Latin Finance - September/October 2009 - 26

central bank scorecards Passing the Test by Ben Miller hat Latin America is better placed to withstand crisis than ever before in recent memory is a mantra repeated by economists since the start of last year’s meltdown. The same can be said of the region’s central banks. Though only a minority is truly independent and active in directing the economy, that group has shown it is able to employ counter-cyclical policy in an unprecedented way. As rates tumbled all over the world amid fears of another Great Depression, LatAm central banks followed suit, with several countries hitting historic lows. Success with fighting inflation in recent years has allowed them to focus on growth. The task moving forward is to continue creating conditions to keep the recovery going while also keeping inflation in check. As with other aspects of the region’s economies a survey of central banks reveals which countries have developed a shield to external volatility, and which still have work to do. LatinFinance polled economists, analysts and strategists specializing in the region to assemble a ranking of leading central banks in the region, based mostly on performance in the 12 months to July. The universe was limited to those institutions in countries with a unique currency that can truly be said to have independence and ability to make a difference. Brazil and Chile are the runaway favorites, with the former receiving most calls to be named the leading LatAm central bank. Colombia, Mexico and Peru occupy the next three spots. Uruguay, Dominican Republic and Costa Rica round out the field, as less influential banks, but ones that stand out from the rest in the region for having at least some true independence and an inflationtargeting role. T For the first time, LatAm central banks had the footing to use counter-cyclical policy to fight crisis. Controlling inflation as growth returns is the challenge ahead. decades is the credibility the central banks now have from the markets, particularly in Brazil, Chile, Mexico – the three generally considered the most active in their respective economies – as well as in Colombia. “A lot of the central banks in the region have shown they have market credibility in responding effectively to these cycles,” a crucial role,” he adds, noting that Chile, Brazil and Mexico have done a good job of building credibility over time. Banco Central do Brasil stands out for being quick on its feet, and interrupting a long-term gradual lowering of its benchmark, which had been above 20% as recently as 2003, and was at 17.25% in February 2006. The Selic paused at Eight at the top Rank 1 2 3 4 5 6 7(tie) 7(tie) Brazil leads the way Bank Banco Central do Brasil Banco Central de Chile Banco de la República (Colombia) Banco de México Banco Central de Reserva del Perú Banco Central del Uruguay Banco Central de Costa Rica Banco Central de la República Dominicana Head Henrique Meirelles José de Gregorio José Darío Uribe Guillermo Ortiz Julio Velarde Mario Bergara Duque Francisco de Paula Gutiérrez Héctor Manuel Valdez Source: LatinFinance A Cut Above The main distinction compared to previous 26 LatinFinance says Siobhan Morden, fixed-income strategist at RBS. “If you’re rating the banks according to their inflation priority mandate, then certainly Brazil, Colombia and Chile have done the best in the region. They’ve only improved their market credibility.” Interest rates in Latin America by themselves have less of an effect of the real economy than they might in a country like the US. But they do help shape it. “A lot has to do with expectations,” says Jonathan Heath, chief LatAm economist at HSBC. “That’s why especially in inflation targeting countries credibility plays such 11.25% for several months before rising to 11.75% in May 2008 and 13.00% in August last year. “[Brazil’s] ability to use counter-cyclical policy has been remarkable,” says Geoffrey Dennis, head of LatAm equity research at Citi. He credits this as one of the factors helping Brazil weather the crisis so well, making it among the first to see a rebound in growth, as well as an equity rally. Brazil has also made good use of reserves. Although both Mexico and Brazil had built up ample stores of hard currency over the past decade, many thought that Brazil’s – which surpassed $200 billion September/October 2009

Latin Finance - September/October 2009

Table of Contents for the Digital Edition of Latin Finance - September/October 2009