Investors need to parse the differences amid the turmoil
The salad days for emerging markets are over. Last week some of the worst-hit economies, such as Argentina, Turkey and Russia, erupted in near-panic as their currencies slid. The contagion spread to developed world markets too, as the share prices of western companies with large emerging country operations took a dive. Yet as in all panics, some of the fear is justified, some not. In few places is the need for differentiation clearer than in Latin America.
It was only a few years ago that many emerging economies, but especially Latin America’s, were squealing about the “currency wars”. A decade-long commodity price boom, combined with ultra-loose western monetary policy, flooded the emerging world with capital and pushed up exchange rates to wildly overvalued levels.
The world has turned since then. Fears about China’s financial stability, stagnant commodity prices and rising borrowing costs in the developed world have prompted capital to head for the exit, especially in Latin America. All of the region’s currencies have fallen this year, from business-minded Mexico, down 4 per cent, to heterodox Argentina, down 20 per cent, a startling drop that made Buenos Aires a centre of this week’s broader panic.
Of course, weakening currencies make investors and traders jumpy. But the depreciations are to be expected given the changing world economy – and even welcomed. For one, flexible exchange rates are why this turbulence is less likely to explode into an emerging markets crisis, as it often did in the past when fixed exchange rates were the norm. When the pegs broke, debt crises soon followed.
Still, there are good and bad ways of devaluing . In Latin America’s blue corner are reform-minded countries characterised by generally prudent policy making, such as Chile, Colombia, Mexico and Peru. They are experiencing more orderly currency falls. In the red corner stand more populist countries, such as Argentina and Venezuela, which squandered the past decade’s boom and now face the consequences. Between these two camps stands Brazil, the region’s biggest economy, its credibility corrupted by slow growth and fudged statistics.
Today’s leaner times, though, are forcing some changes. Prompted by the “taper tantrum” sell-off last May, there are already welcome signs of a new pragmatism in the “red corner” countries. Dilma Rousseff, Brazil’s president, was in Davos this week wooing business leaders. Socialist Venezuela this week bowed to reality with a stealth devaluation of its massively overvalued official exchange rate. Argentina, locked out of capital markets by its almost $100bn sovereign default in 2002 and desperate for hard currency, has also begun to try and mend fences with international creditors, from the Paris Club to Spanish oil company Repsol, yet to be compensated for the 2012 nationalisation of its Argentine operations. Even communist Cuba is edging towards the market.
But much of this pragmatism is being forced by external events. Take Argentina. Many of its new measures lack conviction and consistency. Without an accompanying macroeconomic adjustment programme, this week’s devaluation risks boosting inflation running at over 25 per cent.
It is against this backdrop that the region’s heads of state meet this week for a summit in Havana. The symbolism of the reunion, 90 miles from US shores, will be obvious to all. So despite the region’s many differences, expect proclamations of solidarity plus a rousing condemnation of Washington’s outdated Cuban embargo policy. In that sense, Havana is a fortuitous venue. Amid the emerging market ructions, current and still to come, it provides a low-cost venue for trumpeting perhaps the only message the region can agree upon.
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The salad days for emerging markets are over. Last week some of the worst-hit economies, such as Argentina, Turkey and Russia, erupted in near-panic as their currencies slid. The contagion spread to developed world markets too, as the share prices of western companies with large emerging country operations took a dive. Yet as in all panics, some of the fear is justified, some not. In few places is the need for differentiation clearer than in Latin America.
It was only a few years ago that many emerging economies, but especially Latin America’s, were squealing about the “currency wars”. A decade-long commodity price boom, combined with ultra-loose western monetary policy, flooded the emerging world with capital and pushed up exchange rates to wildly overvalued levels.
The world has turned since then. Fears about China’s financial stability, stagnant commodity prices and rising borrowing costs in the developed world have prompted capital to head for the exit, especially in Latin America. All of the region’s currencies have fallen this year, from business-minded Mexico, down 4 per cent, to heterodox Argentina, down 20 per cent, a startling drop that made Buenos Aires a centre of this week’s broader panic.
Of course, weakening currencies make investors and traders jumpy. But the depreciations are to be expected given the changing world economy – and even welcomed. For one, flexible exchange rates are why this turbulence is less likely to explode into an emerging markets crisis, as it often did in the past when fixed exchange rates were the norm. When the pegs broke, debt crises soon followed.
Still, there are good and bad ways of devaluing . In Latin America’s blue corner are reform-minded countries characterised by generally prudent policy making, such as Chile, Colombia, Mexico and Peru. They are experiencing more orderly currency falls. In the red corner stand more populist countries, such as Argentina and Venezuela, which squandered the past decade’s boom and now face the consequences. Between these two camps stands Brazil, the region’s biggest economy, its credibility corrupted by slow growth and fudged statistics.
Today’s leaner times, though, are forcing some changes. Prompted by the “taper tantrum” sell-off last May, there are already welcome signs of a new pragmatism in the “red corner” countries. Dilma Rousseff, Brazil’s president, was in Davos this week wooing business leaders. Socialist Venezuela this week bowed to reality with a stealth devaluation of its massively overvalued official exchange rate. Argentina, locked out of capital markets by its almost $100bn sovereign default in 2002 and desperate for hard currency, has also begun to try and mend fences with international creditors, from the Paris Club to Spanish oil company Repsol, yet to be compensated for the 2012 nationalisation of its Argentine operations. Even communist Cuba is edging towards the market.
But much of this pragmatism is being forced by external events. Take Argentina. Many of its new measures lack conviction and consistency. Without an accompanying macroeconomic adjustment programme, this week’s devaluation risks boosting inflation running at over 25 per cent.
It is against this backdrop that the region’s heads of state meet this week for a summit in Havana. The symbolism of the reunion, 90 miles from US shores, will be obvious to all. So despite the region’s many differences, expect proclamations of solidarity plus a rousing condemnation of Washington’s outdated Cuban embargo policy. In that sense, Havana is a fortuitous venue. Amid the emerging market ructions, current and still to come, it provides a low-cost venue for trumpeting perhaps the only message the region can agree upon.
Copyright The Financial Times Limited 2014. You may share using our article tools.
Please don’t cut articles from FT.com and redistribute by email or post to the web.
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