Capital inflows threaten to destabilise Latin America

Large capital inflows to Latin America have resumed in recent months. If we are right in expecting the euro-zone crisis to worsen later this year, then risk appetite is likely to deteriorate and lead to a reversal of capital flows to emerging markets. But if we are wrong, and the region continues to receive large inflows, there is a threat of overheating and asset price bubbles. Most at risk of overheated growth are Brazil and Colombia, while the Mexican equity market is already looking expensive.