IDB’s chief economist, Guillermo Calvo, announced
that more capital flows are returning to Latin America and
the Caribbean due to favorable macroeconomic conditions
in the region’s economies. “Growth is accelerating,”
said Calvo during a presentation at the Bank’s headquarters.
Commodity prices, terms of trade and current accounts have improved in Latin America and the Caribbean, driving an upsurge in capital flows to the region. The IDB chief economist, Guillermo Calvo, analyzed these favorable macroeconomic conditions in a full report on the financial outlook for the region that also warns against lavish spending.
Commodity prices, terms of trade and current
fiscal accounts have improved in the region, Calvo pointed
out. And improvements in commercial prosperity, reductions
in public expenditure and financial adjustments after the
Russian banking crisis in 1998, and US dollar depreciation
are positive signs for the region, in view of its high debt
The regional growth rate, which averaged
1.4 percent of the regional GDP from 1990 until the Russian
crisis, now hovers around 5 percent, Calvo underscored.
“Now we have reached levels that prevailed in prosperous
times before the Russian crisis.”
There is a clear recovery in investment.
The cost of borrowing money in the region has declined—and
because local currencies are appreciating—investors
are increasing their appetite for instruments in local currency.
Soon, Latin America will capture a fragment
of the net flow of new savings, generated globally every
year. The money will come from the bond market, Calvo predicted,
“not from the banks, because currently they aren’t
lending and the bond market has taken their place.”
In regard to foreign direct investment,
the specialist said it should also grow, but he sees it
complicated in the region since many trade agreements have
not been closed.
The money from China
China will play an important role in the region, probably
because it will facilitate the flow of money. Calvo emphasized
that China invests 42 percent of its GDP, most of it financed
by the Chinese’s own savings. Chinese direct investment
is relevant for Latin America because “what enters
in foreign direct investment into China turns around and
is reinvested outside,” Calvo said.
There is a great advantage to China investing
overseas, he added, because there is evidence of domestic
over-investment and inflationary pressures, so there is
incentive for foreign investment. China's investments overseas
are driven by signs of ineffectiveness in local resource
allocation. In addition, if China invests overseas, it joins
capitalism and places its funds in more effective investments.
Future and options
The stabilization of the dollar and the international financial
system rely heavily on two assumptions: that the United
States stops increasing its current debt rate and enforces
a financial adjustment, and that Asia’s appetite for
international reserves continues.
The wind is favorable, said Calvo. The great
depreciation after the Russian crisis has already started
to revert, and heavily in some countries. “It’s
a generalized phenomenon, and maybe, a successful sign in
The specialist used Brazil as an example
to illustrate what is happening throughout the region: the
cost of money has decreased significantly, the real exchange
rate has appreciated, the growth rate had an important recovery
from 3 to 5.3 percent of annual GDP—the biggest in
But we should look beyond the short-run
outlook for the market, Calvo concluded, because we are
expecting higher interest rates from the United States,
and that could imply hurdles in the future.
“We should not spend in excess, which
is what always happens in prosperous times,” Calvo
concluded. “We should save for meager times.”