| COSTA DO SAUIPE, Brazil, March 31
COSTA DO SAUIPE, Brazil, March 31 Leading Latin
American economies such as Mexico and Brazil are poised to
receive short-term capital flows from investors fleeing Russia
due to fear of geopolitical instability and an economic
recession there, analysts said.
Such inflows are not expected to be strong enough to have a
lasting impact on the countries' exchange rates but have already
caused market buzz and became a topic of discussion during this
weekend's annual meeting of the Inter-American Development Bank
in a resort near the Brazilian city of Salvador.
"There are indications based on what we have heard from our
European analysts that some of that money that is flowing out of
Russia may be coming to the region," Mauro Leos, Moody's senior
analyst for Latin America, told Reuters on the sidelines of the
Leos' comments echoed remarks made by local analysts in
Brazil, who had attributed part of the real's recent
gains to dollar inflows coming from Russia.
He noted, however, this is likely to be a "short-term and
not very significant phenomenon" that is not going to make a
"big difference in terms of capital inflows and appreciation of
Many investors have been pulling out of Russia as Western
powers' sanctions over Moscow's annexation of Crimea risk
tipping the Russian economy into a recession. Goldman Sachs
recently predicted capital outflows from the country could reach
$130 billion this year, or double the level recorded in 2013.
In Latin America, Brazil and Mexico are the two main
destinations for such inflows but for very distinct reasons,
While both countries offer deep financial markets with
diverse investment options, Mexico is a favorite for its
economic stability and a government push for structural reforms
that has led Moody's to lift its credit ratings to grade A.
Brazil, on the other hand, lures investors with its high and
still-rising yields. As the central bank continues to battle
inflation, Brazil's benchmark interest rates are expected to
climb to 11 percent on Wednesday.
INSTABILITY NOT GOOD FOR ANYONE
Despite a possible short-term boost, the geopolitical
instability and economic weakness resulting from the
Russia-Ukraine crisis could hurt emerging markets in the long
run, officials with the Mexican government, the International
Monetary Fund and the IADB warned.
"Geopolitical risk isn't good for anyone," Manuel Sanchez, a
board member of the Mexican central bank, told Reuters during
the IADB meeting.
"This is not a favorable element at a moment when financial
markets are digesting a new trajectory for the U.S. monetary
policy," he added, referring to market concern that the U.S.
Federal Reserve may start raising interest rates earlier than
Fears about the timing of withdrawal of U.S. monetary
stimulus have hurt emerging markets by increasing investors'
aversion to risk across the board.
Alejandro Werner, the IMF's director of the Western
Hemisphere Department, made a similar warning during a speech to
investors at Costa do Sauipe.
"Maybe there will be some small effect in terms of the
mandates on some money that has to go somewhere and that
generates flows to Latin America, but I think that significantly
increasing the geopolitical risk and hampering the recovery in
Europe is not a good thing for the global economy and Latin
America," he said.
Moreover, short-term capital flows are not the kind of
investment that Latin American countries are in need of, said
the IADB chief economist Jose Juan Ruiz.
"What is crucial to Latin American is to grow and keep its
economic predictability. That is the right way to attract
capital flows and, besides that, the money we want is that
coming from foreign direct investment," he said.
Flows of short-term capital leaving Russia could exit Latin
America as quickly as they entered, Moody's Leos said. "So this
is more like the flavor of the hour, not even of the day. The
region is not going to look any different because of Russia."
(Reporting by Walter Brandimarte; Editing by Meredith Mazzilli)