Many fear the possibility of interest rate hikes and a global recession if the “Chinese addiction” to buying dollars comes to an end, expressed the IDB Chief Economist, Guillermo Calvo. But the seven largest economies in Latin America (Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela, also known as the LAC-7) are currently growing fast. Stock prices went up 174% in the past two years, bank credit and foreign investment are increasing, and commodity prices have also enjoyed a boost.
External factors should remain favorable for these economies, stated Calvo, while global imbalances, specifically the United States deficit, should not create imminent problems for Latin America. The interest rates in the U.S. have remained low and when examining U.S. public debt as a percentage of GDP, the country’s debt levels are actually lower than other industrialized countries, with room leftover to absorb the current fiscal deficit.
According to Calvo, “current imbalances are sustainable, interest rates are low and investment is increasing”. Even if the interest rates do rise, it would not be by much. Despite concern in the U.S. regarding rising short-term interest rates, long-term rates continue to fall.
Bank credit to the private sector has increased in Argentina, Brazil, Chile, Colombia, Mexico and Venezuela, and where it has not risen, it has not fallen either. This favorable situation coincides with price increases of several Latin American export commodities, such as oil, metals and foods.
Argentina, Chile, Colombia, Peru, Uruguay and Venezuela have received increased investment, stated Calvo, with national reserves also increasing. “This accumulation shows that we are doing well largely due to external conditions,” stated the chief economist.
The region's fiscal balance has improved to a current -1% of GDP, noted Calvo, adding that “this is not because of adjustments, but rather because of external conditions that have improved fiscal results and generated less public debt.”
However, this success comes at a price, warned the IDB Chief Economist: currency appreciation. The fall of the dollar reduces the competitiveness of Latin American economies.
Financing the U.S. deficit
The governments of the world are currently financing the U.S. deficit. China is buying U.S. Treasury bonds in amounts equivalent to 31% of the country’s deficit, while Asia represents a staggering 75%.
Asian Central Banks Finance the US Deficit
To buy U.S. dollars, central banks sell bonds to their domestic private sector, so it is actually private companies worldwide who are lending to the U.S government.
If Asian Central Banks stop buying U.S. government bonds, the private sector will directly buy the bonds in dollars, stated Calvo. This would possibly be more expensive, but the financing would not be interrupted. However, things would get bad if private sector savings decreased "like they did in the Russian crisis,” warned Calvo. “If the savings rate of China or Japan decreased, then there would be a problem.”
The oil price scare
The IDB chief economist clearly stated that the problem of oil prices has been overrated. The current price is $60 a barrel, and it reached $100 a barrel in 1980 at today’s prices, said Calvo, and the market does not anticipate a major increase.
Regarding dependency on oil, the United States, Europe and Japan have all reduced consumption by half since the 1970s. In Latin America, change has been less pronounced, but there's no expectation of a large increase in global demand for oil, seeing that consumption has decreased and prices have not risen to alarming levels.
If oil prices went up to $80 a barrel, according to the International Monetary Fund (IMF), it is possible that global growth would be reduced to a mere 1%.
The financial impact of this would not be severe, sustained Calvo. “Any rise in oil prices is good for oil producers, but when prices stop climbing or decrease, it can be catastrophic for them since in some cases spending has increased at a similar pace.”
Overall, the increase in oil prices has been a positive development for the region, expressed Calvo. However, the situation is a little different in Central America, where oil represents 20% of imports, he concluded.