Last week, Chinese capital markets fell into crisis. In only three weeks, the most important stocks in the Shanghai Stock Exchange dipped by 30%. The volatility of the Chinese markets was accompanied by a slowdown in growth of the Asian giant, which has prompted widespread revision of global economic forecasts.
On their part, the US’s economic indicators are encouraging, namely, the near 5% unemployment rate and predictions of higher growth in the coming quarter. The dollar is strengthening in such a way that it looks as if it will continue to appreciate at least through the remainder of the year.
With a strong dollar on one side, and volatile markets in China and Europe (even pre-Greek Crisis) on the other, there will be a huge capital migration, prompted by the stability exhibited by the American capital markets.
Regardless of the situation, the security of the dollar combined with good returns in the variable income market would be attractive, and would catch the eye of investors, as they are able to invest with minimal costs given the low interest rates in the US. Even if the Federal Reserve decides to raise interest rates, investors still have the option to invest in the fixed income market, an attractive alternative given that they would have better prospects than those already in that part of the market. For these reasons, the United States currently shines bright in the international landscape as a sort of “refuge” market in the face of volatility, an accolade that will strengthen the dollar even further.
While the strength of the dollar has its costs for the American economy in terms of export competitiveness, a robust dollar will also lower the price of oil even more, which will have positive effects on the internal savings rate and consumption in the US, further stimulating the economy.
With China navigating their own challenges, and the downward trend of oil prices continuing seemingly indefinitely, the outlook for Latin American countries is grim. The economic crisis of Venezuela will certainly get worse, and countries like Mexico and Ecuador will suffer too. All three should take steps to preempt the coming slowdown.
In Venezuela, due to the coming December elections, a critical opportunity has emerged to change the dialogue in the National Assembly. By pushing aside unproductive political polarization, leaders could be able to construct a new roadmap for the country. All of the parties must be aware that the shift the country demands, needs to take place as part of a national agreement, illustrated by a sustainable proposal that opens the country up to private and foreign investment. Also key to the nation’s future is the capitalization and relaunching of industrial and business sectors of the country. Specifically, state corporations and expropriated businesses must be efficiently relaunched, as they are both currently sunk deep in a bankruptcy that has the country at the mercy of imports, due to a lack of national production.
Mexico’s 2015 performance will be lower than expected, an especially inconvenient fact considering this is happening right in the middle of the execution of crucial reforms. Those reforms were heralded in on the promises of economic performance, and if that performance is not seen, political will for these reforms could collapse. This is why it’s essential to establish a political consensus that focuses the debate on what needs to be done without jeopardizing reforms.
Ecuador is also implementing economic reforms. Correa has proposed a lower threshold for the inheritance tax, and a higher capital gains tax. Even though these specific reforms may not be the best route to take, the idea that there needs to be some sort of reform is prudent. These possible fiscal adjustments have proven to be fertile ground for protests, spurred by the strategy of provocative political confrontation and polarization practiced by President Correa. It’s time for a shift in Correa’s leadership towards tolerance and transparency; otherwise, the popularity which his government currently enjoys will continue to erode, and will create unrealistic expectations for the country’s leadership.
This isn’t the time for improvisation, postponement, nor for evasion of this crucial debate. This is the moment for a new political focus to emerge, promising more sensible ideas, and collaboration on a solution for the economic mess that looms in the various Latin American countries who thus far have enjoyed a decade of resilience and growth against international events –in part by the demand for raw materials from China– but who are now starting to experience the deceleration of growth.
Leopoldo Martínez Nucete – IQLatino