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Americas: At a Glance

Economic Review  United States: Better than expected growth in private consumption
January 2011 during the last quarter of 2010 and the sustained momentum in
manufacturing growth lifted the prospects for the current year. The
The Americas region continues IMF now expects the U.S. economy to outpace other developed
countries in 2011, with a growth rate of 3%.
to enjoy rising optimism about
the economic outlook for the  Canada: Higher commodity prices and sustained growth in
current year, helped by sustained domestic consumption are expected to support economic expansion
domestic demand growth and this year, but currency appreciation remains a concern.

strong commodity prices.  Brazil: Economic growth may be slowing down as credit
Indicators from the large expansion has slowed and the trade surplus has declined. Costlier
economies in the region suggest borrowing rates may restrict consumption growth.
that the pace of economic  Mexico: The outlook has improved further as U.S. demand growth
activity is accelerating, with the is expected to accelerate. Unlike the rest of the region, lower
notable exception of Brazil inflationary risks may allow the central bank to hold interest rates
where the growth rate may be steady.
moderating. The relatively  Argentina: Export growth, which was the significant contributor to
smaller economies in Latin economic expansion last year, may slow down, as the country’s
America are also likely to soybean crop is expected to decline because of drought conditions.
expand at healthy rates, though
 Chile: The country’s central bank surprised the market with an
the pace may slow when unexpectedly large currency intervention program, aimed to
compared to last year. Inflation prevent currency gains due to higher commodity prices.
remains a concern for most
 Peru: Interest rates hiked unexpectedly on concerns that rising
economies in South America, commodity prices will fuel inflationary pressures. Bank reserve
while price increases are requirements were also enhanced to restrict credit expansion.
relatively more contained in
 Colombia: Despite the flood damages, the growth forecast for
2011 has been retained at 5%. Reconstruction efforts will be partly
financed by a new tax on personal assets.
Mexico and insignificant in the U.S. and Canada. Though Brazil and Peru raised their benchmark
rates during the month, monetary policy remains mostly accommo
accommodative
dative in the region. With the
exception of the U.S. and Argentina, other economies are still concerned about currency
appreciation. Brazil and Chile took further steps this month to restrict currency gains and protect
export competitiveness.

The prospect of attracting even stronger capital flows prevented central banks in Latin America
from tightening their monetary policies last year. Countries like Brazil which hiked interest rates
were very measured, as their interest rate differential with the developed countries is already
very high. As a result, fueled by the continued gains in consumption growth, inflationary
pressures are rising across the region
region.. Since it is likely that central banks in the region will
continue to be restricted by concerns
concerns about increased capital flows, the World Bank has
recommended tighter fiscal policies to contain inflation. Private inflows into the region were
$203 billion during 2010, and will increase by another 5% this year, according to World Bank
estimates. Thee bank expects economic growth in the region to slow this year, with the sharpest
decline forecasted for Brazil.

30 Buoyed by improved economic outlook, developed


markets outperform in January
25

20
% Change 1-year

15

10

0
MSCI AC World Index
-5 MSCI North America
MSCI EM Latin America
-10
Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov
Nov-10 Jan-11

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United States: Economic growth for 2011 will likely top most other developed
countries

Aggregate U.S. economic output, in real terms, has regained its pre-recession
recession level as the
economy expanded 3.2% during the last quarter of 2010. Though ough the pace was slightly below
expectations because of a larger decline in inventories, the strong growth in consumer spending
has lifted optimism about the current year’s outlook. Private consumption rose 4.4%, pushing up
final retail sales by over 7%. Net exports were another significant contributor, as imports
declined during the quarter and export growth accelerated to 8.5%. At the same time, growth
gr in
subsequent quarters may get a lift as businesses revert to their normal pace of inventory
additions.

The continuing momentum in domestic consumption growth, despite the high


unemployment level, is driven by the faster than expected recovery in agg aggregate
compensation levels in the economy. Aggregate compensation paid by all employers during the
last quarter of 2010 was marginally above the previous record set in early 2008. It is believed
that, along with higher equity prices which have increased the wealth effect, the rising employee
payouts have led to more optimism about income sustainability and have lifted consumer
confidence. It is also expected that the payroll tax cut
cut, which comes into effect this year will
further enhance disposable
able incomes and support consumption growth. However, the pace of
growth in consumption could be restricted if energy prices rise further
further,, leading to cuts in
household spending.

Manufacturing activity surveys for the month of January indicatee sustained momentum in
the sector, as both domestic and overseas demand outlook remain upbeat. Nearly two-thirds
of the respondents in a survey were optimistic about their prospects for the current year, and the
employment index for the sector climbed to its highest level in more than three decades. The
manufacturing revival is highly significant for the labor market, as last year the sector added jobs
for the first time since 1997. The index for new orders also gained strongly, confirming the
continuing gains in business spending and capital investments.

The housing sector remains the biggest concern for the economy, as housing starts declined
more than expected in December and average home prices trended lower in November. The
more than half a percentage point rise in long term mortgage rates over the last few months is not
helping housing demand, which was briefly propped up by the federal tax credit for first time
buyers during the first half of 2010. Reflecting the subdued trend in the sector,
sect construction
spending remained weak during the last quarter.

The improved economic climate has encouraged the IMF to revise higher its U.S. GDP
growth forecasts for the current year to 3%, the most for any developed economy. The

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Federal Reserve also acknowledged the improvement in household spending in the statement
released after the meeting which decided to leave the target fed rate unchanged.

Canada: Economic
conomic outlook improves, but currency gains remain major
concern

Canada’s economic outlook has turned more optimistic, helped by the sustained
momentum in commodity prices and the expected growth in U.S. demand for
manufactured products. The country’s central bank now forecasts that the economy will
expand by 2.4% this year, with growth accelerating during the second half. The economy is
expected to gain further in 2012, when the central bank anticipates growth to touch 2.8%.
Though the contribution to economic growth from government spending is likely to slow down,
business
ness investments are expected to retain momentum and the central bank anticipates exports
to outpace imports this year.

The Bank of Canada has acknowledged that the strength of its currency against the U.S.
dollar remains one of the risks to the country’s economy, as exports account for nearly a
third of the total economic output. The Canadian dollar has gained over 20% since 2008, and
has traded above parity with the U.S. dollar so far this year. Higher prices of oil, natural gas, and
potash, the major commodities
mmodities exported by Canada, have exerted upward pressure on the
currency over the last several quarters. Most forecasters expect the Canadian dollar to retain its
strength as long as international commodity prices remain elevated.

To prevent further currency gains, the Bank of Canada decided to leave its benchmark
rate unchanged at 1%. The bank’s comments in the minutes of this month’s meeting suggest
that rates are likely to be held steady for the rest of this year. The bank said iit is confident of
containing inflationary pressures through gradual monetary policy tightening in 2012.

Meanwhile, revisions to employment data indicate that the Canadian economy has not yet
regained all the jobs lost during the recession, as thought earlier.
earli Despite the downward
revision, the country’s labor market recovery has been faster than most other developed
economies. To support job creation by businesses, the government had cut corporate income
rates recently, with another similar reduction expected
expect in 2012.

Brazil: Economic growth may moderate as credit growth slows and trade
surplus narrows

Even as Brazil is recovering from the deluge and the mudslides,


mudslides which caused extensive
damages earlier this month, recent
recent economic data suggest that the pace of economic growth

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maybe moderating, after last year’s 7.3% expansion. The trade rade surplus narrowed by a fifth
during 2010, as import growth outpaced the rate of expansion in exports. Strong domestic
consumer demand pushed up import growth to over 40% last year, while exports increased by
slightly above 30%. The trend continued this month as well, as the trade surplus declined more
than expected, though export revenues benefitted
benefit from higher international commodity pr prices.
Also, industrial output fell for the second successive month in December as production of both
consumer and capital goods declined. Though industrial growth for the whole of 2010 was very
strong at 10.5%, the pace of activity slowed during the last qquarter
uarter of the year. Besides, credit
growth also declined in December as lending rates went up after the central bank’s decision to
raise reserve requirements for commercial banks. In the most recent survey of economists
conducted by the central bank, the B Brazilian GDP growth rate is forecasted
ed to slow down to
4.6%.

Persistent inflationary pressures forced the Brazilian central bank to hike its benchmark
rate by 50 basis points to 11.25%,
11.25% earlier this month. During the first half of this month,
consumer inflation crossed 6% for the first time since 2008, and led to heightened expectations
about further interest rate hikes later this year. The government’s proposal to increase minimum
wages will likely add to inflationary
nflationary risks, as the labor market remains tight with record low
unemployment rates. To fund its healthcare initiatives, the government is also planning to
reintroduce a financial transactions tax, which may reduce corporate profitability.

Meanwhile, Brazil has stepped up its efforts to curb currency appreciation, even though its
earlier measures have not been particularly effective. Earlier this month, tthe country’s central
bank extended commercial banks’ reserve requirements to also cover their foreign
forei currency
positions. The new rule, aimed at restricting speculative short
short-term
term currency trading, did weaken
the currency soon after its announcement. However, despite the higher taxes on capital inflows
imposed earlier, the Brazilian currency has gained nearly 40% over the last two years. Part of the
currency gains were due to the strong industrial investment flows from overseas, which rose to a
record high of $48.5 billion in 2010. Foreign investment flows for the month of December
included a $7 billion acquisition of Brazilian energy assets by a Chinese producer.

Mexico: Despite improved economic outlook,


o , interest rates remain on hold as
inflation is contained

Encouraged by the improving economic conditions, the Mexican government is considering


an upward revision of its GDP growth forecasts for the current year. The continuing
improvement in U.S. economic activity could lift export demand for manufactured goods from
Mexico. Non-oil
oil exports expanded a healthy 15% during December,
December while energy exports were
higher by more than a quarter, helped by strong oil prices. However, the trade deficit widened
from November as imports increased at a faster pace, suggesting sustained
sustained growth in domestic
consumption. It is now widely expected that GDP growth for the current year will likely be

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between 4% and 5%, as compared to the government’s earlier forecast of 3.9%. For the year
2010, the Mexican economy is estimated to have expanded by nearly 5%.

Unlike several other Latin American economies, inflation pressures appear contained in
Mexico, which will allow the central bank to maintain its benchmark rate at the current
level for an extended period. The central bank expects inflation
nflation to cool this year and move
within its target range of between 2% and 4% by the end of this year, even though food and
energy prices have trended higher. Validating this view, consumer price inflation for the first half
of January rose less than expected
pected to an annual pace of slightly below 4%. The central bank yet
again left its policy rate unchanged at 4.5% this month,, and it is widely expected that the rate
will remain on hold for the rest of this year.

Also, the Mexican peso has not appreciated as much as the currencies of some of its
neighbors against the U.S. dollar,
dollar thereby providing a relative price advantage to the
country’s exports. The country’s comfortable foreign reserves position and the extended $72
billion credit line from the IMF will
w likely allow the Mexican central bank to prevent excessive
currency volatility, without resorting to capital controls.

Argentina: Export growth may slow down further on lower soybean crop

Recent trade data suggest that the pace of Argentinean export growth may be slowing
down, as very high domestic inflation reduces the price competitiveness of Argentinean
goods in export markets. Export
xport growth slowed to 16% in December, narrowing the trade
surplus considerably as imports surged by nearly 50%. For the calendar year 2010, exports
increased by nearly a quarter, but imports grew twice as fast. Though increased imports of
capital goods and other industrial products suggest strong domestic industrial
industrial investments,
narrowing of the trade surplus will likely reduce overall growth in the economy this year.

Lower expected output of soybeans, because of drought conditions in main growing areas, areas
could also restrict economic growth this year. Though export rt prices have trended higher,
Argentina’s soybean crop this year may fall short of last year’s record.

Meanwhile, the country’s improved economic outlook and the government’s efforts to
restructure defaulted debt have further lowered the country’s yield spread with
comparable U.S. treasury bonds bonds, which will reduce the country’s borrowing costs from
overseas markets. The spread has declined nearly 250 basis points since the third quarter of last
year, and is currently at its lowest level in nearly two years.

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Chile: Central bank steps up currency market interventions

Prices of copper, Chile’s principal export, rose to a record high this month on strong
demand outlook, as the global economic growth prospects have improved. Copper prices
increased by nearly a third during 2010, as industrial consumption growth gathered pace,
especially in larger emerging economies like China. Part of the price gains were also due to
speculation about global copper demand outstripping supply w within
ithin a few years. Along with
strong domestic consumption growth, increased export earnings from copper and other metals
are likely to help the Chilean economy sustain the growth momentum this year as well. The
government expects the economy to expand by between 6% to 6.5%, and the unemployment rate
to fall further in 2011.

The Chilean central bank has stepped up its efforts to prevent currency appreciation and
announced that it will buy up to $12 billion to restrict the peso’s gains. In one of the biggest
ever currency interventions in the country’s history, tthe
he bank will buy dollars at the rate of $50
million a day until the second week of February
February. Soon after the aggressive measure was
announced, the peso slipped nearly 5% against the U.S. dollar and bond d yields strengthened. On
its part, the Chilean government has decided not to sell bonds in overseas markets in the short
term. The Chilean peso has been one of the biggest gainers against the dollar since the middle of
last year.

Further, the central bank k unexpectedly decided to leave its benchmark rate unchanged this
month, to reduce capital inflows and restrict currency appreciation
appreciation. Though
Th consumer price
inflation increased in December, the central bank said it considers currency gains to be a bigger
threat than inflationary risks. Despite successive rate hikes last year,
year, Chile’s benchmark rate
remains one of the lowest in the region.

Peru: Policy rate hiked unexpectedly to prevent inflationary pressures

Sustained economic growth momentum and expectations of higher interest rates have
further strengthened the Peruvian sole this month. The currency is now at its highest level
against the U.S. dollar in more than two years, despite the efforts of the central bank and the
government to prevent currency appreciation. The central bank ha had actively intervened in the
currency markets last year and had purchased more than $9 billion, but this was not enough to
offset the increased capital inflows and higher export earnings. However, the high prices of
copper and gold, the country’s major exports, wwill likely limit any deceleration in export growth
because
cause of the stronger currency.

The central bank of Peru announced a surprise hike in its benchmark rate earlier this
month, when it was widely expected to hold the policy rate unchanged.. Though consumer
inflation for the month of December was below its forecast, the central bank said it is concerned

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about the buildup of inflationary pressures due to higher food and energygy prices. Besides, though
the rate of expansion is likely to slow from last year, economic conditions remain favorable.
GDP growth for the current year is forecasted to reach 6.5%, as increased private investments are
expected to counterbalance lower government
gove spending. Reflecting the economic optimism,
Peruvian equities gained the most among all emerging markets during 2010.

Concerned by the continued momentum in credit growth, the central bank has once again
increased the reserve requirements for commercial banks. Total bank credit was nearly a
fifth higher in December from a year ago, as domestic consumption and investment demand
remains upbeat. The increased reserve requirements have been extended to the overseas
operations of Peruvian banks, which
which will increase the cost of foreign currency loans for
companies.

Colombia: Additional taxes to finance flood reconstruction efforts

Extensive damages from last month


month’s floods and mudslides are likely to have slowed
Colombia’s fourth quarter economic growth.
g The central bank, in the minutes of its December
meeting, said output growth could turn out to be lower than the 4.5% forecast earlier. The bank
also said public spending was lower than expected during the last quarter of 2010, though the
economy continues
ntinues to enjoy favorable trends in domestic consumption and export demand. The
country’s economic planning agency has lowered its 2010 GDP growth estimate to 4.2%, from
4.5% earlier, but has maintained the forecast for the current year at 5%.

To ensure better coordination of flood relief and reconstruction efforts, the Colombian
government extended the economic emergency in January. The government has also
expanded its annual budget for the current year by $3 billion to repair facilities damage
damaged by the
floods, now estimated to have caused total damages of nearly $6.5 billion. To finance the
rebuilding, the government will raise up to $1.7 billion from a new tax on personal assets.

As the domestic unemployment rate remains above 10%, the Colom Colombian
bian government
remains concerned about declining export potential because of the stronger currency. The
export sector is the major employment generator in the economy, and any slowdown in export
growth will upset the government’s ambitious plans to boost economic growth and bring down
unemployment. Nevertheless, higher international oil prices could offset the stronger peso to
some extend and support export growth this year.

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