Latin America Can Handle Fed’s Post-Stimulus Effects, IMF SaysJose Enrique Arrioja and Joshua Goodman
Latin American economies are “well positioned” to withstand capital outflows as speculation increases that the Federal Reserve will roll back its stimulus, said the International Monetary Fund’s top official for the region.
Latin American banks are better capitalized than in the past and asset prices aren’t inflated, two important buffers in the event of volatility, Alejandro Werner, director of the IMF’s Western Hemisphere Department, said in an interview. Much of the capital flowing to the region in recent years has come in the form of foreign direct investment and even some portfolio flows are more permanent, reflecting investors’ preference for markets with lower debt levels, said the 46-year-old economist.
As the region prepares for the possible end of the Fed’s $85 billion-a-month program of asset purchases, “there will be a lot of volatility, investors do overreact, but I think these economies are well positioned to absorb these kind of movements,” Werner said. “We won’t see important side effects from these movements in asset prices,” he said at Bloomberg’s office in Washington June 7.
Debate among U.S. policy makers over when and how to dial back the Fed’s campaign has shaken financial markets in developing nations. Brazil last week began unwinding capital controls it erected in 2010 after the real lost 8.8 percent in the past three months, the second-biggest decline among 16 major currencies tracked by Bloomberg.
The Mexican peso advanced 0.3 percent last week, halting four consecutive weekly declines. The currency has tumbled 2.7 percent since Fed Chairman Ben S. Bernanke’s May 22 comments that the U.S. “could” scale back the pace of asset purchases in the “next few meetings” if the labor market improves and the Fed is convinced the gains are sustainable.
“Latin America has not built the type of vulnerabilities that it built in the past that generated this type of, let’s say, capital outflow episode,” according to Werner, former deputy finance minister in Mexico.
Brazil’s Ibovespa has lost 8.5 percent since May 22, while the MSCI Emerging Markets Index gauge has tumbled 6.4 percent and declined for four straight weeks through June 7. Investors pulled $5 billion from emerging-market stock funds in the week through June 5, according to Citigroup Inc.
“This will not generate balance sheet problems, neither in corporate nor in banking, and it’ll alleviate some of the pressures that some sectors of the economy now face with stronger currencies,” Werner said.
The IMF in April cut its forecast for growth this year in Latin America and the Caribbean to 3.4 percent from 3.6 percent, as a weak global economy and a slowdown in Brazil offset consumer demand. The region is recovering after growing 3 percent last year, following a 4.5 percent expansion in 2011, the IMF said in a May 6 report.
The IMF in December reversed its decades-long opposition to capital controls, saying that their targeted and temporary use can help prevent the formation of asset bubbles in times of excessive global liquidity.
Werner defended the IMF’s change of opinion giving the low levels of international interest rates.
“It’s a valid tool,” he said. As global monetary conditions become more normal “the rationale to have these controls disappear and eventually these controls should go away.”