Latin America illustrates both the best and the worst of sovereign economic management. Since I started working 36 years ago, I have seen an Argentine co-worker come back with suitcases of cash to deposit in the U.S. and I suspect his family still has cash in the U.S. as Argentina remains an economic political pariah. I also suspect my Peruvian college roommate (who had US citizenship from his parents who moved to Peru after WWII and did very well there) still has money in the U.S. despite Peru being an example of a country that has learned well. I have also seen a Brazilian co-worker (both the Argentine and Brazilian were doing this in the early 1980's) bring suitcases of cash back to the U.S. and it remains to be seen if continuing that is prudent or not.
When I came back into EM in 1992, my job was risk assessment. I was aware that Mexico in 1994 was vulnerable and I learned just how hard it is to call a market turn and the need for every country to manage with a plan for market volatility. Of course, in 1997 Asia learned this lesson the hard way and in 1998, Russia did to.
Enough ancient memories.
Today, the many Latin American countries are constantly working on their plan for market volatility. Floating FX rates and flexible interest rate policies help maintain stability. The key to smoothly functioning stable democracy and economic activity is a high domestic savings rate. Thus, Chile, Mexico and Peru which have created pension systems and increased their savings rate are the most stable countries in Latin America. Each still has challenges and Mexico in particular has made tremendous progress on reforms in the last 12 months.
Colombia belongs in the good camp but has more challenges than the other good countries.
Costa Rica, El Salvador and Panama used to be good countries but each has allowed politics and easy access to money to take themselves out of the clearly good category but each still has time to rescue themselves if they have the political will.
Then, comes the big behemoth; Brazil. Where 10+ years ago, President Lula surprised everybody and set the country clearly down a path toward stability. His successor today has run a populist policy that has started to harm the various state owned companies, is threatening to destabilize the economy (it hasn't yet though) as inflation rises, and the fiscal budget is still full of political favors that need to be eliminated. There is an election this year and there is time to change this poor set of policies. Time will tell which way Brazil goes: Back to the good category or back to the basketcase category.
Then there is Venezuela and Argentina. The citizens of both these countries continually buy into populist policies that elected officials run on and implement. Then these populist policies generate inflation, create shortages of goods, capital flight and weak exchange rates. Both of these countries are running out of FX reserves and are using devaluations to try and stem off default. Neither country has been able to access new money for a long time, so any default will be a re-default on old debt. Neither country shows an inkling of changing its political economic policies, so I think both will be a source of market turmoil latter in 2014. They are already contributing to general angst about Emerging Markets overall.
In the case of Argentina, this is really too bad. It is a wonderful place to visit when the economy is stable.
So that is it. 18 years on the buy side, 11 years on the sell side and 8 years in corporate America. After this week, it will be off into the world of entrepreneurship with study to become a Certified Financial Planner and looking into being a managerial mentor. We shall see what happens, but thanks to ObamaCare, I can afford to take this plunge. I will be quiet on the blogging front for a few weeks as I empty my office and go skiing in Northern New England.
No comments:
Post a Comment