Economy

Latin America is anxiously counting the days to Nov. 5, when U.S. voters will choose between relative continuity under Vice President Kamala Harris or a return to policies that triggered volatility in the region’s largest markets and economies under former president Donald Trump.Trade and tariffs, as well as monetary policy’s effect on global interest rates, are likely the largest avenues for the election to jolt the U.S.’s neighboring region. Washington’s economic war with China could particularly rock Mexico and boost Brazil, especially in a tit-for-tat scenario.On a broader level, a Trump victory would likely send shockwaves through the region, potentially putting the squeeze on some currencies and central banks even as countries that are more tied to commodities or trade with China could emerge largely unscathed.While the Biden administration did not roll back tariffs imposed by Trump on China, Harris’ plan to keep them roughly as they are makes her a dove toward the world’s No. 2 economy. Under Trump, tariffs on Chinese products would jump to around 60%. China will also hover over talks to revise the U.S., Mexico and Canada trade deal (USMCA), scheduled for 2026, as some goods including from Chinese companies’ transplant factories could stop being treated as Mexican. Automotive sector content requirements, known as “rules of origin,” are likely to loom large in those talks. Trump said weeks ago that he would slap a tariff as high as 200% on vehicles imported from Mexico.”A trade war (with China) would likely intensify in the case of a Trump presidency, and I think that the most affected country in Latin America could be Mexico,” said Carlos de Sousa, emerging markets strategist and fixed income portfolio manager at Vontobel. “If Trump wins, he would probably try to leverage that (USMCA) sunset clause as some stronger negotiating position, potentially to change the rules of origin.”He added that the increased scrutiny on the trade rules regarding Mexico could mean “We’ll go back, in terms of Mexican asset prices, to a higher volatility level than what we have seen in the last five or six years.”Lazard (NYSE:LAZ) said in a recent client note that a universal 10% tariff like the one proposed by Trump could be used as leverage to prevent countries from skirting tariffs by setting up shop in U.S. trading partners. Other instances of its use as leverage could include policy around migration, as remittances make a big contribution to several regional economies, especially in Central America.South American countries may be in a better position to dodge a stricter U.S. trade regime. The investment bank places copper and lithium powerhouse Chile on a list of countries with high exposure to the US market that could be largely spared based on the less replaceable nature of their exports.Such calculations would become much less relevant in the case of a Harris victory.”If the Democratic candidate Vice President Kamala Harris wins, likely with a divided government, tariff risk would likely decline and we would expect lower growth and investment conditions in the United States, which could lead to sustained outperformance of EM assets,” the investment bank said in its October outlook for emerging markets, published last week.While Mexico’s industrial export economy would likely feel the squeeze under a second Trump administration, other countries that are primarily commodities exporters could even benefit.South America could also benefit from its lower reliance on remittances from the U.S., which under a Trump scenario may be taxed at 10% if U.S. Senator JD (NASDAQ:JD) Vance, Trump’s running mate, follows through on his proposed tax.Some Central American countries such as Honduras and El Salvador receive more than 20% of their GDP from remittances, meaning the tax could translate into a couple percentage points of GDP lost per year. In the case of Mexico, the largest remittance recipient in the region by dollar amount, it could shave over $6 billion in inflows per year based on the 2023 estimate.As trade tensions with Beijing ballooned under Trump in 2018, China replaced all its U.S. soybean imports with Brazilian ones. China is already Brazil’s largest trade partner, and South America’s largest economy would further benefit from even more China commerce.”There can be a tariff outcome that helps Latin America if, as a result of tit-for-tat dynamic, it redirects purchases of primary products away from the U.S. into other suppliers like Brazil and Argentina,” said Alejo Czerwonko, CIO for emerging markets in the Americas at UBS Global Wealth Management.”The rhetoric that tariff uncertainty can only hurt Latin America might be overly simplistic.”A Trump presidency is expected to raise the U.S. budget deficit more than a Harris administration, driving inflation, as well as interest rates, higher. Tighter financial conditions globally could also weigh on Latin American assets. “If Trump wins and the deficits are a bit larger, then the disinflation process could be a bit slower, and that could translate into a slightly slower monetary policy easing” in the U.S., Vontobel’s De Sousa said. Tighter monetary policy in the U.S. has historically translated into subdued financial asset prices across emerging markets, including Latin America.Lastly, Argentina’s President Javier Milei, who shared a stage with Trump earlier this year at a conservative gathering outside Washington, could see his Trump-like abrasive style rewarded. Milei could benefit from added U.S. support if Trump were to be elected as the South American grains exporter seeks to extend or renew its loan program with the International Monetary Fund, of which the U.S. is the largest shareholder.Trump would have a “higher decibel approach to different countries, less institutional and more personal,” said Francisco Campos, chief economist for Latin America at Deutsche Bank. “Because of the ideological affinity and similar governing style between Milei and Trump, maybe Argentina could find itself with a little tailwind under a Trump scenario.” More

Kazimir, an outspoken conservative, was one of the few policymakers to openly express doubt about the need to cut rates this month, but he relented and eventually supported the move, the third policy easing step this year.”If new data and forecasts confirm an accelerated pace in disinflation, we will be in a strong and comfortable position to continue the easing cycle,” Kazimir said in a blog post.Kazimir also argued that the ECB was waiting for more evidence and until then, it had to keep an open mind about December and leave all options on the table.”I’m increasingly confident that the disinflation path is on a solid footing,” Kazimir said. “But the doubting Thomas in me still needs to see further proof of a sustainable return to target.”Markets currently expect the ECB to cut at each of its coming meetings through next March or even April, and for the 3.25% deposit rate to hit 2% sometime next year.But Kazimir also warned that the long-awaited decline in wage growth and services inflation has yet to materialise and the ECB should await actual evidence of this happening before declaring victory.”If new information points in the direction of higher inflation (risks), we can still slow down the pace at which we remove restrictions in the coming meetings,” he said. More

The People’s Bank of China (PBOC) said 20 institutions participated in the swap operations with a fee rate of 20 basis points.The PBOC kicked off the swap facility on Friday, part of broader efforts to reinvigorate China’s stock market and an economy bruised by a property sector crisis and weak consumption.Chinese shares surged after Beijing unveiled on Sept. 24 the most aggressive stimulus since the pandemic, but the rally has lost steam over the past weeks as euphoria turned into caution.”The swap scheme was set up with the sole purpose of improving market liquidity, as the funding can only be used to buy stocks,” said Wang Mengying, analyst at Nanhua Futures, who believes China’s bull run still has legs. Under the swap scheme, initially worth 500 billion yuan, brokerages, asset managers and insurers can have easier access to funding by exchanging risk assets such as stock ETFs and blue-chip stocks for highly liquid assets such as treasury bonds and central bank bills. The first batch of 20 participants include China International Capital Corp (CICC), Citic Securities, China Asset Management Co and E Fund Management Co.Separately, more than 20 Chinese listed companies, including China Petroleum (OTC:SNPTY) and Chemical Corp (Sinopec (OTC:SHIIY)) and China Merchants Port Group have announced plans to tap special central bank lending for share buybacks and purchases in another newly-created funding scheme, initially worth 500 billion yuan. ($1 = 7.1111 Chinese yuan renminbi) More

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Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Gold surged to an all-time high on Monday, fuelled by geopolitical tensions and central bank interest rate cuts.Bullion’s price climbed 0.4 per cent to $2,732.45 a troy ounce in early trading in London on Monday, representing a 40 per cent gain in the past year.The war in the Middle East, coupled with uncertainty over the outcome of next month’s US presidential election, have supercharged gold’s allure as a haven asset.“The outlook for gold is quite bullish,” said Joni Teves, UBS precious metals strategist, who has a $3,000 a troy ounce price target next year. “We think that investor holdings of gold have a lot of room to grow over the next year or so, and that should drive prices higher.”The anticipation of further rate cuts, with the US Federal Reserve next meeting on November 6-7, has also helped propel gold prices this year. Gold does not yield any interest, so prices typically benefit from falling interest rates.Many global central banks are in easing mode, with recent rate cuts in the eurozone, Canada and the UK, among others.Although physical gold demand has been dented by high prices in the top market China, buying from central banks has been very strong as they diversify their reserves away from the dollar.During the first half of this year, central bank buying hit a record high of 483 tonnes, according to the World Gold Council, the industry body.Western investors have also poured into gold since the summer, with five consecutive months of global inflows into gold-back exchange traded funds during May to September.Ole Hansen, head of commodity strategy at Saxo Bank, said the gold price drives include “the risk of fiscal instability and uncertainties surrounding the US presidential election” as well as central banks diversifying away from the US dollar.The outcome of the US election on November 5 between vice-president Kamala Harris and former president Donald Trump is looking very close, adding to the uncertainty. “There are a lot of risks around the next few weeks, with the US election coming up,” said Teves. “We could be in for some choppy price action.” Silver prices have also climbed sharply, hitting a near 12-year peak, reflecting tight supply for the metal, which is used in electronics and photovoltaic cells, as well as a knock-on effect from rising gold prices. More

LONDON (Reuters) -The punishing post-COVID wave of sovereign defaults has finally crested, with the likes of Ghana, Sri Lanka and Zambia concluding years of painful debt reworks. But the International Monetary Fund and others worry that a dangerous liquidity shortfall could take its place in many emerging economies – setting back development, stunting climate change mitigation and fuelling distrust in governments and Western institutions. The issue, and what to do about it when western countries are increasingly loath to send money overseas, is a key topic at the IMF World Bank autumn meetings taking place in Washington, D.C. this week. “It’s a challenge in the sense that for many, debt service has grown, borrowing has become more expensive, and external sources (have become) less certain,” said Christian Libralato, portfolio manager with RBC BlueBay.The U.S. Treasury’s top economic diplomat has called for new ways to provide short-term liquidity support to low- and middle-income countries to head off debt crises. The Global Sovereign Debt Roundtable – an initiative bringing together representatives from countries, private lenders, the World Bank and the G20 – has also tried to tackle the issue, and it will be on the agenda when they meet in Washington on Wednesday. But with constrained budgets and crises around every corner, Vera Songwe, chair of the Liquidity and Sustainability Facility – a group that aims to lower debt costs for Africa – said current fixes lack the scale and the speed needed. “Countries are avoiding…education, health and infrastructure expenditures to service their debt,” Songwe said. “Even in the advanced economies…there are stresses in the system.” QUESTION OF CAPITALData from non-profit advocacy group ONE Campaign shows that in 2022, 26 countries – including Angola, Brazil, Nigeria and Pakistan – paid more to service external debts than they received in new external finance. Many first gained access to bond borrowing roughly a decade prior, meaning big payments came due just as global interest rates rose, putting affordable refinancing out of reach. ONE estimates those flows turned net negative for developing countries on the whole in 2023, estimates backed by experts at the Finance for Development Lab. “The IMF-led global social global financial safety net is simply not deep enough anymore,” Ishak Diwan, research director at the Finance for Development Lab told Reuters. Diwan, who spent two decades at the World Bank, said that while full official figures are not yet available, net negative transfers for 2023 and 2024 are likely worse. Fresh funding from the IMF, the World Bank and other multilaterals failed to compensate for the rising costs, he said. World Bank and IMF officials seem to agree. The World Bank aims to boost lending capacity by $30 billion over 10 years. The IMF cut surcharges, lowering the cost for the most overstretched borrowers by $1.2 billion annually.TIDE TURNING?Bankers say many of the countries are now able to tap markets again, alleviating cash flow worries. “I don’t think there’s a limitation on access,” said Stefan Weiler, head of CEEMEA debt at JPMorgan. “The market is really wide open.”             Weiler expects bond issuance in Europe, the Middle East and Africa to reach a record $275-$300 billion this year – with more countries, even Nigeria and Angola, possibly issuing bonds next year.But the cost remains high. Kenya, scrambling to repay a maturing dollar-bond, borrowed at above 10%, a threshold seen widely as unsustainable. Finance minister John Mbadi said Kenya cannot fund infrastructure investments through the budget. “Kenyans keep on complaining about ‘we don’t have money in our pockets.’  That in a sense is just saying that we have challenges with liquidity in the economy,” Mbadi said during a news conference. China’s pull-back in lending has also hit emerging countries hard, turning what had become a large source of incoming cash into a net negative flow for those repaying old debts.SO WHAT NEXT?Development banks are already scrambling to work together to maximise lending; the Inter-American Development Bank and the Africa Development Bank are in the midst of a global campaign to get countries to donate their IMF reserve assets, so-called “special drawing rights”, which they say could turn every $1 donated into $8 in lending.But the World Bank and others are still fighting to convince western countries to cough up more cash to supercharge their lending; debt-laden France plans to cut 1.3 billion euros of foreign aid, following cuts by the previous government in Britain. A strong dollar means key donor Japan would have to significantly boost its contributions to keep at the same level. The mix is toxic for developing nations. “We see protests from Kenya to Nigeria to elsewhere. It’s a very dangerous situation,” Diwan said. “We’re losing the whole global south at this stage.” More

VILNIUS (Reuters) – The European Central Bank is likely to cut its key interest rate down to its “natural” level between 2% and 3% but it may need to reduce it even further if a fall in inflation becomes entrenched, ECB policymaker Gediminas Simkus said on Monday.”If the disinflation processes get entrenched… it’s possible that rates will be lower than the natural level,” Simkus, the Lithuanian central bank governor, told reporters in Vilnius. More