 ince
the beginning of this year, many emerging markets around the globe
have begun lowering interest rates. This is a good development, and
one that could enhance growth prospects worldwide.
Here's some
background to the cuts. During 2001, many emerging-market countries
suffered from recession and currency weakness. While the U.S., Europe,
and the U.K. reduced interest rates in 2001 — dramatically
in the case of the U.S. — many emerging markets had to either
maintain their interest rates or raise them in an effort to protect
their currencies and the lean against capital outflows.
With the U.S.
beginning to recover, emerging markets are now getting the opportunity
to reduce
interest rates. Here's the scorecard:
China cut
the 1 year lending rate by 0.54% to 5.31% and the one year deposit
rate by 0.27% to 1.98% on February 20.
Brazil cut
the Selic rate by 0.25% to 18.75% on February 20.
Chile has
cut the benchmark nominal interest rate by 0.5% twice since the
beginning of the year, bringing it down to 5.5%.
Turkey cut
the interbank rate by 2% to 57% on February 19.
The Philippines
cut the overnight repo rate by 0.25% to 7.5% on February 15
Poland cut
the intervention rate by 1.5% to 10% on January 31.
Czech Republic
has cut its 2-week repo rate by 0.25% twice since the beginning
of the year, bringing it down to 4.25%.
Of course,
the global environment is still a challenging one for emerging markets.There
is still weak nominal growth, low commodity prices, and a stubborn
tendency toward deflationary strength in the U.S. dollar. But even
these factors are beginning to improve, and the news on interest
rates is a real positive.
Lower interest
rates improve growth prospects — strengthening the currency,
attracting foreign investment, and allowing more interest-rate cuts.
But this virtuous circle is heavily dependent on a currency-oriented
focus for monetary policy, and we're not yet at the point where
there is a broad reallocation of capital flows to emerging markets.
Just as the
U.S. economic recovery is a piece-by-piece process, the recovery
in emerging markets will be too.
China, Korea, and Taiwan are already seeing capital inflows, currency
stability or strength, and an increase in international reserves.
For many other countries, two key issues remain: the strength of
the U.S. and European recoveries, and the issue of whether their
currencies and international reserves will respond positively to
the interest-rate cuts.
So how does
the global investor proceed? Investors should look for countries
which achieve stable or strengthening currencies, increasing international
reserves, and then use repeated interest-rate cuts to raise their
growth expectations. That's the winning formula.
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