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Fundamentals shield Mexico: Carstens

Sep 6, 2013

Mexico is well positioned to withstand volatility, central bank governor Agustín Carstens says

Mexico’s "strong fundamentals" will help shield its economy from the worst effects of a deteriorating global business cycle that has already taken its toll on emerging markets worldwide, its  central bank governor Agustín Carstens told LatinFinance in an interview.

Speaking in advance of a surprise 25 basis point interest rate cut Friday, Carstens said Mexico’s output would be "much better" in the second half of the year than the first, as economic activity in the US gathers pace.

"Given that Mexico is very closely integrated into the US, that should benefit Mexico in particular," he said, though he acknowledged that the economy’s 'poor performance’ in the first six months of the year "is sufficient to anticipate lower growth for the year as a whole."

The central bank last month cut its 2013 growth forecast to 2% to 3%, half the pace of 2012. On Friday, it unexpectedly cut its benchmark interest rate for the second time this year, citing a sharp slowdown in the second quarter.

Capital Economics said in a research note that the move was "likely to be a one-off" and that interest rates would stay at 3.75% "for a prolonged period." Analysts said further that any decision on further monetary easing would depend on the timing and impact of the US Federal Reserve’s moves to reduce its $85 billion-a-month stimulus program.  

Carstens said that while tightening global liquidity conditions will "certainly create some volatility in the markets," Latin America was in general well positioned to deal with the fallout.

"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," he said.

Volatility has soared across emerging markets since the Fed hinted in June that it could withdraw its stimulus program sooner than expected, triggering capital flight from emerging markets and leading to a sharp decline in many emerging currencies against the dollar.

But Carstens said currency volatility should not trouble countries that pursue sound economic policies. "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," he said. 

"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 economy."

He said that a worsening business cycle was now having an impact on emerging markets. "The business cycle around the world has become more severe. Emerging markets are being affected by the world business cycle," he said. "Most of the policy instruments that advanced economies had have run their course and we don’t have much space left."

Although emerging markets are "still growing much faster than advanced economies" Carstens said they must now "mind the structure of their own economies and try to engineer additional structural reforms so that they can enhance their capacity to growth and counterbalance the effects of external weakness."

He added: "In Mexico, we are going through a reform process so we don’t have to depend so much on the performance of the global economy."LF

Click here to read the full interview with Mexico’s central bank governor Agustin Carstens.

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