Latin America's economic boom is vulnerable to any potential fall in commodity prices and the region could suffer a crisis if policy makers did not handle the present windfall wisely, senior officials at the International Monetary Fund have said.
Latin American governments, particularly Brazil, needed to keep public spending under control and try to manage a "double bonanza" of large foreign fund inflows and favourable trading conditions.
"If a big correction comes to the fore ... capital could stop coming into the country all of a sudden and you could have a big financial crisis," Nicolás Eyzaguirre, IMF director for the western hemisphere, told a seminar in Rio de Janeiro, as quoted by Reuters.
Brazil's economy grew at its highest rate in decades last year on the back of high commodity prices, inflows of money from abroad and a rise in state-backed credit.
The economy has continued to boom this year as a new class of consumers among the working and lower middle classes buy homes, appliances, cars and motorbikes.
But there is growing concern that the boom in Brazil and some other Latin American economies is overly reliant on demand for the region's commodities from Asia, particularly China.
Tony Volpon, head of emerging markets research for the Americas at Nomura, said: "If you were to call me and say China's going to fall out of bed, Brazil certainly would be on the top of the list of countries to short."
Sluggish economies in the developed world have also led to a flood of liquidity into Latin America and other emerging markets in search of higher growth opportunities.
Analysts warn that if Latin America is to sustain the benefits of the present boom, it will need to save more and invest more in infrastructure.
Improvements in productivity will help to sustain a structural shift in regional economic growth and development.
Mr. Eyzaguirre, a former Chilean finance minister, said a downward shift in commodity prices could force a sudden correction in Brazil's currency, the real, against the dollar.
Mr. Eyzaguirre said Dilma Rousseff, the Brazilian president, should continue to "rein in the economy through an array of measures to avoid excessive exuberance, or it could end in tears." A crisis could hurt those investors who have borrowed abroad to invest in real-denominated assets onshore in Brazil, which attract high interest rates.
The warning is disputed by many investors and economists in Brazil, who argue that the country is on a sustainable development path. They argue that Brazil has lifted millions out of poverty through government social benefit programs in recent years.
And while credit has grown rapidly, consumer credit and mortgages remain low as a percentage of gross domestic product compared with levels in the U.S. before its crisis.
Mr. Eyzaguirre also cautioned about spending freely in boom times. "We are much more prone to overspend in good times than other parts of the world. We have to watch carefully that this won't be the case any more."
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