Growth prospects in Latin America remain fairly good in spite of global risks and unbalances generated by massive capital inflows, a top IMF official said on Friday.
Nicolas Eyzaguirre, the IMF’s Western Hemisphere director, nevertheless urged policymakers to refrain from taking measures that could spoil the region’s current performance amidst what he called “dream conditions today”, thanks to the extended period of high commodity prices.
In the meantime, Latin American policymakers should not adopt domestic policies that could “make things worse”, he said in a veiled reference to protectionism and expansionary fiscal policy.
He said the regional growth forecast to be issued next month by the Fund would be “somewhat better” but they “may not look that different” from the modest 3.5% forecast for 2012 issued at the beginning of the year.
This is one point below the average growth registered last year in Latin American and the Caribbean, according to the IMF. In 2013, growth is expected to exceed 4%, which is “close to its potential rate of growth,” Eyzaguirre said.
The Institute of International Finance expects growth to decline to 3.7% this year compared to 4% last year, before rebounding to 4.5% next year.
Massive capital inflows have become a “headache” for many countries, which have implemented a series of capital controls. “Provided you are not making things worse with recklessly loose fiscal policies... we are fine with the application of some degree of capital controls, especially in the short term,” Eyzaguirre said.
The region’s performance continues to be supported by high commodity prices, and the IMF expects those to remain at a fairly high level this year. Although credit risk is currently seen as quite low, the IMF said the region was still “prone to boom and bust cycles, and sustained strong credit growth should remind us to continue to guard against financial excesses”.
A fall in commodity prices and a more pronounced Chinese slowdown are only considered as medium term risks, as is “a runaway fiscal imbalance” in the run up to the forthcoming US election.
The IMF official urged Latin American policy-makers to maintain or tighten fiscal policies. They should “continue rebuilding fiscal buffers to bring public debt back to pre-Lehman levels,” the IMF said. “Premature fiscal stimulus should be avoided,” he said.
“This may be the decade of Latin America, as long as we do not get overly enthusiastic,” he said.
Meanwhile, Latin American governments are considering taking further steps to try and shield themselves from the crisis environment. But Eyzaguirre said the pooling of foreign currency reserves by Latin American countries may offer only a limited insurance against systemic shocks“
We do not oppose the pooling of reserves. The pooling may also help if [countries] do not have to face a problem at the same time,” he told Emerging Markets. “But if the shocks are not correlated in the region, that would be helpful. If there are correlated, it would not make much difference,” he said.