After skyrocketing over the past decade, commodity prices have remained stable or eased somewhat in Latin America and the Caribbean since mid-2011; and most projections suggest they are not likely to resume the upward trend observed in the last decade.
This is according to a recent paper by the International Monetary Fund (IMF). The analysis suggests that growth in the years ahead for the average commodity exporter in the Region could be significantly lower than during the commodity boom, even if commodity prices were to remain stable at their current still-high levels.
Slower-than-expected growth in China represents a key downside risk. The results caution against trying to offset the current economic slowdown with demand-side stimulus and underscore the need for ambitious structural reforms to secure strong growth over the medium term.
Many analysts now argue that the upward phase of the commodity “super-cycle” that started in the early 2000s has run its course. According to the IMF, indeed most market futures and analyst forecasts show commodity prices softening further in the near term, reflecting an anticipated increase in commodity supply along with weaker demand from some of the major commodity-importing economies, notably China.
“While these projections are subject to large uncertainty, there is nonetheless a wide consensus that the period of ever-increasing commodity prices has come to an end. What would this imply for the commodity exporters of Latin America and the Caribbean (“LAC” hereafter)? The Region is highly dependent on commodities and has greatly benefited from the recent commodity boom.”
According to the paper, average annual output growth in the Region increased from less than 2.5 per cent between 1980 and 2002 to more than four percent in 2003-11.
Deceleration
More recently, however, growth has decelerated considerably. Average output growth fell from 4.6 per cent in 2011, to 3.1 per cent in 2012 and 2.7 per cent in 2013. Some observers claim that the recent economic slowdown across the Region is primarily linked to the end of the upswing in commodity prices, raising obvious concerns for the future.
Others have downplayed these concerns, pointing out that commodity prices are still higher than in the mid-2000s, let alone in the 1990s, the IMF stated.
According to the IMF, for most countries in the Region, the outlook is characterised by a sharp decline in the growth rates of their country-specific commodity price indices. The level of these indices is nonetheless projected to remain well above the averages attained during the boom years.
“We then investigate whether it is the lower growth of commodity prices or their still-high levels that will matter the most for output growth in the Region over the coming years. To this end, we use a variant of the dynamic multi-country GVAR model originally proposed by Pesaran, Schuermann, and Weiner, an approach especially designed to model the interactions between many countries.”
Correction models
The IMF said in a first stage, individual vector error correction models are estimated for a large set of countries. These country-specific models are linked to each other by including foreign variables and, in the second stage, stacked into a global model in which national and global variables are determined jointly.
“Our model specification considers 13 LAC economies, including the 12 largest commodity exporters in the Region, and includes a broad set of global variables related to commodity prices. The model is estimated on annual data from 1970 to 2013, and used to generate conditional out-of-sample GDP growth forecasts under different commodity price scenarios over the period 2014-19. We also use the model to assess the potential impact of slower-than-expected growth in China on commodity prices and output growth in LAC.”
The IMF said its quantitative exercise suggests that the end of the commodity price boom implies a significant drag on growth for the commodity exporters of LAC.
“Even if prices were to remain stable at the relatively high levels observed in 2013, the annual average output growth rate over the medium term (2014-19) would be almost one percentage point lower than in 2012-13, and more than 1½ percentage points lower than during the boom years. Projected growth is even a bit weaker when we condition on the path for spot commodity prices suggested by futures prevailing at end-February 2014. Our simulations also confirm that a slowdown in China’s growth represents a key downside risk for commodity-exporting countries across LAC.”
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