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Beware of the Bubble, IMF Warns Brazil and Latin America

IMF's Nicolas EyzaguirreBrazilian and its Latin American neighbors have been warned by the International Monetary Fund. Latin American economies as a whole are recovering nicely from the global economic downturn but “cheap and abundant external finances raise the risk of a boom-bust cycle”, said Nicolas Eyzaguirre, IMF Western Hemisphere Department Director.

Eyzaguirre said that Brazil, which has instituted a tax on foreign capital inflows, is probably the most prominent example of a country that is targeted by foreign investors seeking a high return.

Brazil has to “deal with the difficulties associated with success and for being considered a very promising economy”. But he said the IMF is not critical of Brazil’s resort to a capital tax.

The IMF official also referred to Argentina’s case saying it would be very good for Argentina and for the world community if Argentina were to resume its annual economic consultations with the IMF, which it abandoned several years ago.

Larger commodity exporting countries with access to international financial markets are benefiting strongly from rising commodity prices and easy access to international finance. Smaller commodity importers that rely heavily on remittances have a more difficult outlook.

As a result, the policy issues facing the region also vary, Nicolas Eyzaguirre said at a press conference during the IMF Spring Meetings. The larger commodity exporting countries more integrated into the world economy have to pay special attention to their policies to cope with the flood of cash from investors seeking the higher returns available in countries with good growth prospects.

Eyzaguirre cautioned that “cheap and abundant external finances raise the risk of a boom-bust cycle.” To guard against that, these countries must first allow their exchange rates to appreciate to cope with excessive international liquidity, and return their fiscal policies to a neutral stance to lean against excessive growth. They must also use macro-prudential policies to help keep their financial systems stable.

As a last resort, if these actions prove inadequate to avoid an over expansion or excessive appreciation in the exchange rate, then “carefully designed taxes on capital inflows” may have a role on a temporary basis, he said.

While most advanced economies are projected to grow slowly in coming years, the prospects for Latin America are rosier. The regional economy contracted by 1.8% in 2009, but is expected to grow by about 4% this year, perhaps even a little more.

Not only has the region emerged more quickly from the downturn than have advanced economies, but “social costs in the region were more muted,” Eyzaguirre said. In the larger Latin American economies, unemployment rose about 2 percentage points. In the United States, by contrast, unemployment rose 5.5 percentage points.

While the commodity exporting countries with broad access to international capital markets have to guard against too much of a good thing – “the strong tailwinds from the global setting” as Eyzaguirre characterized it – other economies must adopt different policies.

Commodity exporters with less access to international markets will have to fight against their past habits of spending the increased government revenues from rising prices and build more credibility in their macroeconomic policy frameworks.

They need to make some structural reforms to deal with supply side issues to enhance their ability to grow. They also need to normalize their relationship with financial markets, “an endeavor where the IMF could help,” Eyzaguirre said.

Some other countries with good macroeconomic frameworks, mainly in Central America, are also commodity importers that face a slowdown in remittances from citizens living abroad. They will grow, but should manage their fiscal policies carefully, focusing attention on the poor and keeping some flexibility in reserve in case “some downside risk scenarios were to materialize,” the IMF official said.

Smaller countries that rely on tourism and remittances face a bleaker future but should resume growth next year.

Eyzaguirre said that the recent global crisis showed how interdependent the world has become and how essential it is that a country knows what is going on in other countries when it develops its own policies, and that other countries know its policies.

“Economic policy dialog among nations is what the Group of 20 advanced and emerging systemic economies has called for and it is especially important that Argentina hold such consultations because it is a G-20 member”, underlined Eyzaguirre.

Mercopress

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  • Show Comments (3)

  • ch.c.

    Lloyd Cata-strophe “when did they care about the poor”
    Just refer to the money loaned to…BRAZIL…for example !!

    And who has diverted these mega amounts ?

    Wellll….the corrupted BRAZILIANS politicians, including the Amaral dynasty…for example !

    Lloyd you have NOOOOO sense of REALITY !

  • João da Silva

    Llyod Cata
    Very good comments, my esteemed friend. IMHO, this IMF, Paris club, etc; are there to steal the resources of LA and Africa. Of course, MHO doesn’t count.;-)

    I am glad that you are in good health and spirits and continue warding off the vultures of the “Empire” with your words of wisdom.;-)

    But..but… I am slightly disappointed in you, because your silence on the following article is deafening as well as disturbing.8)

    [url]https://www.brazzil.com/articles/218-april-2010/10388-mr-amaral-the-band-of-military-criminals-you-admire-must-never-rule-over-brazil-again.html[/url]

    Cheers

  • Lloyd Cata

    Suddenly The IMF Finds Its Conscience
    What a tentative and somewhat humble advisory from the IMF. Certainly not the magisterial tone of past IMF edicts concerning the region. Is it possible this is in response to the increasing irrelevancy of the IMF in Latin America?

    [b]They will grow, but should manage their fiscal policies carefully, focusing attention on the poor and keeping some flexibility in reserve in case “some downside risk scenarios were to materialize,” the IMF official said.[/b]

    During all the years the IMF handed money to dictators and despots, when did they care about the poor except to force up the price of bread and fuel? Who has done worse by not being associated with the draconian economic policies forced on the ‘customers’ of this lending entity. As a “lender of last resort” it is no wonder nations would resort to crime and drugs rather than deal with such evil social engineers.

    [b]Eyzaguirre said that the recent global crisis showed how interdependent the world has become and how essential it is that a country knows what is going on in other countries when it develops its own policies, and that other countries know its policies.[/b]

    Really, like “knowing” how corrupt the US markets are and not factoring their instability into the cake the IMF pretends to bake for the world. Now even the mighty IMF does not rely on dollars but identifies its currency in SDR’s. Has the IMF given any advice to the US on its responsibility in the global financial meltdown? What is the IMF position on Wall Street Reform and global financial reform?

    Understandably the IMF will have to consult with its ‘sponsors’ before responding to such impudent questions. Naturally anything it says on these matters could affect its very existence, so perhaps there is need for the IMF to take some advice; reconsider, sirs, your jaundiced view of growth and emerging markets, as you struggle to maintain the underpinnings of the Empire you so clearly serve. Only the most desperate nations on Earth would ever deal with you, and as we build partnerships outside your control the better for the entire region.

    Certainly as a member of the G-20, Argentina should be a member in good standing with many organizations, but please consider that it was the IMF policies, under a murderous dictatorial regime, which contributed to the decline of the Argentine nation. So there you are, a global financial institution dedicated to a stable world economy, without a thread of conscience. There is no justice on a ledger sheet, and there are no ethics in the views of the IMF.

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