Fearing the destructive power of capital outflows.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
Bank of Mexico Governor Augustin Carstens doesn’t always mince his words in public. In April last year, he went where no senior central banker had ever dared go, by openly questioning the sustainability – even the wisdom – of the loose monetary policies favored by certain central banks. But things have changed a great deal since then, especially for emerging economies like Mexico.
“Last year was a terrible year, probably worse than 2009,” the head of Mexico’s central bank told a conference of central bankers in Paris on Tuesday. It was the first year since 1988 that emerging markets saw net capital outflows, according to the Institute of International Finance, a Washington-based association of global banks and finance houses.
In December more than $3.1 billion fled emerging market funds. If anything, the New Year has been worse.
“I don’t have any data yet for the first week of 2016 but it’s probably going to be very, very, very bad,” Carstens said. If conditions do not improve, he warned, central banks in emerging markets may have little choice but to adopt a more “radical” approach to monetary policy, including intervening in domestic bonds and securities markets.
“We might have to be market makers of last resort, in our own local markets, not very different from what advanced economies did at the time of the crisis,” Carstens said. To use central banking vernacular, the time has come for emerging market economies to become “unconventional.”
“I would like to avoid this, but given the fact that the stock adjustment might be so violent, given the sheer size of the (flows), there might be no other alternative,” Carstens added.
It’s not hard to understand the central bank governor’s concerns. The day before his speech, the Mexican peso slipped to a new record low against the US dollar, having lost almost 50% of its value since the global financial crisis began in 2008. To rub salt in the wound, the price of the Mexican oil mix has collapsed 77% since mid-2014 while the levels of dollar-denominated debt Mexican companies issued are at a historic peak.
But Mexico is not nearly as vulnerable to the economic shocks buffeting the world as many other emerging or developing economies. On Monday, the central bank of oil-dependent Nigeria, Africa’s largest economy, was forced to halt dollar sales to non-bank foreign exchange operators in a desperate bid to shore up dwindling foreign reserves. The sale of foreign exchange to bureaus de change was using up the country’s foreign reserves for illegal transactions and selling the dollar at 250 naira compared to the official central bank rate of 197 naira.
Nigeria is not alone: if conditions continue to deteriorate, growing ranks of countries face a fate far worse than that suffered by the world’s more advanced economies at the beginning of the Financial Crisis. Unlike the rich economies of North America, Europe, and the Pacific Rim (Australia, New Zealand, Japan), most countries in Africa, Latin America, and large parts of Asia have neither the resources nor the social safety net to blunt the economic carnage or mitigate the humanitarian crisis that will inevitably result from a massive economic contraction.
Even the Bank of Mexico, with its $170 billion in foreign exchange reserves, would struggle to contain the fallout.
But Carstens and his fellow central bankers have an answer up their sleeves: “an international safety net,” as proposed by none other than the IMF (who better to turn to in your time of need?). Such a fund is “relatively urgent” for some countries, Carstens warned. One assumes that includes Nigeria.
As for Mexico, just over a year ago, its government renewed a $70-billion credit line with the IMF. Merely meant as a “precautionary measure,” the “flexible credit line” purportedly has no strings attached and is only reserved for countries that have shown themselves capable of consistently applying “solid economic policies” – in other words, following the IMF’s every order, something the Mexican government has done with aplomb.
But even if the central bankers’ hastily convened committee to save the world does somehow save the world — a big job, given the sheer scale of the problem they themselves largely created by flooding the world with trillions of dollars of easy-come-easy-go currency — there are always strings attached. As we know from recent history, for those countries to be “saved,” the pain is about to get a whole lot worse. By Don Quijones, Raging Bull-Shit.
The Emerging Markets have become a lethal cocktail. Read… Emerging Market Meltdown Sinks Spain’s Biggest Companies