The Challenge of Moderate Commodity Prices in Latin America
IMF Blog, March 25, 2019
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Bibliographic details
- Authors: Christian Bogmans
- Published: March 25, 2019
Overview
- Title: The Challenge of Moderate Commodity Prices in Latin America
- Author: Christian Bogmans
- Date: March 25, 2019
- Core message: Stable and moderate commodity prices imply that Latin America and the Caribbean cannot rely on commodity-driven growth to the same extent as in the past and must pursue alternative sources of inclusive growth.
Commodity dependence
- The region is rich in fertile lands, mineral ores, and oil, natural gas and coal deposits.
- Leading exports by country examples:
- Coffee: Brazil, Colombia, Central America
- Copper: Chile, Peru
- Iron ore: Brazil
- Oil and gas: Bolivia, Colombia, Ecuador, Mexico, Trinidad and Tobago, Venezuela
- Soybeans: Argentina, Brazil, Uruguay
- Because the region’s economies rely heavily on exporting commodities:
- Economic activity, government revenue, and current account balances are susceptible to commodity price shocks.
- Previous IMF research: growth in Latin America is highly correlated with commodity price changes.
- External influences and scenarios:
- Given China’s large weight in commodity markets, a US-China trade deal could lead to a rebound in commodity prices.
- The rebound would benefit the region’s energy and metal exporters, but not necessarily the region’s agricultural exporters, which have benefitted from recent trade tensions through a premium on the price of their soybeans.
- The ongoing El Niño phenomenon—the climate pattern of ocean water warming—could hurt agricultural exporters, but higher food prices could partly offset this effect.
Regional impact
- The impact of commodity price shocks differs across countries depending on the composition of their commodity exports and imports.
- Analytical tool: commodity terms-of-trade indices provide the ratio of average commodity export prices to average of commodity import prices.
- This index captures which countries would benefit and which would suffer from a specific change in commodity prices.
- Example: when oil prices fall as in late 2018, net oil importers such as Chile and Uruguay benefit, while net oil exporters such as Colombia and Venezuela suffer.
- Previous studies have found:
- A rise in the commodity terms-of-trade boosts economic growth temporarily.
- This effect is particularly evident in economies with large commodity exports as a percentage of GDP.
- Growth returns to its pre-shock level once investment and consumption have adjusted to the higher terms-of-trade level.
The way forward — findings and policy priorities
- Findings:
- The short-lived rise in commodity prices from early-2016 to mid-2018 helped boost growth in Latin America and the Caribbean, particularly in the Andean countries.
- The outlook of stable prices indicates that commodity prices are unlikely to be a significant growth engine for the region in the coming years.
- Key policy priorities to accelerate inclusive growth:
- Further opening to trade and foreign direct investment
- Streamlining regulations in the goods and labor markets
- Promoting competition
- Investing in infrastructure and education
- Preserving or expanding well targeted social programs
Source: The Challenge of Moderate Commodity Prices in Latin America — Christian Bogmans, March 25, 2019.