Latin America falls short in saving commodity boom windfall -IMF

05/06/2013

MEXICO CITY, May 6 (Reuters) - Latin American commodity exporters have largely failed to take full advantage of surging raw material prices to boost savings and a recent deterioration in external accounts bears watching, the International Monetary Fund said on Monday.

In its latest regional economic outlook, the IMF said high export prices for oil, metals and agricultural products since 2002 had led to a terms of trade windfall equal to 30 percent of income a year for Venezuela and 20 percent for Bolivia and Chile, or close to 15 percent on average for the region.

But countries had saved proportionally less of the extra income than in past booms and less of that had been used to strengthen external accounts by boosting investment abroad.

Current account deficits rose last year to an average of 2.8 percent of gross domestic product (GDP) in Brazil, Chile, Colombia, Mexico, Peru and Uruguay, from 2 percent of GDP in 2011, as strong domestic demand for imported goods outpaced output growth.

Income from foreign investment is a credit in the current account, a component of a country's balance of payments, the broadest measure of its transactions with the world.

"In previous episodes, foreign savings appear to have delivered higher post-boom income than domestic savings," the IMF said in the report.

"Hence, the current weakening of external current account balances in Latin America - even if driven by higher domestic investment - warrants a close monitoring."

The current account encompasses trade in goods and services and other cross-border money flows including interest payments, profit remittances, workers' remittances and dividends. The other major balance of payments component is the capital account, which includes foreign direct investment.

Past economic crises in Latin America have been associated with boom and bust cycles accompanied by large current account deficits, making countries dependent on inflows of foreign capital and vulnerable to collapse when flows reversed.

Still, deficits in the current account are short of levels reached in the lead-up to past crises and so far there is no sign that investors, attracted by the region's comparatively high interest rates, are losing interest.

According to IMF forecasts, Brazil's current account deficit is expected to reach 3.2 pct of GDP in 2014, from 2.3 pct in 2012 and Chile is seen widening to 3.6 percent from 3.5 percent.

Deficits in Peru, Uruguay and Colombia are seen easing over the next 18 months but still high at 3.4 percent in 2014 for Peru, 2.5 percent in Uruguay and 2.9 percent in Colombia.

The IMF said flexible exchange rates could help mitigate the impact of foreign capital reverses, noting that the share of foreign ownership in local currency debt had doubled from an average of about 12 percent in early 2008 to more than 25 percent by the end of 2012.

In the six months following the collapse of Lehman Brothers in September 2008, countries with more flexible exchange rates had experienced fewer foreign outflows than countries which tried to keep exchange rates stable.

"Overall, the evidence suggests that exchange rate flexibility reduces the vulnerability to sudden changes in foreign investors of domestic debt," the IMF said.

Countries including Brazil, Colombia and Peru are taking steps to prevent their currencies appreciating too much as a result of capital inflows.

The report also found deleveraging by European banks as a result of the ongoing economic crisis had only a modest impact on Latin America, although subsidiaries of Spanish banks had been more cautious in lending than domestic banks. (Reporting by Krista Hughes, Editing by W Simon)



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