MEXICO CITY (Reuters) - Aggressive monetary easing in Japan will probably not swamp Latin America with excess capital, but much depends on when the U.S. Federal Reserve eases back from its stimulus measures, a senior International Monetary Fund official said.
The Bank of Japan last week joined other major central banks in extra monetary easing in a bid to boost growth, pledging to inject $1.4 trillion (908 billion pounds) into the economy in less than two years, a wave of money that could potentially push more funds into emerging markets.
Latin America's financial markets have already absorbed $400 billion in the last five years, driving some local currencies painfully high and prompting currency intervention and even capital controls.
But Alejandro Werner, director of the IMF's western hemisphere department, said yen-denominated funds did not have as large a stake in Latin America as dollar funds and therefore the impact of the BoJ's easing on the region might be less than the impact of quantitative easing in the United States.
"What we are seeing in local markets is manageable.
Clearly the easing of monetary policy in Japan will play a role and we have to evaluate it," he said in an interview on Tuesday, approved for release on Thursday.
"But there are already discussions about an eventual, very gradual exit in the United States, especially perhaps a reduction in the pace of acquisition of securities, and in that sense perhaps the two policies are at different stages in their degree of maturity and will balance each other out."
Policymakers from emerging and developed economies are expected to discuss the unprecedented monetary easing at meetings of the IMF and Group of 20 in Washington next week, when the IMF will also update its economic forecasts.
Investment has been attracted to Latin America by healthy growth, low debt, sound fiscal policy and benchmark interest rates higher than the super-low levels in the developed world.
The Fed is buying $85 billion a month in Treasury and mortgage bonds to stimulate the economy and a recent staff research report estimates that its asset purchases pushed bond yields in emerging market economies down by an average 19 basis points.
The Fed has tied the duration of bond buying to a substantial improvement in the U.S. labour market, but some Of its policymakers have been eager to start unwinding the stimulus, minutes of the central bank's March meeting showed.
A rise in U.S. market rates could draw investment back out of Latin America, but Werner said he did not see any countries as particularly vulnerable to a capital reversal.
"The big challenge for the region is for countries not to develop such vulnerabilities in an environment where perhaps the terms of trade are no longer growing and financial conditions are loose," he said.
Terms of trade is the value of a country's exports relative to that of its imports, according to website Investopedia.com.
"It is very important to maintain very strong financial regulation, develop macro prudential policy instruments to limit exaggerated movements in asset prices and use this environment to further strengthen fiscal policy and lower the levels of public and private debt."
COMMODITY BOOM PLATEAU
High commodity prices have also helped to push Latin American currencies and terms of trade to historic highs. Werner said the outlook was now for commodity prices to start levelling out, meaning countries could not rely on future trade windfalls to plug gaps in the budget or boost growth.
"The scenario we see now is one of stable commodity prices, and this represents an important change from what we were seeing five years ago," he said, adding that risks were probably tilted a little to the downside.
The United Nation's Economic Commission for Latin America and the Caribbean estimates that the region's terms of trade fell 2.2 percent in 2012, with mining and metal exporters Chile, Peru and Brazil the most affected.
Werner said although countries had managed the "decade of abundance" well, they could have done more to save for the future and invest in infrastructure and social projects.
"Latin America must take advantage of the remainder of the commodity price boom to migrate the drivers of growth towards other sectors of the economy through investment in structural reforms and productivity," he said.
yahoo.com
The Bank of Japan last week joined other major central banks in extra monetary easing in a bid to boost growth, pledging to inject $1.4 trillion (908 billion pounds) into the economy in less than two years, a wave of money that could potentially push more funds into emerging markets.
Latin America's financial markets have already absorbed $400 billion in the last five years, driving some local currencies painfully high and prompting currency intervention and even capital controls.
But Alejandro Werner, director of the IMF's western hemisphere department, said yen-denominated funds did not have as large a stake in Latin America as dollar funds and therefore the impact of the BoJ's easing on the region might be less than the impact of quantitative easing in the United States.
"What we are seeing in local markets is manageable.
Clearly the easing of monetary policy in Japan will play a role and we have to evaluate it," he said in an interview on Tuesday, approved for release on Thursday.
"But there are already discussions about an eventual, very gradual exit in the United States, especially perhaps a reduction in the pace of acquisition of securities, and in that sense perhaps the two policies are at different stages in their degree of maturity and will balance each other out."
Policymakers from emerging and developed economies are expected to discuss the unprecedented monetary easing at meetings of the IMF and Group of 20 in Washington next week, when the IMF will also update its economic forecasts.
Investment has been attracted to Latin America by healthy growth, low debt, sound fiscal policy and benchmark interest rates higher than the super-low levels in the developed world.
The Fed is buying $85 billion a month in Treasury and mortgage bonds to stimulate the economy and a recent staff research report estimates that its asset purchases pushed bond yields in emerging market economies down by an average 19 basis points.
The Fed has tied the duration of bond buying to a substantial improvement in the U.S. labour market, but some Of its policymakers have been eager to start unwinding the stimulus, minutes of the central bank's March meeting showed.
A rise in U.S. market rates could draw investment back out of Latin America, but Werner said he did not see any countries as particularly vulnerable to a capital reversal.
"The big challenge for the region is for countries not to develop such vulnerabilities in an environment where perhaps the terms of trade are no longer growing and financial conditions are loose," he said.
Terms of trade is the value of a country's exports relative to that of its imports, according to website Investopedia.com.
"It is very important to maintain very strong financial regulation, develop macro prudential policy instruments to limit exaggerated movements in asset prices and use this environment to further strengthen fiscal policy and lower the levels of public and private debt."
COMMODITY BOOM PLATEAU
High commodity prices have also helped to push Latin American currencies and terms of trade to historic highs. Werner said the outlook was now for commodity prices to start levelling out, meaning countries could not rely on future trade windfalls to plug gaps in the budget or boost growth.
"The scenario we see now is one of stable commodity prices, and this represents an important change from what we were seeing five years ago," he said, adding that risks were probably tilted a little to the downside.
The United Nation's Economic Commission for Latin America and the Caribbean estimates that the region's terms of trade fell 2.2 percent in 2012, with mining and metal exporters Chile, Peru and Brazil the most affected.
Werner said although countries had managed the "decade of abundance" well, they could have done more to save for the future and invest in infrastructure and social projects.
"Latin America must take advantage of the remainder of the commodity price boom to migrate the drivers of growth towards other sectors of the economy through investment in structural reforms and productivity," he said.
yahoo.com
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