Tap markets now, urges IMF’s Werner
Sovereigns, corporates and banks should take advantage of still favorable market funding rates to bring down their cost of debt and lengthen maturities, Alejandro Werner, the IMF’s Western Hemisphere director, cautioned on Thursday.
Warning of a triple-whammy of risks facing Latin America in
the years ahead — tapering of the US’s
quantitative easing, slowing Chinese growth and worsening terms
of trade — Werner called for the region’s
economies and borrowers to prepare for the worst.
Countries should be prepared for any of the three events to
be worse than forecast, and borrowers should tap markets ahead
of tapering, said Werner.
"How to prepare for the effects of monetary policy in the US
on capital flows? First, continue taking advantage of the good
situation of low international interest rates, by continuing
refinancing debt at very low levels, increasing maturities, and
strengthening your balance sheet."
At the same time, countries must "start adjusting" to the
future global economy, he said.
"That’s an environment where, with higher
interest rates, investment will be financed at tougher terms.
The financing of infrastructure will be harder to get. And
public finances will get tighter."
The IMF saw, overall, healthy government, financial and
corporate sectors in Latin America. The growth of local pools
of capital provided a further buffer, he said.
"More than two thirds of the inflows that we have seen in
the last four years have been accumulated either as
international reserves or as foreign assets by the private
sector of these economies. So there is a significant stock of
foreign assets being held by nationals. That could perform a
stabilizing role whenever volatility arises.
"We saw that in 2009 in Chile — the pension funds
in Chile played a stabilizing role during that period in time.
That could be something that happens again if we were to
observe extreme volatility in local asset prices."
But things could get worse, he cautioned.
"In many cases, what triggers important crises in the region
is the combination of a bad external environment and a bad
policy response. So in the next two years, the most important
thing to watch will be to see how policymakers react to the bad
environment. It’s easy to be virtuous in a good
international environment than in a much tougher international
Werner spoke at the EMTA Annual Meeting in New York on