Regional Reserves Update: Broad Stability Even As Global Rebalancing Takes A Toll
BMI View: We expect foreign reserves stockpiles in the major commodity exporting economies of Latin America to remain under pressure in the coming months, as a relatively subdued outlook for goods exports, combined with weaker investment inflows, could leave current account deficits underfunded, putting downward drag on reserves. That said, import cover in most major economies remains sufficiently robust to prevent balance of payments crises. Elsewhere in the region, strong growth in exports in Mexico and Colombia should provide a boost to reserves positions, while rapid reserves depletion in Venezuela and Argentina amidst substantial external imbalances are likely to drive further currency adjustments.
In line with our long-held view, global economic rebalancing has prompted a deterioration in the trade and investment dynamics throughout Latin America, leading to a drop in foreign reserves growth across most of the major economies in the region ( see 'Regional Reserves: Global Rebalancing Leaving Its Mark', July 12 2013). Indeed, the combination of weaker external demand for commodities exports from China, and capital outflows from emerging markets as developed market bond yields rise, have taken their toll on reserves stockpiles in Latin America in recent quarters.
That said, we believe that most of the region's economies are relatively well positioned to withstand the reversal in capital flows, having shifted to free floating exchange rates and built up vast piles of reserves in recent years. While external accounts will remain broadly under pressure in the coming months, we expect that 2014 will be a moderately stronger year for exports across the region, due to favourable base effects and improved economic competitiveness following substantial exchange rate depreciation in 2013, providing some cushion for reserves stockpiles ( see 'Regional Exports Update: Some Upside In 2014', December 13 2013). Moreover, remittance inflows could see an uptick across the board as economic growth strengthens in the US, a major destination for foreign workers. Therefore, with the exceptions of Venezuela and Argentina, where structural economic imbalances will necessitate further currency adjustments, we believe that balance of payments crises stemming from rapid reserves depletion are highly unlikely across Latin America in the coming months.
|Reserves Stockpiles Moderately Eroding|
|Latin America - Foreign Reserves, % chg y-o-y 12mma|