IMF warns Latin America's boom could end in crisis

Latin America's economic boom could end in a "full-blown" crisis unless the region's governments properly manage the situation, the International Monetary Fund's top regional official said in an unusually stark warning to both policymakers and investors on Thursday.
Nicolas Eyzaguirre, the IMF's director for the western hemisphere, said that Latin America's economic fundamentals appear to be in good shape. Yet he urged policymakers to take steps to keep their economies from overheating, and set aside as much of the windfall from the current boom as possible.
Otherwise, he told a conference of central bankers in Rio de Janeiro, the region could see its currencies dramatically weaken as a result of a sudden external shock - such as, he said, a fall in global commodities prices or an unexpectedly fast increase in interest rates in the United States.
-- Commodities' price fall could spark chain reaction Eyzaguirre honed in on Brazil, saying that the government of President Dilma Rousseff should continue to "rein in the economy through an array of measures to avoid excessive exuberance, or it could end in tears."
"If a big correction comes into the fore ... capital could stop coming into the country all of a sudden and you could have a big financial crisis," he added. Eyzaguirre's remarks amounted to one of the strongest warnings to date by a senior official of the near-term dangers posed by Latin America's recent run of prosperity.
While he tempered his speech with praise for policymakers' efforts so far, he also criticised Latin America's record of overspending during good economic times. He warned investors not to overexpose themselves to the so-called carry trade in Brazil's real currency, which he said could face weakness ahead. Eyzaguirre's comments come as the real and some other regional currencies have weakened in recent days in tandem with global commodities prices. Concerns over demand in China, a main buyer of Latin America's commodities, have prompted some to ask whether regional growth will shift into a slower phase.
"There is a very good chance that prices could change quickly and abruptly," said Jorge Knauer, treasurer of Banco Prosper in Rio de Janeiro. "The drop in commodities prices has the same impact as a reduction in liquidity through interest rates. When commodities fall, the region's currencies will fall with them." Others saw longer-term reasons for concern.
"It sounds like he's asking whether the region is doing enough to prepare for the proverbial rainy day," said Gray Newman, head Latin America economist for Morgan Stanley. "The risk is that policymakers get too comfortable (with growth) and don't feel the kind of urgency to really prepare for what might be ahead." Eyzaguirre said a moderate correction in global commodities prices could particularly affect appetite for the real, and warned investors should not overexpose themselves to the carry trade in Brazil's currency. With interest rates near zero in many developed economies, investors have been borrowing money cheaply abroad to pour into higher-yielding assets in Brazil, where interest rates remain among the world's highest at 12 percent.