As some key analysts had announced , the Fed postponed any change in its QE program at least up to December, while the USA economy get traction to a more robust pace of recovery , with the unemployment performance closer to a sustainable level .-
This decisions meant relief for anxious markets operators, who worry about the consequences of such a change in US monetary policy. Some questions arise about the ability of Emerging economies to get over with it.-
A recent article by Satyajit Das (www.economonitor.com, September 25th), suggest that although some of the critical vulnerabilities for facing external shocks(fixed exchange rates, low foreign exchange reserves , and foreign currency debt ), have been addressed , the fundamentals of Emerging economies do not look strong enough to endure the impact of the expected change in monetary policy stand, on emerging economies (higher interest rate , capital outflow , currency depreciation and foreign reserves loses ),taking into consideration that the IMF is still focused in the EZ own crisis .All recent data (growth performance, Debt level, Current account balances, foreign reserves levels),support the hypothesis of a fragile situation for these economies.
However, this weaker stand for emerging economies, also deals with unsolved structural constraints, lasting two stages of economic growth periods, so far : (2000-2008) with China as the growth engine, and (2008-2012), with massive credit availability as the driven force of growth. As a result of this reforms lag, the so called BRIC countries which looked as a new source of global power, is getting closer to be part of those economies which will face troubles arising with the next round of policies for the global recovery.-
It is well known that Monetary Policy makers are evaluating about the timing of Normalization. It is also well known that financial markets have started to anticipate such a policy step . What it is unknown, is the path Emerging markets and Latin America economies, will follow after this adjustment is in place and its impact rolls on across global economy. Let remember that for these economies, the Fed normalization means on the one side capital outflows , currency depreciation and higher interest rates, but on the other side, it also mean a better balanced US economy growth. Thus , the expected impact goes on depending upon the proportion these economies exposures are connected with the former or the later variable.-
On September 6th , the Roubini Monitor report (www.roubini.com) , proposed the Fed Normalization indicator, which is a useful tool to get a better understanding of what come next, concerning emerging markets performance after the FED normalization start. The indicator is done on the basis of two categories : Vulnerability to high external borrowing cost, and Exposure to Improved US Growth via trade channel .
The outcome of the analysis is quite interesting for Latin America economies. Leaving aside Mexico and Colombia considered to be positive outliers,(high trade links ,and low exposure to higher interest rate), It shows that the less vulnerable Latin America economy to expected Fed normalization is Peru. Next, it comes out Chile and Brazil , both in a similar position for vulnerability for external borrowing cost , but with different trade links: Chile with more trade exposure than Brazil to US Growth.-
Fiscal policy performance is not included in this indicator, because it is based on linkages variables(interest rate and trade) among economies at a global scale. However, from the domestic stand point , it also play a role to evaluate the net impact on the economies as a whole.
A fiscal policy focused on growth , help significantly to what monetary policy has to do when it comes to confront capital outflows. The expected currency depreciation, mean a challenge hard to solve for monetary policy alone. How to cope with the expected interest rate increases , and its contractive impact on domestic economy ?. A countercyclical fiscal policy approach, can mitigate this impact.
Whether Interest rate goes up, and currency depreciation take place, a countercyclical fiscal policy can compensate the contractive effect on domestic private expenditures ,by spending past accumulated saving, reducing output losses .This alternative is even more relevant if exporters have a high propensity to save .Therefore the net impact of FED normalization on Latin America economies , will depend as much their exposure to external as internal unbalances, and how both it constraints its ability to react.-