LatinFinance - July 2013 - 15

US rates

The Fed is unlikely to act to pull down
long-term yields for fear of choking an
incipient recovery in the US economy and
triggering inflation. “My guess is they will
let long-term interest rates go up. And that
will have an impact on Latin America,”
says Calvo.
“That in itself may have an effect on
the withdrawal of liquidity from Latin
America. People will try to get rid of shortterm bonds. The channel is there and
there is reason to be concerned.”
Liliana Rojas-Suarez, senior fellow at
the Center for Global Development, says
the danger is that rates could rise much
more sharply than any reasonable forecast
today.
“What worries me is that if the Fed
finds itself in a situation where it has to
hike interest rates very quickly, then we
could have a problem,” she says. “Rates
could rise much faster than the market
is currently pricing in. The market could
force it to happen.”
It’s a risk that’s not lost on investors.
According to Ignacio Sosa, emerging
markets product manager at bond fund
Pimco, says that while it’s not the firm’s
base case: “If US interest rates were to rise
significantly, virtually all dollar issuers
whether sovereign or corporate would be
affected. This is especially true of issuers
whose local markets are not developed
enough to serve as an alternate source of
funding.”

currency debt, so there is less worry about
currency weakness.”
But the sheer scale of the liquidity
in the system in the wake of the global
financial crisis has heightened fears that
this round of monetary tightening could
have disastrous implications for emerging
markets.
Carlos García Moreno, América Móvil’s
CFO, says the risk is orders of magnitude
bigger, given the size of the US central
bank’s stimulus: by June, its balance sheet
had ballooned to $3.5 trillion, up from

It is a view echoed by former Peruvian
prime minister Pedro Pablo Kuczynski,
who warns that policymakers must be
“very careful” and that a “huge problem”
is ahead as monetary stimulus is
unwound in the developed world, risking
“disorderly” currency depreciation and
inflation.
“We’ll have huge reverse pressure
on exchange rates and that will lead to
inflation,” he says. “I’ve always supported
strong intervention by the central bank,
but the problem is that the exchange rate

Hariharan: ‘spontaneous combustion’ unwind

Buffers

Latin America’s economies are, of course,
not the same as in the 1990s: economic
reform and sound macro management
have changed the picture significantly.
Crucially, the major economies have built
up vast foreign exchange reserves to
withstand external shocks.
“The good news is that the region is
on a far more stable footing now than
then,” says Neil Shearing, chief emerging
markets economist at Capital Economics.
“The external debt is much lower, there’s
little denominated in foreign currency.
“In 1994, the concern was that either
policymakers had to raise local rates to
keep inflows, or let their currency fall,
[something that was difficult to do] with
large foreign-denominated debt burden.
This time around they have less foreign

$870 billion in August 2007.
“There’s this notion that you will only
have a graceful exit [from low US interest
rates],” says García Moreno. “Well, in the
past, markets have not been graceful. But
we are told ‘this time is different’.”

The policy bind

Latin policymakers have been forced
into an abrupt about-face in recent
weeks, from worrying about rampant
capital inflows, upward pressure on
currencies and overheating, to fearing
precisely the opposite. Calvo says that
while Latin economies may today have
the international reserves to deal with a
sudden stop in capital flows, defending
exchange rates could come at the expense
of inflation.

is reversing in a disorderly manner.”
But the question is how policymakers
will react when put to the test. “The factor
that is crucial to the story is: what will
governments do if the situation worsens?”
says Calvo. “They haven’t been tried by
fire.”
“I’m afraid they will start resorting to
old-fashioned policies of intervention and
capital controls. If the market factors that
in, this can become deadly. In that case,
no one in their sane mind will buy Latin
American bonds because all of a sudden
these firms won’t be able to repay because
of capital controls.”
Says Hariharan: “It’s all hunky dory
[for investors] on the way in. But on the
way out it causes policy challenges. That is
happening right now.” LF

July 2013

LatinFinance 15
LatinFinance - July 2013

Table of Contents for the Digital Edition of LatinFinance - July 2013
