Investors differentiate between emerging countries, that explains the resistance of the Mexican peso: BIS

The resistance shown by some emerging market currencies, such as the Mexican peso, demonstrates the differentiation that world investors are making, said economists from the Bank for International Settlements (BIS for its acronym in English).

Although they consider that the emerging countries are not exempt from fragility, such as the depreciation during the day on Monday, they warn that the interest rate differentials with respect to United States bonds, as well as inflation expectations, monetary perspectives and exposure to shocks external, were decisive in the exchanges.

In the introduction to the BIS Quarterly Report, they recognized that world growth prospects were impacted by uncertainty about Covid-related restrictions in China, the slowdown in that country, the effect of the tightening of global financial conditions due to the reaction of banks power plants in the face of still rising inflation and liquidity risk.

In the document, they highlighted that the Mexican peso as well as the Chinese renminbi registered gains in the third quarter of the year, unlike other emerging currencies, which shows that investors are weighing strengths and other factors.

In the analysis, they highlighted that at the end of October and especially in November, world volatility increased.

Given the uncertainty due to the consolidation of the slowdown in inflationary pressures, they highlighted that central banks have to remain vigilant about the impact that the upward trend in rates will have on each sector of the financial system.

This is because since 2008 the conditions for obtaining credit in the market have been relaxed and indebtedness has increased exponentially due to quantitative easing programs.

This context made it easier for investors to seek risky returns that, when materialized, would impose substantial costs that must be anticipated by central banks to respond in the event of an emergency.

backgrounds in focus

According to the BIS, which is the central bank of central banks, the monetary authorities will have to know the size of the risk in order to generate reserves that guarantee liquidity if needed.

Thus, they take the case of pension funds and some non-bank financial issuers that they estimated have more than 80,000 million dollars of off-record debt on the balance sheet. This is due to the management of currency swaps that have operated as a proxy or hedge fund when there is a lot of volatility in the market.

Swap markets, as described in the report, are where a foreign pension fund or insurer borrows dollars and exchanges euros or yen before repaying. As this operation is not documented, it is where the BIS identifies fog segments.

The missing debt from currency swaps/forwards is very large, the entity said, so a detail of direct information and the location of the problems is required.

“In moments of volatility, policies operate to restore the short-term availability of dollars in the financial system.” This would be a blind spot for global debt, they described when referring to operations carried out in currency swaps.

ymorales@eleconomista.com.mx