Global Finance: Emerging markets currencies are de-preciating vis-à-vis the US dollar. What is driving this?
Eduardo Suárez: We have a combination of the expected tightening by the US Federal Reserve, loosening monetary policy in some economies and oil price exposure. So far the adjustment has been relatively orderly.
GF: Which are the most vulnerable currencies?
Suárez: We will move by stages. Emerging markets with a low “volatility beta” relative to a US rates hike, like the Chilean peso, will outperform until mid-June. Then those with a low “rates beta” [low sensitivity to US interest rates announcements] but high “volatility beta” [high sensitivity to volatile market fluctuations] will push ahead as they reverse their overshoot, like the Mexican peso and maybe the Brazilian real and the Colombian peso, though the latter have additional issues—Petrobras and the fiscal adjustment in Brazil, and oil in Colombia.
GF: Is this trend going to last?
Suárez: We will probably feel the biggest shock through mid-June. We don’t have much to look back on in terms of Fed cycles at a time when emerging markets were trading globally. The 2004–2006 cycle is it. Back then, EMs sold off until a little after the Fed started tightening and then rallied. I would expect a similar behavior, at least for countries in good financial conditions.
GF: What should we watch for?
Suárez: The “original sin” [the inability to borrow abroad in one’s domestic currency] problem is not as bad in sovereign balance sheets as it has been. I’d watch corporate balance sheets for weakness and bank balance sheets in the context of the credit expansion driven by recently loose global financial conditions. Those countries where lending and debt have risen most since 2005–2006 are more vulnerable, in my opinion.
Valentina Pasquali 