Analysis: Spoonful of reforms helps Latin America capital flows go down

Mon Mar 4, 2013 7:06am EST
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By Krista Hughes

MEXICO CITY (Reuters) - Bumper capital inflows to Latin America are putting the spotlight on shock-proofing policies to help economies digest the rush of investment - and guard against the inevitable exit.

Foreign investment inflows to Latin America were more than $280 billion in 2012, according to balance of payment data from countries covering 75 percent of the region's economic output, similar to the flows registered in 2011 as low interest rates in developed economies pushed investors to seek returns elsewhere.

According to the Institute of International Finance, Latin America outpaced other emerging market regions as a magnet for foreign capital in 2011 and 2012, taking the relative size of economies into account, a trend it expects to continue in 2013.

Rapid inflows can push up currencies, cause domestic demand to overheat, create asset price bubbles and fan inflation, but can be offset by tighter fiscal policy and reforms to boost economic efficiency. Peru and Chile have already done much of their homework, but reforms are pending in Mexico and Brazil.

"Currency appreciation pressures are a problem if they are too intense but it's also an opportunity to jump start structural reforms in order to improve productivity, which is one of the Achilles' heels of the region," said IIF Chief Latin America Economist Ramon Aracena.

Data show Peru and Chile are Latin America's foreign investment hotspots, with capital inflows, including banking, direct and portfolio investment, worth more than 10 percent of gross domestic product last year.

Mexico and Colombia follow, with inflows equivalent to around 7 percent of GDP, while Brazil - which has erected strict barriers to speculative financial investment - attracted inflows worth about 4 percent of GDP last year, down sharply.


Mexico's central bank governor Agustin Carstens speaks during a Monetary Authority of Singapore lecture in Singapore February 5, 2013. REUTERS/Edgar Su