Latin America had weathered the financial crisis so well that several countries were paying the price of success with rapidly appreciating currencies and an influx of foreign capital that could raise the spectre of future bubbles, said Nicholas Eyzaguirre, western hemisphere director of the International Monetary Fund.
“The direction of the wind changes so fast that we are beginning to get a bit concerned about things getting too good for these countries,” Mr Eyzaguirre said in an interview with the Financial Times.
Brazil, Chile, Colombia and Peru benefited from solid macroeconomic policies and strong relationships with international financial markets during the downturn, he said.
He also praised Bolivia, which has had a fractious relationship with the IMF and other multilateral lenders under the leadership of Evo Morales, the leftist president, who rattled foreign investors in 2006 with the nationalisation of the hydrocarbons industry.
“They were very responsible in terms of macroeconomic policies, they have some internal funding to continue counter-cyclical policies going forward, and that, on top of what is going on with their terms of trade – they are getting better – will give them enough space,” Mr Eyzaguirre said of Bolivia, which is forecast to achieve growth of 3 per cent by year end.
Mr Eyzaguirre was in Lima on Thursday for the IMF’s regional outlook conference where, in meetings with policymakers, he discussed how to manage an expected strong rebound in private investment in Peru and other countries.
“If both the public and private sector [continue to] spend a lot, central banks are going to be forced to avoid inflation, to hike interest rates, and that is where it is going to attract even more capital from aboard,” he said.
While there was no “silver bullet”, he recommended countries facing a flood of capital rein in excess fiscal stimuli and exit from temporary monetary measures to increase liquidity. Capital controls would also be “perfectly acceptable”, he said, and he recommended that central banks also allow some exchange rate flexibility, even short-term volatility, to discourage speculation.
Brazil and Colombia have already reacted to currency appreciation, with Brazil imposing a 2 per cent tax on capital inflows to equity and bond markets, and Colombia’s central bank announcing it would buy dollars to stem the rise of the peso. Meanwhile, Peru has signalled it may limit foreign exchange exposure of its banks as part of an effort to reduce currency volatility.
While the IMF’s regional outlook forecasts a return to growth of about 3 per cent for the entire region in 2010, Caribbean nations will lag due to their reliance on tourism and remittances – which have both been hit hard by the downturn in the US and Europe – and by a higher level of indebtedness. Mexico too had been hit because of its strong ties with the US, leading to a sharp slowing in consumer credit and deteriorating labour market conditions, and the impact of the H1N1 flu.
Venezuela, Argentina and Ecuador were unlikely to fully reap the benefits of an expected upswing in commodity prices because they were “not in fluent relations with the international financial markets”, Mr Eyzaguirre said.