Latin America learns the price of growth

Latin America is starting to learn the ironic lesson of its stunning economic growth: with it comes rising currencies and inflation which threaten to reverse many of the gains made. Brazil's real soared on Monday to the highest level against the dollar since 1999, when the South American giant delinked from the US currency. The latest jump came despite efforts by the Brazilian government to contain the rise of the real, once seen as a badge of success but increasingly more a burden. The currency has gained 72.8 percent against the dollar from its value in 2002. The same thing is happening, to a lesser extent, in other Latin American economies -- Mexico's peso has firmed steadily against the dollar, as has Peru's nuevo sol and Chile's peso. According to the agency Economatica, the dollar's purchasing power fell by 52.2 percent in the main regional economies between December 2002 and May 2011. The region expects another year of strong growth in 2010. The UN's Economic Commission for Latin America (ECLA) forecasts that this year the region will expand by 4.7 percent. Panama will lead the way growing some 8.5 percent, followed by Argentina at 8.3 percent. None is worried about contagion from the eurozone or US financial crises. But what is worrying them is inflation and currency appreciation. Surging currencies in general have been strongly positive for regional companies. They have attracted foreign investment and have increased buying power in overseas markets for local firms and the people. This ends up boosting economic growth. But rapid growth also fuels the spiral of inflation, which can eventually snuff out the benefits of growth and also cause hardship for those on the lower rungs of society. And while exporters can earn more dollars for their products, they can also be confronted with rising world prices for raw materials, and their exports may rise in price on foreign markets. "The challenge for Latin America is to avoid growing too fast, and to do that, the central banks have to keep boosting interest rates," said BNP Paribas chief economist for Latin America Marcelo Carvalho. Rising interest rates, though, have proved as much as a problem: they have attracted more foreign funds seeking higher returns in the more dynamic emerging economies. This tends to push up the value of the currencies. Quelling that is both costly and increasingly difficult. Brazil's central bank has spent about $36 billion intervening to slow the rise of the real in the first six months of the year. The government has also slapped taxes on financial transactions to discourage speculative investments from abroad. And last week the central bank again raised its benchmark overnight lending rate by 0.25 points to 12.50 percent -- one of the highest levels in the world. Nevertheles, the real hit the record of 1.53 reals per dollar on Monday marking another 0.9-percent increase from Friday. Brazilian officials have lashed out at the United States for flooding the world with weakening dollars, and at China -- a key economic competitor -- for not floating its currency. For Florencia Carriquiry, from the consulting firm Deloitte in Uruguay, the rise of merging economy currencies "is inevitable." "This brings with it strong inflationary pressures, and at the same time also challenges companies to boost productivity and improve management" to keep up with rising costs, she said. The situation varies from country to country, but overall Latin American economies are showing significant growth. But the governments do not have many effective tools to counter the downside of high growth, the rising currencies and consumer price jumps. "In the case of Uruguay, inflation is already very high. To continue to raise interest rates in this context will just destabilize the currency rates," she added. There is also the external effect of global commodities, especially food. Weather, rising demand and production problems have sent prices of a range of basic food commodities such as wheat and rice soaring in the past year. In Latin America, food prices make up about a quarter of average consumer costs. According to official data, food prices in Brazil have risen by 9.0 percent since November, well above the official inflation rate of 5.6 percent. In Mexico, food prices have tripled, while in Argentina in 2010 they rose 37 percent. No one has an easy answer. "How prepared is Latin America and the Caribbean for managing economic growth? " asked UN executive secretary Alicia Barcena "We must recover the fiscal space in order to be able to take measures to ensure sustained growth with productive employment and equality."