Amid fears of a perfect storm of spiking US rates and a sharp Chinese slowdown breaking over the region, leading economists have urged Latin American policymakers not to abandon the economic reforms that have so far kept the region from recession.
However they insisted countries would remain under pressure this year as the looming monetary tightening in the US and the China-related soft commodity prices acted as a drag.
The Institute of International Finance (IIF) said that sound economic policy was the solution. “This is not rocket science,” said Ramon Aracena, its chief Latin America economist. “The recipes are here. Do your homework and you will see that the possibility of contagion is more limited because people trust you.”
The IIF said economic expansion was likely to decelerate to 2.1% this year compared to 2.4% in 2013. In 2015, the positive impact of Mexico’s reforms and a recovery in Brazil should help push the regional average to 2.7%.
Rodrigo Vergara, central bank governor of Chile, said the region would probably grow less this year than last year. “Mexico and Brazil together add up to 62% of the region’s GDP. It is not only that they affect the weighted average with their slower growth, but they also are where many of the countries in the region can export manufactured goods.”
However, Charles Collyns, managing director and chief economist of the IIF, insisted that the US/China double-whammy was not likely to result in a substantial capital flight. “Pessimism is overdone,” he said in an interview with Emerging Markets. “We think there is a reasonable outlook for stabilization of capital flows in emerging markets, including in Latin America. In fact there has been a gradual increase lately.
“Capital has continued to flow in a positive direction towards capital markets. There has been a pick-up in February and March. We think that this trend can continue.”
The macroeconomic situation has remained unstable in some countries like Argentina and Venezuela, but most Latin American policymakers have achieved a good level of credibility, including Brazil’s central bank, according to Collyns who added that other countries had “gaps in their policy framework”.
He said the China slowdown would have a greater negative impact on exporting countries than US monetary policy. A combination of both would harm Brazil, Chile and Peru, he said.
China has several problems to solve including credit growth, the shadow banking system and signs of overheating in various sectors that may lead to restrictive measures, which in turn may affect Latin America, according to the Mexican deputy governor of the central bank Manuel Sanchez.
Craig Botham, emerging markets economist at Schroders, said Brazil and the other members of the so-called “fragile five” group of emerging markets had made the adjustments needed to reduce current account deficits.
He said that the situation was less worrying than six months ago but added: “They are still dependent on these flows. They are balancing a big chunk of economic activity through foreign money and that foreign money is about to get more expensive and hurt activity.”
Nicolas Cowley, Henderson Global Investors’ head of Latin American equities, said the markets had got used to the impact of the tapering of US quantitative easing.
“It is a headwind for EM for the next couple of years, but it is perhaps better understood by investors because it has gone from an unknown impact to us seeing how it affects the economy and it really isn’t as bad as people initially feared,” he said.
Peru Economy and Finance Minister Luis Miguel Castilla said there had been a “normalization of the conditions in the world. The major hit was taken around a year ago, when the announcement that tapering would start was made. A rebalancing has been going on that has already been internalized by market.”
So far GDP growth has been somewhat disappointing. Enrique Garcia, president of CAF, said Latin American would grow by around 3% this year, but should in fact grow by twice as much.