On the whole, Latin America has benefitted from a boom in commodity prices over the last few years. The region is an important supplier of a large number of products for the agricultural, mining and energy industries that make up the basket of international commodities, whose nominal value almost doubled between 2003 and 2013. The real rise (discounting inflation) reached 50%, thereby helping to improve these countries' real terms of trade. The prospect of prices softening (see the article «The trend in commodities: a long-term view» in this Dossier) raises the question of to what extent the region's main economies can withstand this new scenario, as well as the responses that might be made by economic policy.

To analyse this issue, a good starting point is by taking a look at the most important countries' dependence on commodities. A recent report by the IIF combines an overall view of the situation with details to draw some revealing conclusions.1 The first is that Mexico does not seem to be very vulnerable: while in most of Latin American countries exports of commodities represent between 97% and 66% of all international sales, in Mexico they only account for 26%.

But the other countries analysed –Argentina, Brazil, Chile, Colombia, Ecuador, Uruguay and Venezuela– do show a high dependence on commodity exports. Moreover, it is possible to analyse these vulnerabilities even further if we consider that concentrating exports in just a few products is an added risk factor. The general tone observed is that, unfortunately, a small number of product categories concentrate most exports at a national level. With the exception of Brazil, which benefits from a relatively diversified product portfolio, between 60% and 70% of each country's exports are of only one type of commodity: Argentina and Uruguay specialise in agriculture; Venezuela, Colombia and Ecuador in oil and other energy products; and Chile and Peru in mining (see the graph).

Having reached this point in our analysis, the next step is to quantify the possible impact on economic growth of any price changes in commodities, an exercise that has actually been carried out by another recent study, this time by the IMF.2 The Fund has analysed the relationship between commodity prices and economic growth in Chile, Peru, Ecuador, Uruguay, Brazil, Colombia and Bolivia under three different scenarios. The first is where «stable prices» dominate, with commodity prices remaining constant at their 2013 average levels. The second, in which the IMF assumes a moderate decrease, is based on the market prices of commodity futures at the time of the study (February 2014). Lastly, the third adverse scenario assumes that all commodity prices fall by 10% more than those implied by the «futures» scenario. The general conclusion drawn from this analysis is that, even in the most benign scenario (namely «stable prices»), projected growth for 2014-2019 would be lower than that recorded in 2003-2013. Specifically, it would be 1.2 percentage points lower in the «stable prices» scenario, 2 points lower in the «futures» scenario and 2.5 points lower in the adverse scenario, as shown in the graph.

To throw some light on different countries' sensitivity to commodity trends, the IMF also provides explicitly individualised information on projected growth under the «stable prices» scenario. Even under this scenario, all the countries analysed would see a slowdown in growth in 2014-2019 compared with their average in 2003-2013. Specifically, the order of countries, from the most to the least affected, is as follows: Peru, Ecuador, Bolivia, Uruguay, Brazil, Colombia and Chile.

Taken as a whole, the results of the IMF study show that South America is relatively sensitive to commodity price shocks and, should the most adverse scenario take place, it would see its growth reduced to less than half that recorded in 2003-2013. However, the Fund itself admits that the model used for its estimates may be magnifying the negative impact to some degree since it does not take into account the improvements made over the last few years in the framework of economic policy in many of the region's countries.

This issue has been tackled by a third study, in this case by the BIS.3 Traditionally, emerging countries have been less able to implement contracyclical policies than developed countries with a more solid economic policy framework. Many Latin American economies, as well as emerging economies in other regions, would typically have highly procyclical policies, accentuating very volatile growth profiles. The classic pattern was one of fiscal policy managing to gain leeway during boom periods with monetary policy often subordinated to the former. This situation has been gradually changing as many emerging economies, including Latin America, have built up a much stricter fiscal framework, strengthening their central banks with the aim of controlling inflation.

The BIS confirms that, since 2000, numerous emerging economies have been able to successfully adopt contracyclical policies. In fact, in some cases they have even achieved the intensity seen in advanced economies. The BIS estimates are based on data from 2000 to 2011 for Brazil, Mexico, Colombia, Peru and Chile. One initial conclusion is that the degree of countercyclicity in the monetary policy of the first three countries is similar to that shown in many countries within the euro area. The case of Chile stands out, however: its fiscal policy has the most active role in compensating the ups and downs of the cycle, to an extent that is actually greater than that observed in most euro area countries. This is the positive result of gradually building up what is probably the best economic policy in Latin America to guarantee macroeconomic stability.

In short, and going back to our initial question, could Latin America withstand a downturn in commodities? The answer is that, in general terms, the impact of a sharp drop in prices would also be seen on their growth rates. Fortunately, this hypothetical situation would occur at a time when many of these countries are benefitting from significantly more solid economic policy frameworks than in previous decades. Even if there is no sharp drop in commodities, which is a more likely scenario, they clearly have a lot of leeway to take countercyclical action, which will be crucial in the future.

Àlex Ruiz

International Unit, Research Department, "la Caixa"