20
6.27

8.08
2307.69
1.00
3.25
2147

2.87
2.33
545
5975
24.40

16.94%
-2.62%
0.00%

-2.80%
16.96%
0.00%
6.61%
-34.19%

2.71%
18.82%
7.31%
2.05%
18.12%

Managed Float
Independent Float
Independent Float

Managed Float
Independent Float
Dollarized
Independent Float
Managed and Licensed

Independent Float
Independent Float
Independent Float
Independent Float
Managed Float

Stand-by (1/05-5/07)
n/a
n/a

Stand-by (4/03-3/06)
Stand-by (5/05-11/06)
n/a
Stand-by (6/04-8/06)
n/a

Stand-by (9/03-9/06)
n/a
n/a
Stand-by (12/03-9/06)
Stand-by (6/05-6/08)

Currency

SOURCES: Latin American Weekly Report, 16 August 2005; Central Banks for Jamaica and Trinidad & Tobago; IMF Homepage www.imf.orq.
Key for IMF Agreements:
Stand-by is the most common type of credit arrangement designed to provide short-term financial assistance.
1: PRGF (Poverty Reduction and Growth Facility) is a concessional arrangement providing credit at an interest rate of 0.5% to eligible low-income members.

I _ _ \ I

Table 10

SOCIAL ENVIRONMENT, 2005
GDP PER CAPITAL

ANNUAL
(PPP $U.S.)* GROWTH %
2003 1990-2003

INCOME
INEQUALITY
GINI index**

HDI
(World
Rank)***
2003

POPULATION
IN POVERTY
(Year) %

UNEMPLOYMENT
RATE %
2004

NAFTA REGION

Mexico

CENTRAL AMERICA
Costa Rica
El Salvador
Guatemala
Honduras
Nicaragua
Panama

CARIBBEAN
Dominican Republic
Jamaica
Trinidad and Tobago

104.3

4.2
6.6
12.0
6.9
5.3
3.1

8.6
2.6
1.3

ANDEAN SOUTH AMERICA
Bolivia 8.8
Colombia 44.2
Ecuador 12.9
Peru 27.2
Venezuela 25.8

BRAZIL AND SOUTHERN CONE
Argentina 38.0
Brazil 181.4
Chile 16.0
Paraguay 5.9
Uruauav 3.4

4.2
20.3
30.9
20.0
23.3
8.1

12.3
12.4
1.5

13.5
5.8
9.0
12.3
7.0

2.8
11.6
4.3
8.4
2.3

$9,168

$9,606
$4,781
$4,148
$2,665
$3,262
$6,854

$6,823
$4,104
$10,766

$2,587
$6,702
$3,641
$5,260
$4,919

$12,106
$7,790
$10,274
$4,684
$8280

54.6

46.5
53.2
59.9
55.0
43.1
56.4

47.4
37.9
40.3

44.7
57.6
43.7
49.8
49.1

52.2
59.3
57.1
57.8
44.6

53 (2002) 39.4%

(2002) 20.3%
(2001) 48.9%
(2002) 60.2%
(2002) 77.3%
(2001) 69.3%
(2002) 34.0%

(2002) 44.9%
(1998) 15.9%
(1997) 22.0%

(2002) 62.4%
(2002) 51.1%
(2002) 49.0%
(2001) 54.8%
(2002) 48.6%

(2002) 45.4%
(2001) 37.5%
(2003) 18.8%
(2001) 61.0%
(2002) 15.4%

6.7
6.3
(2003) 3.4
8.0
(2003) 10.2
(2003) 15.6

17.0
13.0
7.8

(2003) 9.5
15.6
11.0
9.5
15.3

13.8
11.5
8.8
(2003)11.2
13.0

SOURCES: UNDP, Human Development Report 2005; Population in poverty and unemployment rates are from CEPAL, 2004.
* GDP per capital (Purchasing Power Parity in $U.S.). 1 PPP dollar has the same purchasing power in the domestic economy as 1 U.S. dollar has in the U.S. economy.
** The Gini index measures inequality over the entire distribution of income or consumption. A value of 0 represents perfect equality, and a value of 100 perfect inequality.
*** The Human Development Index (HDI) ranks 177 countries according to three aspects of human development: longevity (life expectancy at birth), knowledge
(combination of literacy rate and enrollment ratio), and a decent standard of living (GDP per capital PPP in $U.S.).

POPULATION
(Millions)
2003

AVG. POP.
GROWTH %
2003-15

ILLITERATE
POP. %
2003

Table 11
POLITICAL ENVIRONMENT, 2005
Level of Democratic Consolidation1

Current Political Environment

Election
Inaugurating Political Civil
Civilian Rule Rights2 Liberties3

Corruption Perception4

Index Rank

Current
President / PM Term Control of Legislature

Fox 2000-2006

Opposition

CENTRAL AMERICA
Costa Rica
El Salvador
Guatemala
Honduras
Nicaragua
Panama

CARIBBEAN
Dominican Republic
Jamaica
Trinidad & Tobago

ANDEAN SOUTH AMERICA
Bolivia
Colombia
Ecuador
Peru
Venezuela

1 4
3
4
3
3
2

1949
1984
1985*
1982
1984
1994

1963
1962
1962

1980*
1958
1978*
1980*
1958*

BRAZIL AND SOUTHERN CONE
Argentina 1983*
Brazil 1989
Chile 1989
Paraguay 1993
Urucuav 1985

2
2
1 +

1

Pacheco
Saca
Berger
Maduro
Bolanos
Torrijos

Fernandez
Patterson
Manning

Rodriguez
Uribe
Palacio
Toledo
Chavez

Kirchner
Lula da Silva
Lagos
Duarte
Vazauez

2002-2006
2004-2009
2004-2008
2001-2005
2001-2006
2004-2009

2004-2008
2002-2007
2002-2007

2003-2007
2002-2006
2005-2007
2001-2006
2000-2006

2003-2007
2002-2006
2000-2005
2003-2008
2005-2010

Opposition
Govt. Coalition
Govt. Coalition
Opposition
Opposition
Government

Opposition
Government
Government

Govt. Coalition
Government
Opposition
Opposition
Government

Opposition
Govt. Coalition
2 Houses Split
Opposition
Government

1. As measured in Freedom in the World 2005: Civic Power and Electoral Politics. (www.freedomhouse.org/ratings). *Interrupted democracies
2. Freedom House definition: Those rights that enable people to participate freely in the political process. On this scale 1 represents the most free and 7 the least free.
3. Freedom House definition: Freedoms to develop views, institutions and personal autonomy apart from the state. On this scale 1 represents the most free and 7 the least free.
4. As measured by Transparency International, Corruption Perceptions Index 2004 (www.transparency.org). Focuses on corruption in the public sector and defines corruption as the
abuse of public office for private gain. The country ranks measure the corruption level in 146 countries as perceived by business people, risk analysts, investigative journalists and
the general public. The scores used range from 10 (country perceived as virtually corruption-free), down to close to 0 (country perceived as almost totally corrupt).
* 4 Up or down indicate, respectively, an improvement or a worsening of the political environment from 2003.

NAFTA REGION
Mexico

Table 12
FISCAL DEFICIT/SURPLUS, 1995-2004
(% of GDP)

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

NAFTA REGION
Mexico

CENTRAL AMERICA
Costa Rica
El Salvador
Guatemala
Honduras
Nicaragua
Panama

CARIBBEAN
Dominican Republic
Jamaica
Trinidad and Tobago

ANDEAN SOUTH AMERICA
Bolivia
Colombia
Ecuador
Peru
Venezuela

BRAZIL AND SOUTHERN CONE
Argentina
Brazil
Chile
Paraguay
Uruguay

LATIN AMERICA AND
CARIBBEAN

0.0 0.0 -0.7 -1.2 -1.1 -1.1 -0.7 -1.2 -0.6 -0.3

-3.5 -4.0 -2.9 -2.5 -2.2 -3.0 -2.9 -4.3 -2.9 -3.0
-0.6 -1.8 -1.1 -2.0 -2.1 -2.3 -3.6 -3.1 -2.7 -1.3
-0.5 0.0 -0.8 -2.2 -2.8 -1.8 -1.9 -1.0 -2.3 -1.3
-3.1 -3.5 -2.8 -1.2 -4.3 -5.7 -5.9 -5.2 -5.9 -3.5
-0.3 -0.9 -0.8 -1.2 -3.8 -5.0 -8.7 -4.1 -3.3 -3.8
-1.7 0.2 -0.3 -4.5 -2.0 -1.1 -1.7 -1.9 -2.5

0.1 -1.6 -1.6 -1.0 -1.8 -2.1 -2.4 -2.7 -3.8 -2.7
** ** ** ** ** ** ** ** ** **
** ** ** ** ** ** ** ** ** **

-1.3 -1.7 -3.6 -4.0 -3.4 -3.9 -7.4 -9.0 -7.7 -6.1
-2.1 -3.3 -3.5 -4.7 -5.3 -6.4 -5.4 -5.0 -4.8 -5.6
-1.4 -2.4 -1.2 -4.1 -2.9 0.1 -0.7 -0.8 -0.9 -1.7
-3.4 -1.4 -0.8 -1.1 -3.1 -2.8 -2.8 -2.1 -1.8 -1.3
-4.3 0.6 1.9 -3.8 -1.6 -1.6 -4.2 -3.5 -4.3 -3.3

-1.9 -2.8 -1.4 -1.8 -3.0 -2.1 -3.8 -0.3 0.3 1.3
-5.0 -3.7 -3.0 -4.0 -3.3 -1.2 -1.3 -0.3 -1.0 -1.2
3.1 2.2 2.1 0.4 -2.1 -0.6 -0.5 -1.2 -0.4 1.9
-0.3 -1.1 -1.4 -1.0 -3.6 -4.3 -1.1 -3.0 -0.4 0.7
-1.5 -1.4 -1.4 -0.9 -4.0 -4.1 -4.3 -4.6 -3.2 -3.1

-1.7 -1.5 -1.3 -2.2 -2.9 -2.7 -3.3 -3.0 -2.8 -2.2

SOURCE: CEPAL, Balance Preliminar de las Economias de America Latina y el Caribe, 2004.
Preliminary estimates for Year 2004 from CEPAL.

SELECTED SOURCES ON LATIN AMERICAN BUSINESS NEWS

Print

Latin American Weekly Report (London)
LatinFinance
Latin Trade
Wall Street Journal
On-line

BIG-Brasil International Gazeta
www. big-jb. com. br
Brazil Focus: Weekly Report
fleischeriaaol.com.br
Business News Americas
http://www.bnamericas.com/index.jsp
Clarin (Buenos Aires)
www.clarin.com
ElMercurio (Santiago)
http://www.emol.com/
El Nuevo Herald (Miami)
www.elherald.com
La Reptublica (Lima)
www.larepublica.com.pe/
Lanic
http://wwwl.lanic.utexas.edu/la/region/news/
Latin America Advisor: The Interactive Forum for the Region's Leaders
Subscriptions available to mailto:freetrial(@,thedialogue.org
Listin Dario. com. do
www.listin.com.do
Miami Herald
www.herald.com
New York Times
www.nvtimes.com
The Tico Times On-Line (San Jose)
www.ticotimes.com

Primary Data Sources

United Nations Development Programme (UNDP), Human Development Report 2005 (New
York: United Nations, 2005).

Comisi6n Econ6mica para America Latina y el Caribe (CEPAL), Anuario Estadistico de America
Latina y el Caribe 2003 (New York: United Nations, 2004).

CEPAL, Proyecciones latinoamericanas 2005 (New York: UN, 2005).

CEPAL, Balance Preliminar de las Economias de America Latina y el Caribe 2004 (New York:
United Nations, 2004).

	Front Cover
	Preface
	Table of Contents
	Executive summary
	Introduction
	Outlook
	Tables
	Selected sources on Latin American...

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