Snow-clad Calgary might seem an odd venue for the year’s preeminent gathering of Latin America’s financial and policy elite. But this Canadian prairie city has much more in common with its southern counterparts than first meets the eye.
It, too, knows something about cycles of boom and bust: the city’s fortunes for the past century have been at the mercy of oil and gas, its chief natural resources.
To most Calgarians today, hydrocarbons will be looked upon sympathetically – not least as the price of crude hurtles back towards 2008 highs. But it was not always so. And across this fast-expanding city, memories of oil price slumps of past – such as the 1980s brutal recession which laid waste to a once thriving economy – are not hard to unearth.
Over the next few days, Latin America’s finance chiefs will draw attention to their region’s seemingly inexorable boom, which even a global recession failed meaningfully to interrupt. They will cite stronger economic fundamentals, the result of hard-won reforms. And they will reference the region’s renewed resilience to external shocks. But they would do well to engage with the host city’s economic history – while recalling their own.
Prices of many of the region’s main resource exports are soaring, thanks to insatiable demand for commodities from emerging Asian economies, principally China. Yet Latin America’s trajectory remains perilously at the mercy of external forces
While the region’s commodity producers are today reaping the benefits of high export prices and low global interest rates – heightening their appeal to foreign capital – there is no reason to believe that either factor will hold for the long run.
Meanwhile, the region’s dependence on commodity exports runs the risk of coming at the expense of deeper structural and fiscal reforms. Policymakers must now tread with care, not least because the drivers of the region’s terms of trade boost are, at the end of the day, cyclical. And as the city of Calgary knows too well, that cycle will eventually turn once more.
Capital too has also been flowing to the region, thanks in part to ultra-low interest rates in advanced economies. But developed-world monetary policy will also normalise in time. When it does, the tide of capital flows that has seen sizeable inflows into emerging markets for the best part of two years may suddenly turn.
For now, though, rising consumer prices are dominating the political debate across Latin capitals, as authorities start to hike borrowing costs to keep inflation down. The one exception is Mexico, where as-yet-modest upward price pressure has yet to prompt a policy response. But, for the most part, the region’s sharp rebound from the crisis has posed serious policy dilemmas as authorities, notably in Brazil, struggle to prevent their economies from overheating. Central banks have been doing the heavy lifting while government have shown little desire so far to consolidate fiscal policy.
Urgent questions remain over the sustainability of Latin America’s long-term growth. If the region is to have any hope of avoiding the boom and bust cycle that has blighted its history, policymakers would do well to ditch the celebratory rhetoric that has characterised the region’s post-crisis rebound. The stakes could not be higher.