Latin America’s economic bonanza

Latin America has a new swagger. Last week, Time Magazine chose Luiz Inácio Lula da Silva, Brazil’s president, as the world’s most influential leader. Manmohan Singh, Mr Lula da Silva’s closest “Bric” counterpart, limped in at 19th. Even Barack Obama only came 4th. Meanwhile, on the same day, Francisco Luzón, head of the Americas at Santander, Spain’s biggest bank, said he believed Latin America had “the best financial system in the world”. Mr Luzón’s praise is rich with self-interest. The region’s banks may or may not be “best”; they are certainly among the most profitable. Still, it is true that Latin America had a good recession last year. Venezuela aside, it is also enjoying a good recovery. What would be wrong is to think this is all down to its own efforts. Indeed, the biggest financial danger now facing Latin America is complacency, especially in Brazil. After all, the worst falls often come just when you are strutting your stuff.

Luck has played a large role in the region’s recent good fortune. Scarred by past crises, its banks spent much of the noughties at home rather than venturing abroad. They therefore avoided the sub-prime junk that so poisoned their peers in the west. The Asia-driven commodity boom then kept much of Latin America going through the worst of the global downturn. Near-zero US interest rates also deluged the continent with cheap money. Either of these last two factors would be enough to sustain a boom – and they often have in the past. But Latin America is enjoying them both at the same time. As the International Monetary Fund warns in its latest regional outlook, it is an unprecedented bonanza.

The challenge is how to best feast on the bounty without pigging out. As Nicolás Eyzaguirre, the IMF’s regional director, puts it: “Avocados are good; so are cream, whiskey and tomatoes. But mixing them all together makes you pretty sick.” Sovereign wealth funds have absorbed some of the windfall. Allowing currencies to appreciate – as Brazil and Colombia have done – may, in time, curb portfolio inflows, although extreme currency strength brings problems of its own. Meanwhile, long-needed investments in infrastructure, such as ports and roads, are a sensible public use of funds.

Even so, there may still be a surfeit of capital. Brazilian credit is growing at a 47 per cent lick, and house prices are rising in Rio de Janeiro by around 50 per cent a year. Just two early warnings of a post-boom headache yet to come.