By Taimur Ahmad
When running for the top job at the IMF in 2011,
Mexico’s central bank governor Agustín
Carstens campaigned as "the emerging markets candidate".
A former deputy managing director of the Washington-based
multilateral, Carstens was always the underdog to French
finance minister Christine Lagarde, who ended up getting the
job of managing director.
But as a self-styled champion of the developing world, Carstens
sought to hammer home the point that the global emerging
markets he proposed to represent were no longer the
crisis-prone basket cases of decades past; moreover, that any
institution of global economic governance must give credence to
the collective voice of the developing world. On the campaign
trail he argued passionately that the emerging markets, having
been through so many years of financial turmoil, were better
equipped than ever to face the vicissitudes of the global
economy – and also to chart a way through them.
Previously at the Bank of Mexico, Carstens himself gained
first-hand experience of dealing with financial crises,
including Mexico’s debt problems in the 1980s and
the peso crash in 1994. Emerging markets, he said, had learned
the hard way – and they have come out the better for
Nothing bears this out like the 2008 global financial crisis
itself, Carstens says, where the emerging markets –
and Latin America in particular – bounced back with
Storm clouds are again gathering over the region, as growth
slows and financial volatility rises. But in an interview with
LatinFinance, Carstens explains why he thinks the emerging
markets of Latin America are in strong position to withstand
the next global shock.
LF: Latin America proved especially resilient during
the 2008/2009 global financial crisis. What accounted for that
strength relative to past episodes?
AC: Latin America was a crisis-prone
region and that pretty much lasted until the early 1990s. This
weakness that Latin America showed for a couple of decades was
a manifestation of poor macroeconomic management and even poor
institutional development, in the way policy was designed and
Latin America reacted to much better policy management after
the 1990s and this reflects two things: one, the general
recognition, not only among technicians but also among
politicians and society in general, that to have disorderly
macroeconomic policymaking was not good for the country and was
bad for society in general.
That allowed some steps to be undertaken and structural reforms
to be implemented. Among them: to have a far more professional
fiscal process; to have, in some cases, strict rules on fiscal
policy; to have enhanced regulations, reform of financial
markets; and, in for most countries, some sooner than others,
to adopt the autonomy of the central bank.
So as a reaction to the economic problems that permeated all
the way through society, there was support, political support,
to establish arrangements to facilitate good
Many Latin American countries during the first years of this
century have benefitted a lot from the openness of China. China
has participated more in international markets and has become a
very important player in some commodities.
Given that Latin America is commodity-rich that has benefitted
the region a lot.
Latin America experienced a very important terms-of-trade shock
over the last decade. Obviously it has benefitted some
countries more than others. Mexico in general was one with
fewer benefits of this. But for the region as a whole, this was
a very positive development.
You mention the more sophisticated macro-policy
response. But to what extent were measures by G7 central banks,
including Fed swap lines for systemically important economies,
responsible for that apparent resilience?
My view is that Latin America had a solidly-founded
macro-framework and that solidity was the anchor of the
strength of the economy throughout this turbulent period.
These other aspects, such as liquidity provided by central
banks, Fed swap lines and so on, were at particular moments an
important complement to the fundamental aspects of strong
But without the external support, would strong
macro-policies alone have been sufficient to safeguard the
Well, that is mostly what has happened. For example,
ample liquidity in the world economy has helped from the point
of view that in the absence of it probably the collapse of the
world economy would have been worse. Financial instability
would have been worse and that probably would have enhanced the
severity of the storm we are facing.
But all in all the liquidity that was provided has also led to
some important concerns for Latin American countries, namely
the rapid capital inflows; it has generated challenges we
didn’t necessarily want.
In a way it has been a mixed blessing. Yes, it has, in a way,
helped the world economy. The strength of the recovery,
especially in the US, is due to the monetary policy actions the
Fed has taken. But at the same time, these actions have had
spill-over effects that we have been forced to deal with.
Overall, the policies that the Fed and other central banks have
implemented are beneficial for the region, but I certainly
wouldn’t go as far as saying that we have sailed
through this period with resiliency due to the liquidity
injection by the central banks.
The picture has changed again as the global
liquidity cycle looks set to turn. What do you see as the
principal risks here for Latin America?
Certainly this will create some volatility in the
markets. But most Latin American countries have strong
fundamentals to weather this enhanced volatility. Obviously we
could have some turbulence in the markets but would that create
major damage to the economic strength of the region? I
don’t think so.
What is the main difference for Latin America today
facing this volatility as compared to 2008?
In 2008 a lot of the volatility in Mexico and Brazil
and other places was due to some major corporates that had
turned to very perilous types of derivatives trades that
exposed them, and our financial markets, to more
All the authorities, and also the corporates, learned that that
was not adequate and not part of a responsible way of running
business. Today the corporate sector and the banking sector is
not exposed to those types of positions. So an aspect that very
clearly magnified the external shock, the crisis abroad, is not
The Fed and the other monetary authorities will be extremely
careful in how they unwind their policies. The Fed has bent
over backwards to hold the markets’ hand, telling
them what they’re thinking, so that most of the
people are not caught by surprise. Also the unwinding of
monetary policy will take place when there is evidence that the
US economy, and other economies, are stronger. So the
correction in the monetary policy stance should not be so
dramatic for the world economy because the correction in policy
will be a recognition that the reasons for such extraordinary
policy measures are not present any longer.
But in most scenarios it would seem the rest of the
world would probably struggle more rather than less when
liquidity is withdrawn?
Well I don’t think it would be appropriate to draw
such a clear distinction between advanced and emerging
More than anything there are some particular markets that are
more vulnerable than others, for example high yield bond
markets might be more vulnerable – and that includes
corporate high-yield bond markets in advanced economies. So I
don’t think it’s fair to portray that
emerging markets have more to suffer.
But there are some emerging markets that are stronger than
others, there are some markets that are more liquid, that have
more depth than others so there will be a distinction between
advanced and emerging markets, but I certainly would not agree
to characterize that all emerging markets in general are less
well prepared to withstand a correction in policy.
Do you discount the possibility that US treasury
yields could shoot up much faster than the market expects
You can always build catastrophe scenarios. But I
think the probability of such a scenario is very low. Why?
Traders can generate short-term turbulence and some inadequate
dynamics in the short term but at some point, fundamentals kick
If you have strong fundamentals, you have strong anchors in the
nominal variables in your economy and that eventually should
bring order to the behavior of the main macro-variables.
If you have a strong anchor and there is a strong storm, the
boat might move a lot, it will move around the ratio designed
by the length of the anchor, but if you have weak anchor then
it will just bash against the rocks. So if you have a strong
anchor, the boat might still be rocked but that
doesn’t mean that it will lead you to a
Yes, we might have some volatility but at the end of the day,
if you have strong fundamentals it is less of an issue. Take
Mexico, we have a very low debt to GDP ratio, we
don’t have any pressing funding needs neither in
the private sector nor the public sector. We don’t
have any structural imbalances. And we have embarked on a
series of reforms.
There is concern also about a broader slowdown in
the emerging markets. What is your take on this?
My take is that emerging markets have slowed down.
There is a close correlation between world trade and industrial
production. What we have seen is a sharp decrease in world
trade. So what we are seeing is that emerging markets are being
affected by the world business cycle.
We are not immune to it – probably we
didn’t feel this as much before because
expansionary fiscal and monetary policies of some economies,
advanced economies, provided short-term relief for the world
Now what we see is that most of the policy instruments that
advanced economies had have run their course and we
don’t have much space left. So the business cycle
around the world has become more severe and that has affected
Emerging markets are still growing much faster than advanced
economies but I would also take this as a call for emerging
markets that they also have to mind the structure of their own
economies and try to engineer additional structural reforms so
that they can enhance their capacity to grow and counterbalance
the effects of external weakness.
In Mexico, we are going through a reform process so we
don’t have to depend so much on the performance of
the world economy.
How much of a risk does currency volatility pose in
Latin America, given that the headwinds are likely to
In general, if you have strong fundamentals you
shouldn’t worry too much about it. You should
concentrate first in setting your fundamentals and at the same
time, doing more to promote growth.
For Mexico, if you look at a chart of volatility, there has
been a very slight dent recently. It’s still at
very low levels. The Mexican peso is the most liquid market in
Latin America, the 13th deepest market in the whole world.
It’s a very complete market and we have good
pricing. Yes, it has shown some turbulence, but it has not been
extraordinary. Our expectation is that it will continue like
that in the future.
Do you see any risks in the renewed market
enthusiasm for Mexico?
I don’t see a bubble being created in the
Mexican markets. All the parties in this reform effort are very
serious about moving forward. There are already some important
reforms that have materialized and are in the process of being
implemented. Both the government and the legislature have been
very open in discussing what they think. So in general, the
expectations are realistic and they are being reflected in the
market. I don’t see a bubble in any way.
You’ve cut your growth forecast for the
Mexican economy by a full percentage point. Why?
One factor was precisely a slowdown in world growth,
particularly in the US this year. That slowdown affected
importantly our exports. Now we are seeing more solid
performance in the US economy, especially starting in the
second quarter, the second half should be better. The US
economy was affected by the fiscal drag: measures that were
implemented, but will no longer be present, so the expectations
for next year are much better. Given its close ties to the US
economy that should benefit Mexico in particular.
The other aspect was that during the change in administration
we had some form of fiscal contraction as the outgoing
administration wound down and the incoming administration took
charge. This change always slows down the impulse of government
spending in the economy. That was an important factor and has
been addressed by the government. I don’t think it
should be an issue in the second half. The second half of this
year should be much better than the first half, but the poor
performance in the first half is sufficient to anticipate lower
growth for the year as a whole. But also for next year we
expect growth should continue at a reasonable rate.
So these factors speak against the need for a rate
cut in the second half of the year?
We feel that the monetary policy stance is adequate.
We don’t have any additional factors to tell the