2001 Annual Report

The Year in Review

Jacques Rogozinski

In 2001 world industrial output entered the worst slowdown in two decades. Global economic growth is expected to be around 2.8 percent for 2001, marking a sharp drop from 4.8 percent in 2000. The Latin American and Caribbean economies felt the effects of this worldwide economic slowdown due to poor growth in the United States, Europe, Japan, and developing countries in Asia. Domestic factors, particularly weak domestic demand and credit, electric power supply problems, and adverse climatic conditions also had a negative impact. Projections from the Inter-American Development Bank indicate that regional growth will be around 0.7 percent for 2001, compared with 4.2 percent in 2000. The region is expected to grow between 2 percent and 2.5 percent in 2002 and between 3 percent and 3.5 percent in 2003, before returning to 2000 levels in 2004. These figures are tentative forecasts and could change depending upon the duration of the current economic downturn and the uncertainty introduced by recent global events.

Conditions within and without the region were less favorable than originally forecast, so 2001 was a discouraging year for most of the countries of Latin America and the Caribbean. The region's two largest economies, Brazil and Mexico, saw a significant drop in their growth rates. Costa Rica, El Salvador, Jamaica, Paraguay, Peru, and Suriname experienced similar trends, some of which were caused by lower international raw materials prices, weakened exports from free trade zones, and adverse climatic conditions. Argentina faced a worsening of the recession that has affected its economy during the last few years, and Colombia continued to perform below historical levels. Only Chile, Ecuador, and Venezuela in South America; Belize in Central America; and the Dominican Republic, Guyana, and Trinidad and Tobago in the Caribbean posted positive performances. Lower regional GDP growth pushed fiscal deficits higher, to around 3 percent of GDP from 2.3 percent in 2000. As a result, most of the region's economies will have higher financing needs in 2002, and this will inevitably affect the availability and cost of the financing that the region's small and medium-size companies need to be able to grow.

Slower economic growth will likely be accompanied by lower inflation. Regional inflation declined substantially over the past decade, from 830 percent in 1990 to 7.5 percent in 2000, and is projected to decline even further, to around 5 percent in 2001 and 2002. Nineteen of the IIC's twenty-six regional member countries are expected to post single-digit inflation rates for 2001. Falling inflation had been leading to steady growth in internal savings and investment rates, attracting, for example, significant foreign direct investment flows, which grew 34 percent annually from 1992 to 2000.

But this positive trend reversed in 2001 when, according to Inter-American Development Bank estimates, overall foreign direct investment in emerging markets fell from $160 billion to around $100 billion. A partial recovery is expected in 2002 to probably $120 billion. As for Latin America and the Caribbean, foreign direct investment fell by some $10 billion in 2001.

Nor has the picture been promising for domestic investment, whether public or private. Several countries of the region posted negative growth in this area, although in most cases this indicator is expected to improve in 2002. Region-wide, fixed gross investment should go from 17.1 percent of GDP in 2001 to 17.4 percent in 2002.

Despite lower investment flows, the repercussions of recent global events could make the Latin American and Caribbean region relatively more attractive for investors, both domestic and foreign. And the macroeconomic and microeconomic factors that made Latin America and the Caribbean attractive for investment are still present. These encompass gains in consolidation of democracy, regional integration, open trade, responsible fiscal policies, better regulation of financial systems, and a modern legal framework for investments.

To further unlock the region's productive potential, long-term financing needs to be made available for investment and channeled to the productive sectors to support an economic recovery. Investments in infrastructure also are needed to improve productivity and raise standards of living.

Latin American and Caribbean companies are in the process of realigning their businesses and focusing on their core holdings. This process should favor small and medium-size companies, especially in the context of lower dollar interest rates. In order to maintain their share of domestic and foreign markets, companies throughout the region increasingly need access to capital. The Corporation will seek to meet the needs of its target market by deploying its resources in the most effective manner, both directly and indirectly. It will maintain a disciplined approach to lending and investing, and it will diligently manage its resources to achieve a balance between its developmental mandate and the pursuit of suitable financial returns.

The IIC's Role in the Region
In sectors and areas where credit or capital is hard to secure on reasonable terms, the Corporation continues to provide small and medium-size companies with financing that will help them to grow and prepare themselves to access formal financial markets. Key to achieving this goal are the tools that enable the IIC to reach the greatest possible number of such companies; its financial intermediation program and its investments in private equity funds are good examples. The Corporation's equity investment activities continue to focus primarily on such funds or similar vehicles that can provide needed growth capital while opening the ownership structure to other investors that can supply additional capital resources and provide managerial and technical know-how. In doing so, the Corporation also continues to strive to achieve its other goals: promote exports and technology and infrastructure modernization, and protect the environment as an essential part of sustainable development. The IIC also makes direct equity investments in individual companies, including financial institutions in cases where this is the most effective means of meeting the investment needs of small and medium-size companies.

In uncertain economic times it can be more difficult for small and medium-size companies to obtain long-term financing. Foreign direct investment in such companies can fall dramatically, as can international demand for the goods that they export. The IIC's role in providing financing on reasonable terms and catalyzing funding from other sources becomes more important in such times. The problems that small and medium-size companies face during economic downturns are taken up in a separate section of this annual report.