Expert warns Latin America will face dilemma when US interest rates rise

Latin America will face a dilemma if U.S. interest rates begin to increase, though that would also create opportunity, an expert from deVere Group -- a consultancy with $10 billion under advice -- told Latin Business Daily.

“Regional governments will be faced with the choice of allowing their currencies to devalue, with the risk of loan default and corporate failure, or raising interest rates to protect their currencies and risk inducing a recession,” deVere's international investment strategist Tom Elliott wrote in an email. “This unenviable choice accounts for why the investors have shunned the region’s currencies this year. For example, the Brazilian BVSP stock market index is down 6.7 percent year to date in local terms but down 34.5 percent in dollars, while the Mexican IPC index is down 0.9 percent in local terms but down 12.9 percent in dollars.” 

While Brazil and Mexico dominate the region’s capital markets, Latin America is already facing problems related to weak commodity prices.

“Latin America is a net exporter of commodities, whether it is Venezuelan oil or Brazil iron ore and soya. Weak commodity prices of late means that the region runs a current account deficit with the rest of world, relying on capital inflows to sustain investment and to pay for imports,” Elliott wrote. “Mexico is protected to an extent through having a large manufacturing export sector as well as oil."

Debt servicing will become a bigger problem, according to Elliott.

“The region will have to pay higher interest on old dollar debt that is rolled over, and on fresh dollar loans. Second, higher US rates are likely to lead to a stronger dollar and this will increase the local currency cost of servicing and repaying the capital on dollar debt,” according to Elliott.

There will be, however, an opportunity to increase exports.

“Exports of manufactured goods into the U.S. economy is likely to grow as demand in the U.S. grows with employment growth. Mexico will be a beneficiary, and (this) accounts for why the Mexican economy grew at an annualized rate of 2.5 percent in the second quarter, while Brazil’s economy contracted by 1.9 percent,” Elliot said.

The deVere Group was established in 2002 by CEO Nigel Green, who wrote Thursday that the U.S. Federal Reserve is fueling uncertainty by not increasing interest rates.

"A rate raise hasn't happened this time, but it is on its way. It will happen eventually and probably -- as Janet Yellen, the Fed's Chair, hinted -- before the end of the year. Therefore, the countdown clock has simply been reset. Of course, this is a trigger for short-term volatility," Green wrote.