Latin America will withstand the fallout from the first hikes in interest rates since 2006 by the US Federal Reserve, leading analysts said amid growing speculation the first increase will not come until next year.
The region has been braced for tighter monetary policy for two years since then Fed chairman Ben Bernanke announced plans to withdraw liquidity from the US financial system.
The next step in the process, which analysts believe will lead to an appreciation of the US dollar against emerging market currencies, will be to begin raising the Fed funds rate from its current level of 0%-0.25%.
But analysts believe that despite the depressed economic state of the region, most LatAm economies will be able to ride out the pressure. “Everyone has been discussing this for a while, so it is really not much of a surprise,” said Mauro Leos, Latin America credit officer at Moody’s.
Even when rates do start to rise they will increase from almost zero to what will still be a very low level by historical standards, one senior banker pointed out. “I don’t think you are looking in the near term at a dramatic increase in your absolute cost of funds.” he said. “Any interest rate rise will be compensated by a compression in your credit spread.”
Ramon Aracena, chief Latin America economist at the Institute of International Finance (IIF), said it was important to remember that the reason that rates would rise was that the US economy was in recovery mode.
“Even though you have borrowing costs going up, you also have the engine of growth of the US economy to support those economies that have cross-linkages with the US,” he said.
He pointed to Mexico, Colombia and, more generally, all the members of the Pacific Alliance trade bloc that all have free trade agreements with the US. “They will have more demand coming from the US, and they have preferential access to the US market,” he said.
However Roberto Sifon-Arevalo, a managing director for Latin America at Standard & Poor’s, warned that there would be “volatility” when rates started to climb.
“When you look at the world, you don’t need to be very shrewd to see at least 10 things that can go wrong and will change the entire spectrum of the global economy. A year ago we were not talking about oil at $50.
“Volatility is tremendous. If and when interest rates go up the costs of borrowing will be higher, but I don’t think it is going to put debt sustainability in jeopardy. We are not talking about going from 2% to 15%, but to 3.5%. It will be worse, but manageable.”
There are also worries about the further appreciation of the dollar. Moody’s Leos pointed out that LatAm corporates had been borrowing abroad on terms that were quite attractive to them despite paying higher spreads.
“What they did not think that much about is that they would be borrowing in a currency that would appreciate,” he said. “For those LatAm companies that do not have foreign exchange cashflows, that will mean the debt burden is going to be higher.”