The US is slowing at the same time as commodities continue to rally. Oil is largely supply driven and growth contagion to the emerging markets is widely expected to be limited, supporting other commodities. A consequence of globalisation is that no country can avoid the impact of US and possible European slowdowns, but another is that the impact is widely spread. In the new robust emerging markets there is a strong counter-veiling growth story.
Regional growth, together with commodity factors and US rate cuts (for those pegged to the dollar), is causing some inflationary pressure. The big policy issue for Latin America in the next few months will be how to respond to this inflation. The twin goals of macro-economic stability (low inflation backed up by prudent fiscal policy) and weak currencies (at least versus the dollar) to support export-led growth, are no longer compatible.
There are three scenarios in our view. The first is the one largely priced in by the market, and we believe the least likely: that countries continue to intervene buying dollars to keep currencies weak and let inflation rise. Central banks are not in our view likely to sacrifice low inflation though. The other two scenarios both involve substantial currency appreciation against the dollar – one gradual (over maybe two years), one fast (maybe six months). Particularly in the fast scenario there may be overshoots and the dollar could weaken 30 per cent or more, causing a significant importation of inflation. There may have been little structural reform in Latin America in the last several years, but should currencies appreciate and low inflation be maintained, domestic investment booms are likely, and thus a move from demand to supply-side driven growth.
Latin America, like much of the emerging world, is robust, facing strong domestic and external demand, and projected slowdown this year will be more, in our view, due to conscious policy action to cool economies rather than growth contagion from the North. The more important impact of the credit crunch is likely to be from asset allocation changes globally. Emerging countries are pulling assets back from the US and Europe. While savings rates in Latin America are not as great as in Asia, Asian and Middle East savings are likely to be redirected to Latin America.
Dr. Jerome Booth, head of research, Ashmore Investment Management.
