High commodity prices and a strong tide of capital inflows pose the biggest long-term threat to South American economies, the International Monetary Fund's top official for the region told Reuters. "The problem for South America is how to manage abundance and not get dizzy," Nicolas Eyzaguirre, IMF director of the Western Hemisphere Department, said on Thursday.
"We have to be cautious about potential bubbles going forward because they are going to begin to grow very fast," he added. As the US economy struggles with sluggish demand at home, Latin America has looked to China and other emerging markets in Asia as a growing market for everything from Chilean copper and Brazilian soy beans and iron-ore to Peruvian gold.
Eyzaguirre said he worried that booming commodity exports and low global interest rates would lead to destabilising asset bubbles in real estate or services linked to import activities. "What is crucial to avoid the bubble is prudential regulations," he said, adding countries need to keep a close eye on exposures to derivatives, short-term interest rates and currencies.
As former finance minister of Chile, Eyzaguirre said Chile's experience with boom-bust cycles showed that tampering with appreciating exchange rates during boom periods was not the answer because it motivated corporations to increase borrowing from abroad. Brazil, the region's largest economy, has already taken steps to rein in rapid capital inflows and rise of its exchange rate by imposing a 2 percent tax on foreign portfolio investments.
Low interest rates in the United States have prompted investors to borrow money at low cost and invest in fast-growing developing countries like Brazil, where interest rates are high. "The real challenge here is to learn from history and not to make the same mistakes, believing that all of a sudden we have become rich and can spend like mad," he added.
In its October economic outlook for Latin America and the Caribbean, the IMF said the worst of the crisis was over for most countries in the region. In Brazil, where the government has already started to unwind supportive measures, there are concerns it will not meet this year's primary budget surplus because of growing public spending. Brazil's Finance Minister Guido Mantega has said the government will hit a 3.3. percent of GDP target thanks to a pick-up in growth.
Last year, Brazil's primary budget surplus fell to 2.06 percent of GDP, its lowest level since 2001 as the government struggled with the tail-end of an economic recession and tax revenues were squeezed by a series of tax breaks to key industries. Eyzaguirre said he agreed with the government target.
"If they keep that target that seems appropriate, taking advantage of a good situation to have a higher primary surplus," he added. He said countries were worried about a double-dip recession in advanced economies and were hesitant about totally dismantling stimulus policies until they were more confident the storm had passed. "I guess now we can rest assured that the tail risk of a double-dip recession is almost negligible," he added.
Turning to Mexico, Eyzaguirre said he would visit the country next week but refused to say whether it was related to recent comments by authorities that they intended to extricate themselves from a $47 billion line of IMF credit. "It is good if they want to remain with the (Flexible Credit Line) and if they want to have a lower level of access that's fine too," he said.
Comments
Comments are closed.