An end to ultra-loose monetary policies in the world’s largest economies risks stoking inflation in Latin America as currencies depreciate in a “disorderly” manner, Peru’s former prime minister warned Tuesday.
Pedro Pablo Kuczynski, partner at Rohatyn Group and an early candidate for 2016 presidential elections, said the Andean region faced a “huge problem” as monetary stimulus is unwound in the developed world.
“We’ll have huge reverse pressure on exchange rates and that will lead to inflation,” he told an audience at LatinFinance’s Andean Forum in Lima. “I’ve always supported strong intervention by the central bank, but the problem is that the exchange rate is reversing in a disorderly manner.”
Peru’s sol slumped last week to its lowest level in a year amid a sell-off in the nation’s bonds, before recovering ground on weak US data Monday. The sol “went from 2.58 [to the dollar] to 2.72 in two weeks,” Kuczynski noted.
“We have to be very careful. What I would do as finance minister right now is precisely that, to be very, very careful.”
Kuczynski said the US, Japan and Europe “have a huge task ahead as they unwind this because of massive debt.”
This time is different?
Liliana Rojas-Suarez, senior fellow at the Center for Global Development, said that markets would be thrown into turmoil if the US Federal Reserve hikes rates faster than expected.
“If the Fed moves just a little above market expectations then we could have a big problem for emerging markets,” Rojas-Suarez, a former Deutsche Bank chief economist, said. “The market is expecting something very different to what the history of US monetary policy suggests will happen.
“History shows that all large increases in US rates have had a huge impact on emerging markets,” she said. “Emerging markets might lose in terms of capital inflows.”
But she added that the risk to the Andean region of a hike in US rates was offset by a change in the composition of capital flows to the region. There is “more and more capital in the form of FDI,” she said.
Luis Carlos Nuñez, head of capital markets for the Andes at Citi, said that expansionary monetary policy in the US had in effect already come to an end.
“The QE expansion is done, even if it is going to take time for it to unwind,” he said.
But he said that Chile, Colombia and Peru would remain highly attractive to investors for the foreseeable future, despite policies adopted in China, Japan, the EU and United States, he said.
“We are in a unique position around the world to continue to grow,” Nuñez said.
Search for yield continues
Javier Vargas, managing director and co-head of investment banking in Latin America of Credit Suisse, said there were two sides to the story as QE and other expansionist policies unwound. “There will be an obvious increase interest rates, but our view is that rates in the region will remain attractive” to investors.
The search for yield will continue to be a key driver and that there was still plenty of capital in the world looking for investment opportunities, he said.
A domestic investor base in Chile, Colombia and Peru is important to maintain financial market stability. “Local saving is very significant and will continue to stimulate growth,” Nuñez said, but he warned that regulation was constraining the development of domestic capital markets.
“Today any deal we do 30% to 40% of the book comes from local investors. Should we have a tax on interest payments on bonds? That doesn’t make sense,” he said. “If you tax them, not just for pension funds but for also retail investors, they seem less attractive.” LF