Tuesday, May 21st 2013 - 06:27 UTC

Massive money easing in rich countries making Latam currencies too strong

Currency strength due to stimulus measures in the developed world is currently Latin America's Achilles' heel, though the region's macroeconomic management is a bright spot, the head of the United Nations' body for the region said on Monday.

“We're very worried about exports. Last year they fell significantly,” said Barcena

“I think the factor that most worries Latin America is the strength of its currencies,” said Alicia Barcena, the Economic Commission for Latin America and the Caribbean's (ECLAC) executive secretary, said.

“This monetary easing...conspires against the dynamism of our export sector,” she said in an interview in Santiago.

Latin America, a top producer of oil, soy, copper, iron and other commodities, should brace itself for more moderate exports, a fall in demand from crisis-hit Europe and a slowdown of Chinese consumption.

“We're very worried about exports. Last year they fell significantly,” Barcena said. “I think we have to prepare ourselves for more moderate trade, especially given the fall of aggregate demand from Europe and the United States and the deliberate slowdown in China.”

The region's food-exporting countries, whose main market is the European Union, are being impacted by the decline in food prices and subdued Euro zone growth this year, CEPAL has said.

But Barcena said avid raw materials consumer China will maintain a certain level of dynamism and commodities prices should remain relatively high, albeit volatile.

Deepening trade within Latin America is one way to protect the region, she added.

A recovery in regional powerhouse Brazil and solid expansion in Mexico should lead Latin America and the Caribbean's economy to grow to 3.5% this year, Barcena reiterated. That would mark a pick up from 3.0% growth in 2012, though the region expanded 4.3% in 2011 and 5.9% in 2010.

Inflation, a historic foe in the region, is now mostly under control and the labour market is stable, Barcena said. And while the current accounts deficit is manageable, she added the region shouldn't let its guard down.

The region should weigh the timing and measures to manage these massive capital inflows, Barcena said.

Latin American governments have tackled inflows in a variety of ways. Brazil has applied strict controls on foreign capital inflows and its central bank has intervened in the local exchange market to tame the Real, while Andean nations such as Colombia and Peru have opted for periodic currency-buying measures with mixed results.

“Every day the importance of evaluating instruments to administer capital inflows grows. Many countries are weighing how they can neutralize the incentive for capital inflows via reserves, taxes, because this rate differential is a very worrisome subject,” the head of Chile-based ECLAC added.

The region's relatively high interest rates -- 7.50% in Brazil, 4.00% in Mexico and 3.25% in Colombia-- as well as brisk growth have helped attract investment.

”We've never had a monetary easing this intense and for this long (in developed economies), so this means the region has to prepare itself in a different way,” Barcena said. Likewise recent monetary easing in Japan will most likely lead to more investment in Latin America, according to Barcena.

Accumulating reserves is one way to help moderate the impact of these inflows, she added. Market operations, such as bond issues, can then help stem excessive liquidity. Another option is controlling capital inflows via taxes or sovereign wealth funds. Chile, for instance, has created a sovereign fund abroad to save some income from its copper-fuelled bonanza.

6 comments Feed

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1 LEPRecon (#) May 21st, 2013 - 07:48 am Report abuse
Ahh, the 'rich' countries are now 'conspiring' against LATAM, apparently.

“We're very worried about exports. Last year they fell significantly,” Barcena said. “I think we have to prepare ourselves for more moderate trade, especially given the fall of aggregate demand from Europe and the United States and the deliberate slowdown in China.”

Or is it that the 'rich' countries have problems of their own that they are actually addressing, and quite frankly South America needs to start addressing it's own problems too?
2 Condorito (#) May 21st, 2013 - 02:52 pm Report abuse
I don’t think she is implying there is a conspiracy, just pointing out that the beggar thy neighbour policy being pursued by the US, UK and now Japan has serious implications for Latin America. It has equally serious implications for the rich countries too.

I don’t blame the rich countries for falling back on this measure as they have their own incentive to do so, but I would not be so sure that by doing so they are addressing their own problems. Addressing their own problems (in the UK/EU) involves biting a bullet that the voting public is not prepared to bite yet.
3 Simon68 (#) May 21st, 2013 - 05:08 pm Report abuse
One thing is sure, Alicia Barcena is NOT talking about Argentina!!!!!!!

If CFK and her troupe of performing idiots could get their sticky paws on “... these massive capital inflows” it would save their bacon, but unfortunately for them these lashings of dollars and euros are passing us by as they flow into Uruguay, Chile, Paraguay, Bolivia, Brasil, Ecuador, Colombia etc.

Poor old CFK, as usual she cut off her nose to spight her face and we are the ones that suffer!!!!!!
4 briton (#) May 21st, 2013 - 06:20 pm Report abuse
Its all your fault / his fault, their fault ,
But never latams fault..
5 TroLLey_to_Truth (#) May 24th, 2013 - 02:51 pm Report abuse

Wow you really are a complete nutjob.

How are the “rich” countries addressing their problems? BY BECOMING POORER and printing their money into toilet paper.

Why haven't your currencies collapsed yet? Simple, you USED TO have trustworthy currencies, so many still give you the benefit of the doubt.

What you and the others fail to grasp is that trust is not like a mountain range, it does not take millions of years to slowly “erode” away... Trust can be there at 23:59 of day A, and GONE at 00:01 of day B.

That will happen, and it is that “trust” that is keeping the US dollar and inflation in check even as the Fed prints hundreds of billions of new pieces of paper, same with the BoE. But when that moment of gone trust arrives, forget it. You won't even know what hit you it will be so quick and devastating.

Same with the Euro. There may be “trust” today, but that trust can vanish tomorrow and the union crumble.

Market psychology does not operate in years or decades to switch paradigms. It may take years or decades to REACH a so-called tipping point... but when that tipping point is reached, everything else happens almost instantaneously.
6 Captain Poppy (#) May 27th, 2013 - 06:49 pm Report abuse
It's funny is it not how that trust continues to remain in most of Europe and the USA, yet when it comes to some SA countries like Argentina....mmm........not so much....or any. Why is that titti boi? Take a slurp off of mommas nipple before you answer, it will help you think straight.

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