The risk is growing of a sudden reversal in capital flows to
emerging markets that would severely punish economies without
sound fiscal policies, policymakers warned yesterday.
Mexicos central bank governor Agustin Carstens said a
surge in developed world debt issuance and rising interest
rates could torpedo recent investor enthusiasm for emerging
The bottom line for emerging markets and that
is something that worries me the most is that the
possibility of having sudden stops [in capital flows] is
increasing pretty much for everybody, Carstens said in
He added that although Latin economies are able to
place long term debt and the market is receptive, the
likelihood of increased debt issues among large deficit
industrialised countries could undermine emerging markets
access to funds.
Appetite for more risk in terms of EM might reduce. We
might not have access to such long term financing,
Carstens added. The tolerance of markets for fiscal
[laxity] is not there.
Ultra-easy US monetary policy and the cheap cost of dollar
funding has led to a surge in emerging market asset prices,
fuelled by the so-called dollar carry trade where
investors borrow in dollars and invest the money in
high-yielding assets of another country.
Institute of International Finance (IIF) managing director
Charles Dallara urged caution over the direction of US monetary
policy. The Fed will probably need to tighten monetary
policy sooner than markets expect today. When the [US dollar]
carry trade reverses, governments and central banks will have
to be very careful.
Former Mexican central banker Guillermo Ortiz echoed these
concerns, urging policymakers to look to lessons from previous
There are worries about the carry trade, Ortiz
told Emerging Markets. In the past when the US
has reined in loose monetary policy, this entry of [capital]
flows reverses, and sometime dramatically, and things start to
go the other way. Volatility and risk aversion increase and
countries with a weak external positions can end up in
Lack of market confidence in the sustainability of public
finances has historically conspired to create havoc in Latin
Ortiz added that Latin governments must take advantage
of these better times to continue the process of
fiscal consolidation, to keep bringing down debt to GDP levels,
continuing being more efficient in our economies, pushing
through badly needed structural reforms.
Philip Suttle, chief economist at the IIF, said: We
are now in the fourth bull run for emerging markets and
its important to note that the last three cycles ended in
an a crisis. He pointed to the real threat of
crowding out of emerging market borrowers in international
markets by high G7 government spending.
Former Brazilian finance minister Antonio Palocci called on
the US spell out its exit strategy to avoid any adverse shocks
to the global economy.
There will be an impact all over the world but it is
important that Latin American countries are duly
informed, he told Emerging Markets. So far
we have not seen any exit strategy from the US, I have got the
impression that it does not exist.