Trigger for emerging market sell-off still playing out, warns Argentine governor

US monetary tightening, the trigger most attributed to the emerging market currencies sell-off last month, has far from run its course and could result in further stress events, warns the governor of the Central Bank of Argentina (BCRA).

“There is a possibility we may be challenged further,” governor Federico Sturzenegger told Central Banking journal in an interview published on June 1, when asked if he was concerned that tax cuts in the US might lead to yet more rapid tightening of interest rates by the US Federal Reserve, with potential knock-on effects as hot money flows out of markets such as Argentina.

“The US has extremely low unemployment, so the economy is now at full employment, and the US has just done a fiscal shock of 2% of GDP. That has not yet played out completely in terms of its impact on inflation in the US,” he said.

“It is possible we are at the start of the process – and by no means would I suggest it is something that has already run its full course. I can say the process will be gradual and the Fed has communicated very well. But I would not say, by any means, that the process has finished,” Sturzenegger added.

The Argentine governor is not alone.

Jaoquin Vial, deputy governor of the Central Bank of Chile, told delegates at National Asset-Liability Management Americas 2018 on May 24 that while US growth is broadly positive, sustained wage growth could drive up interest rates, causing sharp portfolio outflows from emerging markets.

The Chilean central bank deputy highlighted this as the biggest measurable risk to the Chilean economy, but he is confident that much of the downside risk can be contained.  

…it is more related to growing pains rather than being a disaster

Jaoquin Vial, Central Bank of Chile

“Since we have been living with very low interest rates for quite a long time, this is becoming a bit disruptive. But it is more related to growing pains rather than being a disaster,” Vial said.

He believed the sell-off in emerging markets in May was equivalent in scale to to the ‘taper tantrum’ of 2013.

Emerging markets have adopted different approaches to tackling hot money outflows during the past month.

Some central banks have been forced to raise interest rates, with some intervening in the markets by selling foreign exchange reserves. A good example is Argentina. Others, such as Chile, have allowed the exchange rate to act as a buffer.