Bolivians elected as president on Sunday a former coca farmer who wants to nationalise the country’s natural gas resources. Argentina said last week it would repay International Monetary Fund loans early, as its president called the IMF “a vehicle of policies that cause poverty and pain”. Brazil announced two days earlier that it would pay off the remainder of its multilateral debt.
Are these developments related? They certainly reflect a new-found confidence in South American countries, which have gone to the IMF, cap in hand, on innumerable occasions. But does wriggling out from under the fund’s supervision mean a wholesale abandonment of the economic orthodoxy it preaches?
In part, the moves reflect a loss of faith in IMF policy prescriptions. After all, why should Argentina swallow the medicine when others, such as China or even the US, choose not to?
More importantly, South America’s ability to take action demonstrates how much economic fundamentals have improved. Argentina’s early repayment to the IMF, for example, is only possible because its foreign exchange reserves, $8bn at the time of the 2001 crisis, are now nearly $27bn. Across the region, the story is similar. According to Standard & Poor’s, net international reserves have exceeded four months of current account payments for the past two years, compared with just above two in 1988. Current accounts are in surplus, reducing dependence on capital inflows. Benign international financial conditions have allowed governments to prefinance external debt service obligations, not just to the IMF, and strengthen maturity profiles.
Sceptics argue that these improvements are only cyclical, reflecting strong demand for Latin American exports and low risk aversion among international investors. This is borne out by Latin American foreign currency debt spreads over US Treasuries which, at about 250 basis points, are at record lows. However, while tight spreads may reflect the quest for yield, the current regional upturn, as the IMF itself notes, appears more resilient than previous ones. Some countries, it is true, are using the bonanza to embrace fiscal irresponsibility. Venezuela will undoubtedly go on pursuing highly unorthodox economic policies as long as high oil prices continue and Hugo Chávez remains in charge.
But others are seizing the opportunity to implement significant structural fiscal adjustments. Brazil, for example, may be repaying the IMF, but is pursuing tougher-than-IMF policies under its own steam.
Some things change, others remain the same. South America, as always, remains vulnerable to an unexpected slowdown in international trade or an abrupt tightening of global financial market conditions. External debt ratios remain high – more than 50 per cent of gross domestic product in many countries – and still depend on exchange-rate linked and short-term instruments. Potential for domestic hiccups remains. Five South American countries hold elections next year, including Brazil. Investors should not underestimate the region’s capacity for serial disappointment.
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