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.-
