Banxico’s Carstens Says Emerging-Market Decoupling a Mirage

Emerging markets haven’t decoupled from developed nations and must take steps to protect their economies from the effects of potential capital withdrawal, according to Mexican central bank Governor Agustin Carstens.

“The hypothesis of emerging-market economies decoupling was more a mirage than reality,” Carstens said today in a speech hosted by the Economic Club of New York. “The main risk to emerging markets is to be confronted with sudden massive capital reversals, which so far have not happened.”

The primary challenge for emerging-market economies is stimulating growth without compromising economic stability amid worldwide volatility, Carstens said. He urged developing nations to bolster macroeconomic fundamentals and policies, keep inflation under control, maintain a strong balance of payments and keep large international reserves.

“This takes us down the road of structural reforms, which have huge potential in emerging-market economies,” Carstens said. “This is the hard way to achieve sustainable GDP growth, but it is the only reliable one that is left.”

Capital withdrawal may be spurred by developing nations’ own vulnerabilities, such as poor economic management and current-account imbalances, Carstens said. It could also be sparked by abrupt changes in monetary policy in advanced nations, an interruption in the European Union’s economic recovery, financial-market contagion or rebalancing in investor portfolios, he said.

While a coordinated policy response between emerging and advanced economies would be desirable, it doesn’t look feasible because governments in rich nations need to deal with their own problems, Carstens said.

Growth Pickup

Mexico’s economic expansion in the first quarter was slower than expected in part due to bad weather in the U.S., the country’s main trading partner, according to Carstens.

A pick up in the world’s largest economy combined with Mexico’s economic overhauls, which include opening the energy industry to more private investment and encouraging more competition in telecommunications, can boost potential annual growth to a level close to 5 percent at the end of President Enrique Pena Nieto´s administration, he said.

Carstens also said the nation’s tax increase package that went into effect in January will help diversify the government’s revenue base away from the energy industry and state-owned oil producer Petroleos Mexicanos, known as Pemex, which funds about a third of the federal budget.

“Remember that President George W. Bush used to say ’We Americans are addicted to oil?’” Carstens said, repeating a phrase from a 2006 speech by the president. “We Mexicans have become more addicted.”

Mexico posted a preliminary trade surplus of $976 million in February, a report showed yesterday, while economists surveyed by Bloomberg forecast a $200 million deficit. The economy will grow 3.25 percent in 2014, compared with a 1.1 percent expansion last year, according to the median forecast in a survey by Bloomberg.

Before it's here, it's on the Bloomberg Terminal.