Latin America Should End Stimulus Programs, IMF Director Eyzaguirre Says

Latin American policy makers should withdraw fiscal and monetary stimulus to prevent their economies from overheating before limiting foreign inflows with capital controls, the International Monetary Fund´s regional director said.

Governments should end programs used to bolster economic growth during the 2009 financial crisis and central bankers need to raise interest rates that are low compared with historical averages, the IMF’s Nicolas Eyzaguirre said at the Inter- American Development Bank’s annual meeting in Calgary.

“If you remain in a stimulus mood and add that with what’s coming in from abroad, through high commodity prices and very easy financing conditions, you won’t have enough strength to stop the overheating,” he told reporters yesterday. “You cannot mitigate -- through macro regulation, capital controls or monetary policy -- the strength of these push factors.”

Nations including Brazil and Colombia are trying to curb gains in their currencies, which hurt the competitiveness of their exports, and fight inflation after near-zero borrowing costs in advanced economies such as the U.S. and Japan spurred demand for higher-yielding assets in emerging markets. Brazil has raised taxes on foreign purchases of bonds and stocks.

Some capital controls can be useful when foreign currency inflows become excessive and create distortions in the economy, Eyzaguirre said.

“Capital controls could be perfectly considered as a tool,” Eyzaguirre said. “When tailwinds are very strong you should consider it in your policy toolkit.”

Don’t Work

Still, Mexican Finance Minister Ernesto Cordero said there is no evidence that capital controls have any impact in preventing currency appreciation.

“This creates very strong distortions in the economy,” Cordero said in an interview yesterday. “We don’t believe in capital controls. Interest rates and tighter fiscal policy is the way to do it.”

IMF Managing Director Dominique Strauss-Kahn told the region’s finance ministers over the weekend that the IMF isn’t against the use of some capital controls to curb currency appreciation, marking a divergence from 20 years of macro- economic philosophy, said Juan Carlos Echeverry, Colombia’s finance minister.

Bank of Canada Governor Mark Carney told the 2,000 delegates at the conference that the global recovery could be undermined if policy makers react to the growing power of emerging markets and rising commodity prices with restrictions on currencies and capital flows.

Super-cycle

Emerging markets now account for three-quarters of the world’s economic growth, up from about one-third a decade ago, and commodities are “in the midst of a super-cycle,” Carney, 46, said.

“Many emerging markets are trying to forestall capital inflows and delay necessary monetary tightening,” Carney said. “This in turn is feeding domestic demand, which drives commodity prices up further and leads to more generalized overheating.”

Colombia will prevent a surge in foreign currency inflows from appreciating the peso by taming government spending and leaving some oil money outside of the country, as Chile does with its copper profits, Echeverry said.

“Containing the current inflationary pressures is essential to allow for sustainable growth,” Chilean central bank President Jose De Gregorio said. “Delaying monetary policy adjustment may result in more severe adjustments in the future.”

Brazil’s inflation should converge to target within the next few months as rising agriculture and food prices slow and policy measures reduce credit growth, said Luiz Pereira da Silva, deputy governor of Brazil’s central bank.

Brazilian Prices

“We have excessive capital flows contributing to a rapid pace of domestic credit growth that creates inflationary pressures,” he said in a speech in Calgary. “We identified the need to mitigate risk in some parts of the domestic credit markets.”

Most Latin American governments have not fully withdrawn stimulus to levels before the financial crisis, while their economies have recovered and are running with little idle capacity, Eyzaguirre said.

Economic growth in the region will slow to 4.5 percent this year from 6.1 percent in 2010 as inflation and rising interest rates curb expansion, the Institute of International Finance said in Calgary. Inflation in the region averaged 8.2 percent last year, from 6.2 percent the previous year, the banking group said.

To contact the reporters on this story: Alexander Ragir in Rio De Janeiro at aragir@bloomberg.net; Fabiola Moura in New York at fdemoura@bloomberg.net

To contact the editors responsible for this story: David Scanlan at dscanlan@bloomberg.net; Joshua Goodman at jgoodman19@bloomberg.net