by Otaviano Canuto | August 20, 2015 12:28 pm
The end of the upswing phase of the commodity price super-cycle, after its peak in 2011, has lowered economic growth prospects in most of Latin America. While that broad statement can hardly be disputed, Chapter 3 of the latest IMF Western Hemisphere Regional Economic Outlook calls attention to underlying significant differences among countries in the region. Growth implications of the commodity price evolution have varied substantially as a result of commodity-specific price patterns and country-specific exposures and composition of commodity specialisation.
Figure 1 depicts the three broad groups of commodity prices as following an overall common cyclical path since 2002. After a strong upswing lasting until the 2008 financial crisis, and a subsequent recovery from the plunge, mid-2011 has been dubbed the “sunset of the super-cycle”. Prices definitely ceased to climb during the plateau period (shaded area) and the three groups have all moved to lower levels after mid-2004.
However, Figure 1 also shows that evolution is taking place with different intensities. As we highlighted two years ago (Canuto, 2013), the dynamics of fundamentals in terms of relative supply and demand trends in the markets for each group were then divergent enough to lead to differences like those identified during the plateau period. In the case of crude oil, sector-specific supply-side developments were responsible for the sudden fall during the second half of 2014. The differentiation is starker when one disaggregates the three groups.
A net exporter (importer) of a commodity enjoys (suffers from) a manna-from-heaven gain (thunder-from-heaven loss) when its price increases. The extent to which that price retreats back after the end of the upswing phase determines how much of that gain (loss) is reduced – or even possibly reversed. Therefore, country-specific impacts of the commodity price super-cycle have depended on which commodities – and how much of each of them – a country exports and imports.
The IMF[1] Regional Outlook brings estimates of country-specific “commodity terms of trade” (CTOT) indices across the region. Those are indices in which price changes of individual commodities are weighted according to their (net) export value, and are then normalised by GDP. A certain increase (decrease) in CTOT is thus a way to gauge the net gain (loss) of commodity price movements in GDP terms.
Figure 2 exhibits cumulative changes in CTOT indices from average levels in 2002 to mid-2011 (the sunset of the super-cycle), August of 2014 (when the sudden plunge of oil prices started), and February of 2015. At least four aspects come to the fore:
Take the case of Brazil. It is true that ups and downs in neighbours’ economies more cyclically affected by commodity prices also weighed on its performance as a consequence of their relevance as markets for Brazilian manufactured products. However, it looks hard to state that the recent performance and macroeconomic prospects of Brazil can be predominantly explained by the commodity price super-cycle.
Otaviano Canuto is the executive director at the Board of the International Monetary Fund (IMF) for Brazil, Cabo Verde, Dominican Republic, Ecuador, Guyana, Haiti, Nicaragua, Panama, Suriname, Timor Leste and Trinidad and Tobago. Views expressed here are his own and do not necessarily reflect those of the IMF or any of the governments he represents.
Mr. Canuto has previously served as vice president, executive director and senior adviser on BRICS economies at the World Bank, as well as vice president at the Inter-American Development Bank. He has also served at the Government of Brazil where he was state secretary for international affairs at the ministry of finance. He has also an extensive academic background, serving as professor of economics at the University of São Paulo and University of Campinas (UNICAMP) in Brazil.
Note from the author: adapted from my presentation at the Workshop on Commodity Super Cycles, jointly organised by the Bank of Canada and Federal Reserve Bank of Dallas, Ottawa, at the Bank of Canada Headquarter on 27-28 April 2015.
The views expressed are those of the author and do not necessarily reflect the views of the IMF.
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