Analysis: Late Fed taper may do more harm than good for emerging nations

Mon Oct 14, 2013 2:37pm EDT
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By Alonso Soto

WASHINGTON (Reuters) - Emerging nations heaved a sigh of relief when the Federal Reserve last month decided not to reduce its monetary stimulus.

By postponing the inevitable, the U.S. central bank took pressure off emerging markets to implement reforms that could make them more resilient when the Fed does eventually reverse policy.

"It's very easy to get addicted to high global liquidity," Guillermo Ortiz, chairman of Mexico's largest locally owned bank, Grupo Financiero Banorte, told Reuters.

"I think it's better to bite the bullet now to avoid a more painful withdrawal for EM countries in the future," said Ortiz, who has served as both finance minister and central bank chief for Mexico.

Clear examples are the economies of Brazil and India, which have slowed sharply recently due in part to the lack of government action to remove bottlenecks of growth such as high taxes and cumbersome red tape.

Emerging economies cried foul as the U.S. central bank injected trillions of dollars into the financial system, sending a wave of speculative capital into their markets that threatened to drive up inflation and fuel asset bubbles.

Then, in May, Fed chief Ben Bernanke signaled that the central bank might soon begin to scale back the $85 billion in bonds they were buying each month to keep borrowing costs down.

This led to a sharp reversal in capital flows that dragged emerging nations' currencies to multi-year lows and eroded their balance of payments.   Continued...

Guillermo Ortiz, chairman of Mexico's largest locally-owned bank Grupo Financiero Banorte, talks to Reuters at his office during the Reuters Latin America Investment Summit in Mexico City May 17, 2013. REUTERS/Henry Romero