Latin American governments should reduce spending to temper currency gains and allow central bankers to pursue lower interest rates, the World Bank´s chief economist for the region said.
Augusto de la Torre, in an Oct. 9 interview from Washington, said the region cannot continue on a “consumption binge forever” that forces central banks to carry the burden of inflation control and ends up attracting dollar inflows.
“It would be very useful to rein in fiscal spending, creating space for investment through higher government savings,” said de la Torre, who was Ecuador’s central bank president from 1993 to 1997. Lower government spending would “generate the kind of savings that help relieve pressure on central banks and should help ease some appreciation of the currency.”
Five of seven Latin American currencies tracked by Bloomberg strengthened against the dollar this year, led by a 14.5 percent surge by Colombia’s peso. Political leaders in the region have few incentives to curb spending because upcoming elections in several countries and inflows of cheap cash make it more attractive to increase borrowing, de la Torre said.
In Brazil, the budget deficit widened to 3.4 percent of gross domestic product in the 12 month through August from a record low 1.23 percent in October 2008, according to central bank figures. In Peru, the fastest-growing major economy in South America, external short term debt jumped to $6 billion in June after reaching a two-year low of $4.2 billion in September 2009.
Budget Deficits
“There’s room to borrow and money is available now because it’s flowing to the region in good conditions,” said de la Torre, who has a doctorate in economics from the University of Notre Dame in South Bend, Indiana. “Rich countries have large fiscal deficits so people wonder: Why do we have to tighten if everybody is loosening.”
Policy makers in Brazil, Latin America’s biggest economy, increased this year the benchmark interest rate to 10.75 percent from a record low 8.75 percent to rein in consumer prices. Traders expect the bank will have to further raise the overnight rate next year to keep inflation in check, according to Bloomberg estimates based on interest rate futures.
Policy makers in Chile, who have raised the overnight rate this year by two percentage points to 2.5 percent, are expected to increase borrowing costs by at least another 25 basis points when they meet Oct. 14, according to the median estimate in a Bloomberg survey 17 economists.
Latin American countries may grow an average 5.4 percent this year while a swing from risk aversion to risk appetite is boosting capital inflows to emerging markets, helping strengthen their currencies, the World Bank said in a report last week.
Advanced economies’ growth will slow to 2.2 percent next year, from 2.7 percent this year, while emerging markets are expected to grow 7.1 percent this year and 6.4 percent next year, the International Monetary Fund said Oct. 6.
“Whether you’re on the left or the right, you don’t want to create overvalued currencies,” de la Torre said.
Source: bloomberg.net
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