by Rob Dwyer
A report by the Inter-American Development Bank suggests that fast-growing Latin American economies will need to implement macro-prudential policies to counter exchange rate appreciation. The use of these tools – which include capital controls, liquidity regulations and capital requirements and provisions – to combat the currency appreciation caused by high levels of capital inflows is contentious and was the topic of much debate at the IDB’s annual meeting in Calgary over the weekend.
Alejandro Izquierdo, co-author of the IDB report, One region, two speeds – challenges of the new global economic order for Latin America and the Caribbean, told Euromoney that avoiding “excessive exchange rate appreciation... will require very good macro-economic management to make sure that you don’t have overheating”. Izquierdo says that monetary policy alone will be ineffective in combating currency appreciation in countries that the report designates as the faster-growing “Brazil cluster” because raising interest rates would increase capital inflows from abroad, thereby putting pressure on the exchange rate.
The report’s “Brazil cluster” is essentially the southern, commodity-exporting countries whose exports are aligned to other emerging markets, notably China. They are distinct from the slower-growing “Mexican cluster” of, largely, central American and Caribbean states that are less commodity rich and whose exports are aligned with industrial economies, notably the US.