Finance minister traces EM instability to China and US

A slowdown in Chinese economic growth and the United States Federal Reserve (Fed) disposition to intervene in the US economy were cited by Brazil’s Finance Minister Guido Mantega as causes for the exchange market instability. With a dollar rate constantly over 2.40 reais, he anticipates potential implications on inflation.

“We are going through a period of volatility caused by Fed’s tampering – reducing monetary stimulus [to the US economy]. And since the upcoming meeting may result in further cuts, this creates some instability in the market,” he said. The last time the Fed reduced quantitative easing, it meant a $10 billion cut from the US economy.

Moreover, Mantega pointed out that China’s economy is giving off signs that "growth might be winding down a little.”

According to him, these signs have consequences on the currencies of emerging countries: “It leads to a depreciation driven by commodities. When China grows more slowly, it buys fewer commodities. But since China is a major global buyer of commodities like iron ore, copper, etc., the effects are felt in other markets.” He explained that a slowdown in economic growth in China is expected to negatively impact exporters’ sales and earnings in other countries.

However, the minister pointed out that these trends are temporary, like those that have occurred in the latest high volatility months when some countries are more severely impacted than others: “Brazil, for example, has an advantage, because our reserves are bigger than those of some other countries. Our external debt is smaller because our reserves exceed our debts, which gives us a relatively stable position. Each country has its own peculiar scenario, and volatility pervades every country.”

He mentioned how Argentina, who has been facing difficulties with its exchange policy and its foreign creditors, is adversely impacted by this volatility: “It all results from this whole scenario – not only in Argentina. I can name a number of countries with similar problems.”

Translated by Mayra Borges