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Fast Portfolio money in Latin America

Page history last edited by PBworks 15 years, 8 months ago

02/2008

 
 
Fast growth recently has been accompanied by current account surpluses. Although such surpluses are associated with booming commodity prices rather than competitiveness, it is still a major gain in relation to the past. The 1970s were also years of booming commodity prices but accompanied by current account deficits. Current account surpluses have been used to reduce external debt ratios and accumulate international reserves. As a result, Latin America is better prepared than in the past to undergo the current turbulence in international financial markets.
 
 

BUT,

 
Most money coming into Latin America these days is the capital, not the current account.
 
 
About three-fourths of the accumulation of reserves since 2004 (slightly over $210 billion from the first quarter of 2004 to the third quarter of 2007, for which we have data for all six economies) is the result of capital flows, and the proportion has been closer to 90% since the last quarter of 2006.
 
So, Latin American reserves are largely “borrowed”.
 
The source is different from the past: there has been a larger proportion of portfolio capital inflows invested in Latin American stocks and bonds denominated in domestic currencies. This again has several advantages, as it has reduced the risks associated with the increasing domestic burden of debts after exchange rate devaluation, which were devastating during past crises.
 
Therefore, it is neither competitiveness nor high commodity prices that explain the large amount of international reserves that the region has accumulated, but pro-cyclical capital inflows. The future will show whether these “borrowed reserves”, with their new features –i.e. the composition of the inflows—, are more resilient to an international financial crisis than in the past.

 

 

Country analysis

 

The countries running current account surpluses were mainly mineral economies –Bolivia, Chile, Ecuador, Peru and Venezuela—, which have benefited from booming mineral prices on the world market. The only exception to the association with mineral price booms is Argentina. Brazil was until recently also an exception, but ran a deficit in the last quarter of 2007 and is likely to run one for the whole of 2008.

 

 

Argentina

 
In argentina, the accumulation of reserves is mainly borrowed (and thus more unstable since as easy as they entered the country, they can leave it; and capital controls never work.
 
 
 

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