Activity in much of Latin America appears to have picked up over the past couple of months, following the slowdown seen over the second half of last year. But while worries about the overall pace of growth are easing, concerns about its unbalanced nature are starting to resurface. The resumption of large capital inflows, coupled with a rebound in commodity prices and a pick-up in domestic credit growth, has given a boost to domestic demand in a number of countries, notably Brazil and Colombia. But at the same time, strengthening currencies mean that manufacturers are lagging behind. This has echoes of 2010. Back then, policymakers tried to prevent excessive currency appreciation and limit speculative inflows via a combination of FX intervention and targeted capital controls. The authorities in Brazil and Colombia have already embarked on the former – the latter are likely to follow if inflows to the region continue to recover over the next couple of months.
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