“Not all Latin American policymakers have used the term currency war,” says Luis Oganes, head of Latin America research at JPMorgan. But they “are expressing increasing concern and reacting to it.”
Last week, Felipe Larrain, Chile’s finance minister, lamented that competitive devaluations of global currencies from quantitative easing could lead “to new forms of trade protectionism.”
Agustin Carstens, the head of Mexico’s central bank, warned the following day that massive cross-border capital flows could lead to a “perfect storm” of economic problems. He added that “concerns of asset-price bubbles fed by credit booms are starting to reappear.”
Symptomatic of this was a tweet last week by Bill Gross, the co-chief investment officer of Pimco, the bond fund, which praised the Mexican peso as a “great currency” and that led an almost 1 percentage point jump in the currency. Such concerns are the opposite of those in more mismanaged Latin economies, such as Venezuela, which devalued on Friday, or Argentina, both of which are suffering capital outflows.
What makes this round of currency war complaints different from when Brazil coined the phrase in 2010, is that after years of orthodox policy making the Mexican, Colombian, Peruvian and Chilean economies, which have a combined economic output of $2.1 trillion, enjoy lower inflation and interest rates, and smaller budget deficits. And yet they are still suffering.
“The term ‘currency wars’ is often used as a scapegoat by policymakers,” says Michael Henderson, Latin America economist at Capital Economics, a consultancy. “The fact that people such as Mexico’s Carstens are picking up on the idea lends it more credence.”
Certainly, the evidence seems clear. The Mexican, Chilean, Colombian and Peruvian currencies all appreciated by about 10 percent against the dollar last year. The average of their inflation-adjusted, trade-weighted currencies also is now 8 percent above the 10-year average.
This has prompted howls of protest from local exporters, and increased pressure on politicians to “do something” to help.
“We firmly criticize the monetary policies of developed economies which are generating excessive international liquidity and overvaluing currencies such as ours,” Mauricio Cardenas, Colombia’s finance minister, told the Financial Times.
Part of the reason for the exchange rate appreciation is that Chile, Peru and Colombia are enjoying a trade boost from high commodity prices. Chile is the world’s largest copper producer, Peru the second-biggest, and Colombia the world’s fourth-biggest coal exporter.
But Mexico, where by contrast manufacturing accounts for 75 percent of exports, also bemoans getting caught in a quantitative easing-led currency war — even as quantitative easing helps boost developed world economies and thus its own.
“The fact that emerging world exports are slowing generally has only intensified policy makers’ willingness to ‘fight’ the currency war,” says David Lubin, head of emerging markets economics at Citi.
So far, none of these countries have contemplated Brazilian-style capital controls. “I’ve never thought about capital controls. I don’t see them as necessary,” Julio Velarde, Peru’s central bank chief, said last month.
Instead, they have turned to direct currency intervention; paying down foreign debt; macro-prudential measures — such as increases in bank reserve requirements; and interest rate cuts that reduce the “carry,” or interest rate differential, for yield-hungry foreign investors.
Yet such approaches have limits and bring their own problems. Lowering interest rates, for one, can foster credit booms — and private credit is already growing at an average of 13 percent among the four economies, according to Capital Economics.
Faster credit growth can in turn lead to overheating — but raising interest rates to cool the economy only attracts more capital inflows.
It is an unfortunate Catch-22, with no magic formula to solve it.
“We do not like capital controls, we believe they are not effective enough,” says Cardenas, contemplating Colombia’s trade-weighted peso which is 17 percent above its 10-year average. “But we have not scrapped the idea altogether — it is always a handy option. I even have one plan in my desk drawer.”
— Financial Times
Andres Schipani in Bogota, Colombia, Jude Webber in Santiago, Chile, and Naomi Mapstone in Lima, Peru, contributed to this report.