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Economic outlook brighter for Latin America, Caribbean

IDB says economic indicators point to recovery

Posted: February 18, 2005 Document: Financial Outlook for Latin America and the Caribbean by G. Calvo (PDF)  

Guillermo Calvo
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.

The 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 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 in dollars.

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 region.”

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 15 years.

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.”

Source: IDB

 

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