Rising markets which have coped effectively with the surge in international borrowing prices thus far might discover themselves in bother if episodes such because the turbulence within the UK authorities bond market unfold, a prime IMF official has warned.

Ilan Goldfajn, head of the IMF’s western hemisphere division, instructed the Monetary Occasions that, whereas rising markets had thus far been spared a rush into dollar-based property, traders could flee into markets akin to US Treasuries if turbulence intensifies.

“It may very well be the case that what we noticed within the UK . . . might grow to be a extra generalised vulnerability in order that markets grow to be extra disorderly,” Goldfajn mentioned in an interview throughout this week’s IMF conferences in Washington. “On this world one thing essential will occur for rising markets . . . the flight to security.”

He added that, whereas the greenback had risen towards most international currencies, this was not but due to a shift into US secure property. Traders are likely to flock to US markets in occasions of turmoil owing to their liquid nature and the tendency for the buck to understand in occasions of uncertainty.

To this point, many economies in Latin America have managed to evade the worst of the turmoil in international markets triggered by increased US charges by prudent financial insurance policies.

Brazil’s central financial institution was one of many first to lift charges in March 2021, tightening financial coverage a full 12 months earlier than the Fed. Mexico adopted in June, then Chile, Peru and Colombia in fast succession. After aggressive rises, which have pushed charges into double digits in Brazil, Chile and Colombia, Latin America’s central banks at the moment are at or close to the height of their tightening cycle.

Nevertheless, Goldfajn — as a former head of Brazil’s central financial institution and ex-chief economist of Latin America’s greatest lender Itaú Unibanco — mentioned his previous expertise made him “all the time fearful of economic tightening”, particularly when this concerned US charges rising.

The Federal Reserve has this 12 months engaged in its most aggressive financial tightening for the reason that early Eighties and is contemplating making its fourth consecutive 75 foundation level improve in November.

Such an atmosphere was “by no means very straightforward for [Latin America] to navigate”, Goldfajn mentioned.

In a weblog co-authored with IMF colleagues, Goldfajn warned that Latin America now confronted a “third shock” from increased international rates of interest, on prime of the pandemic and Russia’s invasion of Ukraine. Scarcer and costlier financing would hit consumption and funding in a area that has persistently grown extra slowly than its rising market friends over the previous decade.

These headwinds have led the fund to decrease its Latin America development forecasts for subsequent 12 months. It now predicts the area’s economies will increase simply 1.7 per cent in 2023, down from a forecast of two.5 per cent six months in the past and effectively under the degrees predicted for Asia, the Center East or sub-Saharan Africa.

Brazil, the largest Latin American financial system, is now anticipated to develop by simply 1 per cent in 2023 — a prediction that Goldfajn mentioned was primarily based on an expectation of decrease development in China, Brazil’s greatest export market.

Nevertheless, Latin America will carry out higher this 12 months than was anticipated again in April, when the fund held its spring conferences.

Surging commodity costs, sturdy exterior demand and remittances, a rebound in tourism and strong development momentum after the pandemic led the fund to lift its Latin America development forecasts for 2022 to three.5 per cent, largely as a result of Brazil is performing a lot better than beforehand anticipated.

Brazil will develop 2.8 per cent this 12 months, the IMF now believes, whereas six months in the past its forecasters had anticipated growth of solely 0.8 per cent. Mexico’s forecast has modified much less and now stands at 2.1 per cent for 2022 and 1.2 per cent for 2023.

Nonetheless underneath US financial sanctions, Venezuela will probably be one of many area’s standout performers this 12 months and subsequent, based on the IMF forecasts. After years of financial collapse, the fund predicts the South American oil exporter will develop 6 per cent in 2022 and 6.5 per cent in 2023, which might be its greatest 12 months in a decade.

Though the expansion information for Latin America this 12 months was constructive, the IMF was much less sanguine about inflation.

Whereas the area has led the world in elevating rates of interest and its largely impartial central banks have taken a way more aggressive stance than many friends, the fund mentioned “Latin America will proceed going through excessive inflation for a while”. It raised its regional inflation forecasts to 14.6 per cent for this 12 months and 9.5 per cent subsequent 12 months.

“Central banks ought to keep the course [and] mustn’t ease prematurely,” Goldfajn instructed the FT. “You have to be conscious that inflation is an important threat now and the one which must be tackled . . . we need to make certain that you don’t get inflation entrenched with wage and value spirals.”

His foremost concern for Latin America, although, stays the dangers generated by increased rates of interest within the US. “It may very well be the case that this time round we’re higher off, perhaps financial coverage is best, perhaps we’ll have extra reserves, perhaps our banking programs are extra wholesome,” he mentioned. “However . . . what worries me is that this tightening is there. It’s going to proceed. We’re going to see deceleration, we could even see recessions globally. In order that’s not a straightforward atmosphere in 2023.”

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