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Worldcrunch

South America On The Fed's Stimulus Plan: "Thanks For Nothing"

Article illustrative image Partner logo Waiting for the deluge of dollars

SANTIAGO - The U.S. Federal Reserve’s recently announced stimulus package, designed to strengthen the American economy, offered a clear reminder of the huge gap that exists today between Mexico and the rest of Latin America.

While Mexico enthusiastically applauded the Fed’s decision to begin pumping $40 billion per month into the U.S. economy through the purchase of mortgage bonds, Brazil reacted to the news by preparing an arsenal of measures meant to keep its already pricey currency, the real, from appreciating further. The Fed announcement also set off alarm bells in Chile, Colombia, Peru and other South American countries.

The currency injection, which the Fed plans to keep up until 2015, is meant to stimulate U.S. internal demand, energize the industrial sector and, ultimately, create jobs. But the measures also have a corollary effect: they lower the value of the U.S. dollar vis-à-vis other currencies.

An increase in the price of the real could cause some serious damage to Brazil, whose economic growth rate has dropped to less than 3% annually, in large part because its currency has already appreciated beyond an advisable level. With its economy now almost as stagnant as that of the U.S., Brazil has been trying for the past several months to implement its own stimulus package. The Fed decision is forcing Brazil’s Central Bank to intervene even more.

Deluge of dollars

The Brazilian situation contrasts sharply with what is currently taking place in Mexico, which is growing at twice the rate of Brazil. The Mexican economy is tied tightly to the U.S economy. Its manufacturing sector supplies U.S. consumers with cars, televisions and hundreds of other products. Any stimulus measures meant to boost the U.S. economy, therefore, also promise to spur the Mexican economy.

Mexico, nevertheless, is the exception in Latin America. The region’s other countries see the possibility of local currencies continuing to rise against the dollar as a serious threat. The stronger a country’s local currency, the pricier its exports become, making exporting as a whole more difficult. Prior to the Fed announcement, Chile’s peso had already appreciated 10% this year. Colombia’s peso was up 8%, while the Peruvian sol rose 4%.

When the Fed launched its previous stimulus package, in effect from late 2010 until mid-2011, the deluge of dollars caused the Brazilian real to jump 12%. The Chilean and Mexican pesos each rose 8%.

Analysts and government officials in Chile and Colombia have already raised the possibility that their respective central banks will have to intervene by opening the money spout in their own countries, injecting a surge of pesos to keep local currencies from over-appreciating.

There are risks involved in doing that. For one thing, releasing money into the market tends to trigger inflation. But at the same time, it is absurd for Latin American countries to stick blindly to the mantra that a free-floating dollar is necessarily the best thing, especially when the world’s economic juggernaut is flooding the market, from now until 2015, to the tune of $40 billion a month.

It’s in everyone’s interest that the U.S. economy recover as quickly as possible. AméricaEconomía, for one, is pulling hard for that to happen. But the recovery must not come at the cost of hurting the economies of Latin America.

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About this article source Website: http://www.americaeconomia.com/

America Economi­a is Latin America's leading business magazine, founded in 1986 by Elias Selman and Nils Strandberg. Headquartered in Santiago, Chile, it features a region-wide monthly edition and regularly updated articles online, as well as country-specific editions in Chile, Brazil, Ecuador and Mexico.

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