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Focus on the economy...
continued from page 5
And, that suggests that Argentina is
likely to remain on investors’ radar
screens for some time to come.
Emerging markets feel the heat…
Although the crisis in Argentina has
been a long time in the making, the
country’s latest travails have come at a
bad time for other emerging market
economies struggling to cope with
slowing global demand. As TD
Economics discussed in a recent paper,
“The Domino Effect”, the current U.S.
economic slowdown is being felt around
the world, transmitted not just via trade,
but also through the tighter corporate
and financial market linkages
engendered by globalization. This
increased interdependence has fuelled
fears that the crisis in Argentina could
precipitate another full-blown spate of
global contagion.
Certainly, the more attention given to the
problems in Argentina, the more likely
international investors are to become risk
averse to emerging markets. This will be
a near-term hurdle for emerging market
currencies, especially in Latin America.
Virtually alone in the region, the
Mexican peso has weathered the storm
fairly well, owing to strong inflows of
foreign direct investment related to
market perceptions that the Mexican
economy will be a solid launching
platform for exports to the United States
if the U.S. economy recovers in 2002.
Nevertheless, all Latin currencies – the
Mexican peso included – will likely
weaken over the coming months.
Currencies in Eastern Europe and East
Asia will likely not be spared either, with
the latter group likely to be particularly
vulnerable, as economic conditions
continue to deteriorate in the Asian-
Pacific region.
All of these developments are a negative
for commodity-related currencies – such
as the Canadian dollar – as deteriorating
economic conditions in emerging
markets will likely lower world demand
for raw materials. In contrast, the
already overvalued U.S. dollar, which
stood at a record trade-weighted level in
June, should continue to benefit from
safe haven flows – to the detriment of
other major currencies, including the
Japanese yen and the euro.
…but another global meltdown not
in the cards
The increased risk aversion to emerging
markets will likely put upward pressure
on interest rates in developing countries,
which should erode both consumption and
investment. Weaker currencies may provide
some stimulus to exports, but this will
be offset by slacker global demand.
Nevertheless, the contagion effects are
unlikely to precipitate another global
markets crisis. Latin America and non-
Japan Asia are in better shape
structurally than they were before the
1997-98 financial crisis. Most
currencies are now floating freely, and
in Asia in particular, current account
balances are in surplus and debt burdens
are much lower. At the same time,
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global investors are less leveraged to
developments in emerging markets now
than they were in 1997/98, and while
regional banking systems may not be
robust, neither are they as vulnerable as
they were during the Asian financial
crisis. Perhaps most important, the U.S.
Federal Reserve’s aggressive interest
rate cuts since the start of this year and
the Bush Administration’s tax cuts have
created the preconditions for a U.S.
recovery beginning late this year or in
early 2002. That should shift the
dynamic of interdependence onto a
positive footing – as the transmission of
U.S. weakness abroad yields to a
firming in U.S. demand and increased
global exports, setting the stage for
export-led recoveries in Latin America
and East Asia. The bottom line is that
rough seas may be in store in the
coming months, but calmer waters
should lie ahead in 2002.
annual interest rates
Effective August 22, 2001
(subject to change without notice)
$CDN $US
TD Bank Prime
lending rate 6.0%
U.S. Prime
lending rate 6.5%
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