April 25, 2011

During the recent Sony Ericsson tennis tournament in Key Biscayne, I was surprised to see that most of the people around me at the stadium were Latin American tourists whose conversations centered on shopping sprees earlier in the day. I thought to myself: if this affluence looks like an economic bubble, it probably is.

Now, several new studies released during the spring annual meetings of the International Monetary Fund (IMF) and the World Bank in Washington, D.C. are confirming what common sense should have taught economists several months ago: there's a real danger that Latin America's current economic growth cycle may be too good to be true, and that -- barring urgent measures by the region -- it may not last much longer.

In sharp contrast with what international financial institutions and credit rating agencies were saying only a few months ago, when many of them were claiming that this could be "the Latin American decade," the climate surrounding this weekend's meetings in Washington, D.C., was marked by nervousness.

An internal IMF document titled "Managing abundance to avoid a bust in Latin America," dated April 7, starts with a somber diagnostic: it says the region is facing "persistent double tailwinds, with risks of an abrupt end."

It explains that much of Latin America's current prosperity is based on two extraordinary outside circumstances -- a global liquidity flood that results in a big influx of capital to the region, and a rise in world commodities prices, thanks to China's purchases -- that will not last forever.

"The unusual intensity of these favorable external conditions is conducive to a buildup of vulnerabilities and heightened risks of reversals," the study says. "These conditions can mask underlying fragilities in external, financial, and fiscal accounts, and bring complacency and exuberance."

In other words, most countries in the region are spending more than they should, and have overvalued currencies. The study, put out by the IMF's Western Hemisphere Department, cautions on its first page that it reflects the opinion of its authors and not necessarily that of the IMF, but its lead author is Nicolas Eyzaguirre, the head of the IMF's Western Hemisphere division.

A separate study released last week by the Brookings Institution, coinciding with the opening of the IMF-World Bank meeting, is equally anxious about the region's future.

The 80-page study, titled "Latin America economic perspectives," says that "today, overheating and inflationary pressures are rising, and many financial regulators wonder whether domestic credit is already growing excessively." It adds that "an area of special concern" in Brazil and other countries is the banks' excessive consumer loans, which may never be repaid.

What exactly has moved international economists to suddenly become more nervous about Latin America's future? I asked Mauricio Cardenas, co-author of the Brookings study.

Cardenas, a former minister of economic development of Colombia, said that it's the realization that the outside factors that have benefited Latin American in recent years may come to an end, and the region may not be prepared to absorb that shock.

China, whose commodity purchases have become a major engine of South America's growth, has just announced that it will lower its economic annual growth target from 10 percent in recent years to 7 percent over the next five years, which is bound to result in a drop of China's commodity imports, Cardenas said.

In addition, the United States may soon increase interest rates, which will drive more capital to the United States, and away from the region, he added.

"We must save during the good times," Cardenas said. "There's not too much time left. We may see a change in outside conditions as early as next year."

My opinion: I agree. Most of Latin America hasn't seen a better international context for growth anytime in recent memory. It would be a crime not to set aside part of the current bonanza to maintain social programs when times get harder, as well as to start improving most countries' disastrous education, science and technology standards.

It was great to see the crowds of happy Latin American tourists at the Key Biscayne tennis tournament, but it would be much better if their current affluence were built on solid ground, ensuring that it would last a long time.

 

Available at Amazon.com:

The Great Gamble

At War with the Weather: Managing Large-Scale Risks in a New Era of Catastrophes

 

 

(C) 2011 Andres Oppenheimer, The Miami Herald Distributed by Tribune Media Services