Tap markets now, urges IMF’s Werner
December 5, 2013
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 environment.”
Werner spoke at the EMTA Annual Meeting in New York on Thursday. LF