Interview: Rubens Amaral Jr
How will the free trade agreements (FTAs) between Latin American countries increase regional trade?
RUBENS AMARAL: FTAs are critical for growth in Latin America, as they grant access to new markets and force discussions on economic openness, productivity and job creation. Agreements like the Dominican Republic-Central America FTA would allow regional economies to leverage their competitive advantages such as relatively low labour costs, turning them into exports and hard currency flows. With a few exceptions in Central America, all countries in the region are dependent on the import of oil. However, those countries with more natural resources or major exporters of commodities, such as grain, are also reaping benefits. As China becomes more expensive as a base for manufacturing, companies are looking increasingly towards Latin America. Cost is not the only factor; access and distance from primary markets also matter.
To what extent is the Central Reserve Bank of Peru able to monitor and control the ascent of the sol?
AMARAL: High interest rates encourage investors to take advantage of interest rate arbitrage. It was only a few years ago that we undervalued asset prices across Latin America – something which has very quickly been reversed. Therefore, asset prices have appreciated significantly, but investors continue to invest in the region’s equities, which offer a better proposition than those in some Western markets that were hit harder by the global financial crisis of 2008-09.
There is a natural flow of funds into the region, known as “hot money”, which can result in the artificial appreciation of currencies and risk monetary policy. Central banks are carefully monitoring to determine if any intervention is necessary. Such an intervention can take many forms, such as special taxes on short-term capital or auctions to inject more liquidity. We saw something similar in Brazil in 2012. Concerned that short-term flows were fuelling the rapid appreciation of the real, the central bank quickly increased the tax on financial transactions to 6% for any inflows up to five years, which had the intended impact of devaluating the currency, but also had the unintended impact of reducing medium-term financing for exports.
In the case of Peru, the central bank is constantly monitoring the markets to be ready to act if they see any risk of over-appreciation of the currency, resulting in an increased level of reserve requirements and spot acquisitions in the foreign exchange market. If issues are detected, the central bank will act to prevent undesirable movements in the foreign exchange rate, with the objective of protecting the economy.
How can credit grow during an economic slowdown without weakening the loan portfolio?
AMARAL: We must approach credit growth from a different angle. As far as consumer financing is concerned, countries including Peru, Colombia and Mexico are showing signs of growth, and their governments are looking to alleviate poverty. This has given people access to credit that had not previously been present. It introduces people to finance and makes them bankable.
The middle class is expanding, and this will have an impact on credit growth. However, it is important to be wary of how much credit can, or should, be extended to people in these situations, and we have to continue to monitor the quality of portfolios. Excess liquidity tends to lead to a relaxation of credit standards. The only country in the region where credit has a higher percentage in relation to GDP is Chile. In the rest of the region it is lower, and there is still room for expansion.
My major concern is with consumer financing, as expansion can become explosive. Nonetheless, the region’s central banks are generally fairly prudent with regards to rating systems, requirements and oversight, which is indicative of a more proactive stance than was the case in the past. The central banks will continue to monitor the foreign exchange markets and will act to prevent any undesirable movements in the exchange rate, with the objective of protecting their economies.
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