LatinFinance - March/April 2013 - 20

Currency wars

Pressure point
By Taimur Ahmad and Katie Llanos-Small

W

hen finance ministers of the
Group of 20 nations gathered in
Moscow in February, exchange
rates topped their agenda. Officials sought
to ease mounting fears that the world’s
biggest economies are locked in a race to
the bottom to devalue their currencies.
“We will not target our exchange
rates for competitive purposes,” the G20
ministers said in a communiqué after
their summit. “We will resist all forms of
protectionism and keep our markets open.”
Within days of their statement, the
G20’s wish for a shift in financial market
perceptions appeared suddenly – and
alarmingly – to have come true. For the
first time in months, investors turned
sharply from speculating on an outbreak of
so-called currency wars to worrying anew
about financial crisis in the eurozone, as
a fresh bout of political turmoil took hold
in Italy.
Risky assets – including emerging
market currencies, stocks and bonds –
were dumped in the wake of inconclusive
election results in Italy, as concerns grew
that the country’s debt burden might
become unsustainable if vital reforms are
not pushed through.

Push and pull

Short-term volatility aside, the underlying
forces that have rekindled fears of global
currency wars are unlikely to disappear
soon – not least if European authorities
uphold their commitment to do “whatever
it takes” to safeguard the single currency.
Capital flows to emerging markets
have returned sharply since the end
of last year, thanks to easy monetary
policy in mature economies and the
continued prospect of poor returns there.
Meanwhile, higher growth in emerging
economies, combined with higher yields,
has pulled in new funds.

20 LatinFinance March/April 2013

Latin officials are struggling with the fallout of capital inflows in an
era of easy money. The risk of financial instability may be growing

Abe: seeking aggressive monetary easing
“This is not something that is going to
end rapidly,” says Ernesto Talvi, director
of the Latin America Initiative at the
Brookings Institution in Washington.
“Deleveraging after financial crises takes
six to seven years. There’s still some time
to go before developed countries will be
able to compete for resources with the
emerging markets.”
And with central banks in developed
economies – including, most recently,
the Bank of Japan – embarking on new
rounds of monetary easing, yet more
capital is poised to head from developed
to emerging economies.

Victims of success

Flows of hot money have been hitting

Latin America disproportionately to other
areas. Talvi puts the region’s exceptional
appeal down to two factors: its dramatic
improvement in macroeconomic policy
management, and its large commodity
exports. “Countries in the region are very
attractive because they have this double
boon,” he says.
The Institute of International Finance
(IIF) estimates that capital flows to Latin
America – FDI as well as bond and equity
investments – will hit $321 billion this
year, up from $304 billion in 2012.
But Phil Suttle, the IIF’s chief
economist, says these figures don’t take
into account Japan’s new policy stance
since prime minister Shinzo Abe took
power. “The BoJ’s latest round [of easing]
LatinFinance - March/April 2013

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