MEXICO CITY, May 25: Latin American countries have little room to boost growth with fiscal or monetary stimulus as their economies slow and a slump in commodities prices undercuts a pillar of recent strength, top officials told Reuters this week.
After years of strong growth, Latin American economies have slowed and policymakers may have overestimated the speed at which they can expand without high commodities prices, officials and executives told Reuters Latin American Investment Summit.
Critics say countries have lagged on important economic reforms to increase productivity and boost tax revenue to give governments room to provide fiscal stimulus if growth worsens.
‘The short-term task is to re-establish the working room that monetary policy and fiscal policy had, as they are practically exhausted to a large degree across Latin America,’ said Guillermo Ortiz, chairman of bank Banorte and former Mexican central bank chief.
The average benchmark interest rate across major Latin American economies has fallen to 4.8 percent from 9 percent before the 2008 financial crisis.
Mexico cut its benchmark interest rate to record low of 4.0 percent this year, while Colombia’s has dropped its main rate to 3.25 percent, near its lowest ever, in a bid to jolt the economy and fend off portfolio investments has strengthened its currency and hurt the competitiveness of local exporters.
Brazil has begun raising its main rate from an all-time low of 7.25 percent to fight a spike in inflation even as growth remains sluggish.
On the fiscal side, the region’s average surplus in 2007 has slumped into a deficit.
The International Monetary Fund warned in April that Brazil and other Latin American countries need to realize their economic boom could be over because of cooler global demand for their minerals and farm goods.
Softer demand in China and the potential tapering off of extraordinary monetary stimulus in the United States could lead to even lower prices for the region’s raw materials.
‘The drop in commodity prices appears to be having a bigger effect than maybe we thought at first,’ Peru’s Central Bank President Julio Velarde told Reuters.
Latin America posted average growth of 4.3 percent in 2011, which then fell to 3.1 percent last year. The region is seen growing 3.5 percent this year, according to the United Nations Economic Commission for Latin America and the Caribbean (ECLAC).
Officials interviewed by Reuters this week said Latin America’s economies would need to reduce their reliance on commodity exports due to volatile prices.
Excluding Mexico, which produces mostly manufactured goods for sale abroad, commodities account for about 60 percent of Latin America’s exports.
The value of the region’s exports grew only 1.6 percent last year after surging 24 percent in 2011, helped by a boom in commodity prices fueled by easy money policies in advanced economies. ECLAC project a 1.4 percent drop in the value of exports this year.
‘We are really worried about the issue of exports,’ said Alicia Barcena, ECLAC’s executive secretary (AGENCIES)
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