Nearshore Americas

IMF Says LatAm Economies are “Over-heated”: Fiscal Austerity is Necessary

Source: MercoPress

IMF warned inflation is threatening South America but also admitted countries had a dilemma since increasing interest rates could further worsen the appreciation of local currencies vis-à-vis the US dollar.

“Inflation is growing” said IMF Director for the Western Hemisphere Department Nicolas Eyzaguirre and this is not only limited to “food and fuel prices”. Regional economies are clearly over-heated, he added and “this is a problem”.

Eyzaguirre mentioned internal and external elements as responsible for the situation. Domestically elevated government spending is justified when facing a financial and economic crisis, “but not at boom times”, such is the case.

“It’s time to change” he insisted pointing out that governments in the region last year continued with stimuli policies as if the crisis was still present and actually “it was the opposite”.

Eyzaguirre mentioned as an example to follow Brazil’s recent decision to trim the federal budget. “It’s a strong signal”, but also admitted that other factors also influence and are pushing prices.

The IMF official specifically mentioned the strong demand from China which increases commodities prices, and the massive influx of capital to the region which is expected to reach record levels in 2011.

The combination of expansive fiscal policies, easy access to credit, high prices for commodities and the abundant liquidity in the rest of the world means there’s a big party in the region with plenty of “vodka, gin, beer and good music”.

And to avoid a serious hangover, “fiscal austerity is a must.

But Eyzaguirre also pointed out that things are a little more complicated because if central banks raise interest rates to cool their economies, “strong currencies will become even stronger”.

“So we have different dilemmas when attempting to contain the surge”, and this requires a global balancing act, which means leading countries such as China should prop domestic demand while softening their aggressive export model.

Eyzaguirre said Beijing should appreciate its currency at a faster rate, although “this will not necessarily happen”. Furthermore the world is growing at different rates, faster in developing countries and anaemically in developed nations so “it’s not impossible that we should be experiencing tensions”.

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Eyzaguirre finally forecasted that the surge in commodities prices will probably continue for some time since “China has room to keep expanding” and the current decoupling between emerging and developed economies can be expected to persist.

“I don’t see Latinamerica collapsing in the near future” although if commodities’ prices dropped abruptly, “vulnerabilities would be exposed immediately”.

Tarun George

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