Emerging markets make ‘smaller mistakes’

The quality of policymaking in emerging markets is now better than in advanced economies “in cyclical terms”, because they tend to make “smaller mistakes,” the Insitute of International Finance (IIF) vice president Phil Suttle said on Friday.

Suttle, who is also the chief economist of the Washington-based think tank, said policymakers in the US, European Union and other developed countries had a tendency “to spend too much time looking at the rear view mirror” and trying to address old issues.

While emerging markets were still facing a series a downside risks amid a troubled global economic environment, they had a better record, especially as far as monetary policy is concerned, but part of that was because there is now a “very deflationary global environment,” he said.

“In a funny sense you could even argue that the weakness in the mature economies is actually a good thing for the emerging economies, because it’s like the flip side of what happened in the 70s and the 80s when the weakness in emerging economies was a good thing for disinflation in the mature economies. Now it’s kind of the other way around, and it gives them the chance to grow more rapidly for a sustained period,” he said.

Suttle added that he saw some more easing in Asia, especially in India, whereas Brazil is “probably” at the end of its easing cycle, after cutting its benchmark Selic rate for 525 basis points since August last year.

But not everybody is convinced, as some observers already question the sustainability of Brazil’s policy. “Inflation is no longer the main issue in Brazil, but it may well become again. Because the way it is, the way they have been cutting down interest rate, there is no way the supply can meet the demand,” said a former World Bank official who did not wish to be named.

Indeed, some inflation concerns do persist in Brazil. “One concern we have is inflation,” said Ramon Aracena, chief economist at the IIF. “The labour market is already very tight, and the exchange rate policy does not allow [the economy] to absorb shocks. Real wages have continued to grow, so there is a good chance than inflation will be more than 6% next year,” he said. The central bank’s inflation target is 4.5%, with a margin of two percentage points on either side.

In comments to Emerging Markets, he said sentiment data was “severely down” in Europe but he was looking for an improvement in the coming months, with confidence rising over improving economic data, he said.

“Both France and Italy reported robust industrial production data in July and August versus the second quarter. This is consistent with signs that we are starting to see the beginning of the end of Europe's economic crisis," Suttle said.

But he warned that there was a “very real probability” that the US, currently laboring through a tepid recovery, sinks back into recession in early 2013, he warned.