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
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
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
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